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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________________TO__________________
COMMISSION FILE NUMBER: 1-3720
FRESENIUS MEDICAL CARE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New York 13-3461988
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.)
95 Hayden Avenue, Lexington, MA 02420
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: 781-402-9000
_______________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicated by check 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of the date hereof,
90,000,000 shares of common stock, par value $1.00 per share, are outstanding,
all of which are held by Fresenius Medical Care AG.
2
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Operations............................................. 4
Unaudited Consolidated Statements of Comprehensive Income................................... 5
Unaudited Consolidated Balance Sheets...................................................... 6
Unaudited Consolidated Statements of Cash Flows............................................ 7
Notes to Unaudited Consolidated Interim Financial Statements................................ 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................... 19
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................................. 24
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings........................................................................... 25
ITEM 4: Submission of Matters to a Vote of Security Holders......................................... 27
ITEM 6: Exhibits and Reports on Form 8-K............................................................ 27
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------------
2002 2001 2002 2001
-------- ---------- ---------- ----------
NET REVENUES
Health care services $814,264 $779,613 $1,598,286 $1,533,812
Medical supplies 116,136 124,178 226,018 238,255
-------- ---------- ---------- ----------
930,400 903,791 1,824,304 1,772,067
-------- ---------- ---------- ----------
EXPENSES
Cost of health care services 575,269 530,070 1,138,924 1,048,354
Cost of medical supplies 81,495 89,518 154,618 173,500
General and administrative expenses 79,669 85,150 155,840 171,675
Provision for doubtful accounts 25,998 18,849 47,338 37,122
Depreciation and amortization 36,638 62,769 72,073 124,462
Research and development 2,007 1,162 4,005 2,246
Interest expense, net and related financing costs including $33,687
and $30,925 for the three months and $67,366 and $62,104 for
the six months ended, respectively, of interest with affiliates 55,818 55,148 110,841 110,627
-------- ---------- ---------- ----------
856,894 842,666 1,683,639 1,667,986
-------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 73,506 61,125 140,665 104,081
PROVISION FOR INCOME TAXES 29,032 29,650 55,733 50,160
-------- ---------- ---------- ----------
NET INCOME BEFORE EXTRAORDINARY ITEM 44,474 31,475 84,932 53,921
Extraordinary loss on early redemption of borrowings from affiliates,
net of tax benefit $6,520 9,780 -- 9,780 --
-------- ---------- ---------- ----------
NET INCOME $ 34,694 $ 31,475 $ 75,152 $ 53,921
======== ========== ========== ==========
Basic and fully dilutive net income before extraordinary item per share $ 0.49 $ 0.35 $ 0.94 $ 0.60
Basic and fully dilutive net income per share $ 0.38 $ 0.35 $ 0.83 $ 0.60
See accompanying Notes to Unaudited, Consolidated Financial Statements.
4
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2002 2001 2002 2001
-------- ------- -------- --------
NET INCOME $ 34,694 $31,475 $ 75,152 $ 53,921
Other comprehensive income
Foreign currency translation adjustments 1,546 292 1,113 (116)
Derivative instruments (net of deferred tax expense
(benefit) of ($4,971) and $2,363 for the three months
and ($1,158) and ($16,329) for the six months ended,
respectively (11,832) 4,144 (5,922) (23,895)
-------- ------- -------- --------
Total other comprehensive income (10,286) 4,436 (4,809) (24,011)
-------- ------- -------- --------
COMPREHENSIVE INCOME $ 24,408 $35,911 $ 70,343 $ 29,910
-------- ------- -------- --------
See accompanying Notes to Unaudited, Consolidated Financial Statements.
5
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 29,834 $ 26,786
Accounts receivable, less allowances of $120,164 and
$103,859 398,566 423,912
Inventories 203,117 202,221
Deferred income taxes 180,325 196,831
Other current assets 124,866 119,592
----------- -----------
Total Current Assets 936,708 969,342
----------- -----------
Properties and equipment, net 517,744 520,620
----------- -----------
Other Assets:
Excess of cost over the fair value of net assets
acquired and other intangible assets, net of
accumulated amortization of $742,802 and $718,939 3,430,264
3,418,544
Other assets and deferred charges 139,289 94,460
----------- -----------
Total Other Assets 3,569,553 3,513,004
----------- -----------
Total Assets $ 5,024,005 $ 5,002,966
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and capitalized lease
obligations 152,539 152,046
Current portion of borrowing from affiliates 253,819 291,360
Accounts payable 132,595 125,530
Accrued liabilities 232,319 229,153
Accrued special charge for legal matters 212,945 224,037
Net accounts payable to affiliates 33,730 39,934
Accrued income taxes 74,787 83,654
----------- -----------
Total Current Liabilities 1,092,734 1,145,714
Long-term debt 622,500 300,600
Non-current borrowings from affiliates 651,249 1,005,669
Capitalized lease obligations 2,073 1,675
Deferred income taxes 118,535 113,046
Other liabilities 123,551 146,170
----------- -----------
Total Liabilities 2,610,642 2,712,874
----------- -----------
Mandatorily Redeemable Preferred Securities 745,518 692,330
----------- -----------
Equity:
Preferred stock, $100 par value 7,412 7,412
Preferred stock, $.10 par value 8,906 8,906
Common stock, $1 par value; 300,000,000 shares
authorized; outstanding 90,000,000 90,000 90,000
Paid in capital 1,945,014 1,945,014
Retained deficit (327,857) (402,749)
Accumulated comprehensive loss (55,630) (50,821)
----------- -----------
Total Equity 1,667,845 1,597,762
----------- -----------
Total Liabilities and Equity $ 5,024,005 $ 5,002,966
=========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements.
6
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------
2002 2001
--------- ---------
Cash Flows from Operating Activities:
Net Income $ 75,152 $ 53,921
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 72,073 124,462
Provision for doubtful accounts 47,338 37,122
Deferred income taxes 23,153 12,743
Loss on disposal of properties and equipment 1,263 465
Extraordinary loss on early redemption of borrowings from affiliates 9,780 --
Changes in operating assets and liabilities, net of effects of
purchase acquisitions and foreign exchange:
Increase in accounts receivable (29,992) (100,389)
Increase in inventories (875) (14,285)
Increase in other current assets (8,551) (23,307)
Decrease in IDPN accounts receivable -- 5,189
(Increase) decrease in other assets and deferred charges (7,824) 8,016
Increase (decrease) in accounts payable 7,065 (35,563)
(Decrease) increase in accrued income taxes (2,347) 24,004
(Decrease) increase in accrued liabilities (5,601) 21,089
Decrease in accrued special charge for legal matters (11,092) --
(Decrease) increase in other long-term liabilities (14,651) 7,746
Net changes due to/from affiliates (6,204) 10,544
Other, net 1,517 (6,545)
--------- ---------
Net cash provided by operating activities 150,204 125,212
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures (44,693) (61,462)
Payments for acquisitions, net of cash acquired (23,344) (272,843)
Increase in other assets (1,000) (7,246)
--------- ---------
Net cash used in investing activities (69,037) (341,551)
--------- ---------
Cash flows from Financing Activities:
Payments on settlement of investigation -- (85,920)
Net (decrease) increase in borrowings from affiliates (391,961) 368,394
Premium on early redemption of debt (16,300) --
Cash dividends paid (260) (260)
Proceeds from receivable financing facility 8,000 9,700
Proceeds from mandatorily redeemable preferred securities -- 97,500
Equity Contribution -- 10,000
Net increase (decrease) on debt and capitalized leases 321,366 (170,615)
--------- ---------
Net cash (used in) provided by financing activities (79,155) 228,799
--------- ---------
Effects of changes in foreign exchange rates 1,036 (60)
--------- ---------
Change in cash and cash equivalents 3,048 12,400
--------- ---------
Cash and cash equivalents at beginning of period 26,786 33,327
--------- ---------
Cash and cash equivalents at end of period $ 29,834 $ 45,727
========= =========
See accompanying Notes to Unaudited, Consolidated Financial Statements
7
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2002 2001
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 135,171 $ 95,254
Income taxes paid, net 34,889 5,704
Details for Acquisitions:
Assets acquired 24,583 320,121
Liabilities assumed (1,239) (47,278)
--------- ---------
Net cash paid for acquisitions $ 23,344 $ 272,843
========= =========
See accompanying Notes to Unaudited Consolidated Financial Statements
8
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY
Fresenius Medical Care Holdings, Inc., a New York corporation ("the
Company") is a subsidiary of Fresenius Medical Care AG, a German corporation
("FMC" or "Fresenius Medical Care"). The Company conducts its operations through
five principal subsidiaries, National Medical Care, Inc., ("NMC"); Fresenius USA
Marketing, Inc., Fresenius USA Manufacturing, Inc., and SRC Holding Company,
Inc., ("SRC"), all Delaware corporations and Fresenius USA, Inc., a
Massachusetts corporation.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries and those financial statements where the
Company controls professional corporations in accordance with Emerging Issues
Task Force Issue 97-2.
The Company is primarily engaged in (i) providing kidney dialysis
services, and clinical laboratory testing, and (ii) manufacturing and
distributing products and equipment for dialysis treatment.
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION
The consolidated financial statements in this report at June 30, 2002
and 2001 and for the three and six month interim periods then ended are
unaudited and should be read in conjunction with the audited, consolidated
financial statements in the Company's 2001 report on Form 10-K. Such interim
financial statements reflect all adjustments that, in the opinion of management,
are necessary for a fair presentation of the results of the interim periods
presented. Certain amounts in the prior periods' consolidated financial
statements have been reclassified to conform to the current periods' basis of
presentation.
The results of operations and cash flows for the three and six month
periods ended June 30, 2002 are not necessarily indicative of the results of
operations and cash flows for the fiscal year ending December 31, 2002.
All intercompany transactions and balances have been eliminated in
consolidation.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
during the year. Diluted net income per share includes the effect of all
dilutive potential common shares that were outstanding during the year. The
number of shares used to compute basic and diluted net income per share was
90,000 in all periods as there were no potential common shares and no
adjustments to income available to common shareholders to be considered for
purposes of the diluted net income per share calculation.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
------ ------ ------ ------
The weighted average number of shares of
Common Stock were as follows......................... 90,000 90,000 90,000 90,000
====== ====== ====== ======
9
Net income used in the computation of earnings per share were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------- -------- -------- --------
NET INCOME BEFORE EXTRAORDINARY ITEM
Net income before extraordinary item $ 44,474 $ 31,475 $ 84,932 $ 53,921
Dividends paid on preferred stock (130) (130) (260) (260)
-------- -------- -------- --------
Income available to common shareholders $ 44,344 $ 31,345 $ 84,672 $ 53,661
======== ======== ======== ========
Basic and fully dilutive net income before
extraordinary item per share $ 0.49 $ 0.35 $ 0.94 $ 0.60
======== ======== ======== ========
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------- -------- -------- --------
NET INCOME
Net income $ 34,694 $ 31,475 $ 75,152 $ 53,921
Dividends paid on preferred stock (130) (130) (260) (260)
-------- -------- -------- --------
Income available to common shareholders $ 34,564 $ 31,345 $ 74,892 $ 53,661
======== ======== ======== ========
Basic and fully dilutive net income per share $ 0.38 $ 0.35 $ 0.83 $ 0.60
======== ======== ======== ========
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted the provisions of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities and the
related amendments of SFAS No. 138. The cumulative effect of adopting SFAS 133
as of January 1, 2001 was not material to the Company's consolidated financial
statements.
The Company is exposed to market risk due to changes in interest rates and
foreign currencies. The Company uses derivative financial instruments, including
interest rate swaps and foreign exchange contracts, as part of its risk
management strategy. These instruments are used as a means of hedging exposure
to interest rate and foreign currency fluctuations in connection with debt
obligations, forecasted raw material purchases and Euro denominated mandatorily
redeemable preferred stock.
The interest rate swaps are designated as cash flow hedges effectively
converting certain variable interest rate payments into fixed interest rate
payments. After tax losses of $10.3 million ($17.2 million pretax) for the three
months ended June 30, 2002 and after tax losses of $3.8 million ($6.4 million
pretax) for the six months ended June 30, 2002 were deferred in other
comprehensive income. Interest payable and receivable under the swap terms are
accrued and recorded as adjustments to interest expense at each reporting date.
The Company enters into forward rate agreements that are designated and
effective as hedges of forecasted raw material purchases. After tax losses of
$0.0 million ($0.0 million pretax) for the three months ended June 30, 2002 and
after tax losses of $0.3 million ($0.5 million pretax) for the six months ended
June 30, 2002 were deferred in other comprehensive income and will be
reclassified into cost of sales in the period during which the hedged
transactions affect earnings. All deferred amounts will be reclassified into
earnings within the next twelve months.
The Company enters into forward rate agreements that are designated and
effective as hedges of changes in the fair value of the Euro denominated
mandatorily redeemable preferred stock. Changes in fair value are recorded in
earnings and offset against gains and
10
losses resulting from the underlying exposures. After tax gains of $1.8 million
($3.0 million pretax) for the three months ended June 30, 2002 and after tax
gains of $1.7 million ($2.9 million pretax) for the six months ended June 30,
2002 were deferred in other comprehensive income. Ineffective amounts had no
material impact on earnings for the three and six months ended June 30, 2002.
Periodically, the Company enters into derivative instruments with related
parties to form a natural hedge for currency exposures on intercompany
obligations. These instruments are reflected in the balance sheet at fair value
with changes in fair value recognized in earnings. Pre-tax charges (gains)
recorded in the statement of operations for the three and six months ended June
30, 2002 were ($10.3 million) and ($8.4 million), respectively.
EVEREST ACQUISITION
On January 8, 2001, FMC acquired Everest Healthcare Services Corporation
(now known as Everest Healthcare Holdings, Inc., "Everest") through a merger of
Everest into a subsidiary of FMC at a purchase price of $365 million.
Approximately $99 million was funded by the issuance of 2.25 million FMC
preference shares to Everest. The remaining purchase price was paid with cash of
$266 million, including assumed debt. Everest owned, operated or managed
approximately 70 clinic facilities providing therapy to approximately 6,800
patients in the United States. Everest also operated extracorporeal blood
services and acute dialysis businesses that provide acute dialysis, apheresis
and hemoperfusion services to approximately 100 hospitals. On August 22, 2001
FMC transferred its interests in Everest to the Company at its book value. There
was no gain or loss recorded on this sale as it is a transfer between entities
under common control. The consolidated operations and cash flows of the Company
for the twelve months ended December 31, 2001 include the consolidated
operations and cash flows of Everest retroactive to January 1, 2001.
Accordingly, the Company's previously reported revenues and results of
operations for the three and six months ended June 30, 2001 have been restated
to include Everest revenues of $60.5 and $123.6 million and losses of $0.8 and
$0.1 million, respectively.
NEW PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No.141, Business Combinations ("SFAS
141"), and SFAS No.142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
The Company adopted the provisions of SFAS 141 immediately, and adopted
SFAS 142 effective January 1, 2002. Accordingly, any goodwill or intangible
asset determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001 has not been amortized, but
has been evaluated for impairment in accordance with SFAS 142. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 were amortized through December 31, 2001.
SFAS 141 requires that the Company evaluate existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and that it
make any necessary reclassifications in order to conform with the new criteria
in SFAS 141 for recognition apart from goodwill. The Company is required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company is required to test the intangible asset for impairment in
accordance with the provisions of SFAS 142.
In connection with the transitional goodwill impairment evaluation, SFAS
142 requires that the Company perform an assessment of whether there is an
indication that goodwill (and equity-method goodwill) is impaired as of the date
of adoption. To accomplish this the Company must identify its reporting units
and determine the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company then has up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
11
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with SFAS 141, to its carrying amount, both of
which would be measured as of the date of adoption. This second step is required
to be completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss should be recognized as the
cumulative effect of a change in accounting principle in its statement of
operations.
The Company has completed the impairment tests for indefinite lived
specific intangibles and goodwill and has determined that there is no impairment
of these assets as of the transition date.
However, based on our current assessments and subject to continuing
analysis, had SFAS 142 been effective as of January 1, 2001 the Company
estimates that there would have been a favorable impact to pre-tax earnings for
fiscal year 2001 of approximately $107 million. The favorable impact in fiscal
year 2002 should approximate $97 million.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting
requirements for the retirement of tangible long-lived assets and asset
retirement costs. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period incurred and the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset. SFAS 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company is currently
estimating the impact of SFAS 143 on the Company's financial statements,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
Management does not believe that transitional impairment losses will be
incurred.
In October 2001, the FASB issued SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less selling costs. SFAS 144 also broadens the reporting of discontinued
operations and will no longer be measured at net realizable value or include
amounts for operating losses that have not yet occurred. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 31, 2001.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections
("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under
Opinion 30 to determine if losses from extinguishment of debt should be
classified as extraordinary items. SFAS 145 rescinds Statement No. 44 which is
no longer necessary. SFAS 145 amends Statement No. 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback
arrangements be accounted for in a similar manner as sale-leaseback
transactions. The provisions of this Statement related to the rescission of
Statement 4 is effective for fiscal years beginning after May 15, 2002. The
provisions of this Statement related to Statement 13 shall be effective for
transactions occurring after May 15, 2002. All other provisions of this
statement shall be effective for financial statements issued on or after May 15,
2002. The Company will be required to reclassify the extraordinary loss recorded
in the three months ended June 30, 2002 as a separate expense within operations
once this Statement is adopted in fiscal year 2003. There is no material impact
to the Company for those provisions effective for the periods ended June 30,
2002.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies EITF
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The principal difference between this statement and EITF 94-3 relates to the
requirements for the recognition of a liability for a cost associated with an
exit or disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost was recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002.
NOTE 2. INVENTORIES
JUNE 30, DECEMBER 31,
2002 2001
-------- ---------
Inventories:
Raw materials $ 45,039 $ 40,834
Manufactured goods in process 14,742 11,053
Manufactured and purchased inventory available for sale 80,344 84,789
-------- ---------
140,125 136,676
Health care supplies 62,992 65,545
-------- ---------
Total $203,117 $ 202,221
======== =========
12
NOTE 3. REPAYMENT OF INTERCOMPANY DEBT
On June 27, 2002 the Company repaid its intercompany debt to FMC Finance
S.a.r.l. in the amount of $350,995 originally due in 2006, utilizing funds
borrowed under its senior credit facility. An extraordinary loss of $9,780, net
of a $6,520 tax benefit, was recorded for the premium owed to FMC Finance
S.a.r.l. in the event of the early retirement of this obligation in accordance
with the terms of the intercompany debt agreement.
NOTE 4. DEBT
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
Long-term debt to outside parties consists of:
NMC Credit Facility .......................................... $ 772,500 $ 450,600
Other ........................................................ 1,830 27
--------- ------------
774,330 450,627
Less amounts classified as current ........................... 151,830 150,027
--------- ------------
$ 622,500 $ 300,600
========= ============
Borrowings (receivables) from affiliates consists of:
JUNE 30, DECEMBER 31,
2002 2001
---------- ----------
Fresenius Medical Care AG borrowings primarily at interest
rates approximating 2.57% and 2.85%, respectively ........ $ 166,000 $ 191,967
Fresenius AG borrowing at interest rates approximating 2.73% . -- 15,000
Fresenius Medical Care Trust Finance S.a.r.l. borrowings at
interest rates ranging between 8.25% and 9.25% ............ 654,244 1,005,239
Franconia Acquisition, LLC at interest rates approximating
2.12% and 2.40%, respectively ............................ 83,721 83,721
Other ........................................................ 1,103 1,102
---------- ----------
905,068 1,297,029
Less amounts classified as current ........................... 253,819 291,360
---------- ----------
Total ........................................................ $ 651,249 $1,005,669
========== ==========
NOTE 5. MANDATORILY REDEEMABLE PREFERRED SECURITIES
During 2001 and 2000, a wholly-owned subsidiary of the Company issued
shares of various series of Preferred Stock ("Redeemable Preferred Securities")
to NMC which were then transferred to FMC for proceeds totaling $392,037 in 2001
and $305,500 in 2000. No Redeemable Preferred Securities were issued for the six
months ended June 30, 2002. The table below provides information for Redeemable
Preferred Securities for the periods indicated.
JUNE 30, DECEMBER 31,
MANDATORILY REDEEMABLE PREFERRED SECURITIES 2002 2001
--------- ------------
Series A Preferred Stock, 1,000 shares $113,500 $ 113,500
Series B Preferred Stock, 300 shares . 34,000 34,000
Series C Preferred Stock, 1,700 shares 192,000 192,000
Series D Preferred Stock, 870 shares . 97,500 97,500
Series E Preferred Stock, 1,300 shares 147,500 147,500
Series F Preferred Stock, 980 shares . 113,037 113,037
--------- ------------
697,537 697,537
Mark to Market Adjustment ............ 47,981 (5,207)
--------- ------------
Total ................................ $745,518 $ 692,330
========= ============
13
These securities are similar in substance except for the order of
preference both as to dividends and liquidation, dissolution or winding-up of
the subsidiary. The order of preference is alphabetically Series A through
Series F. In addition, the holders of the Redeemable Preferred Securities are
entitled to receive dividends in an amount of dollars per share that varies from
approximately 3% to 8% depending on the Series. The dividends will be declared
and paid in cash at least annually. All the Redeemable Preferred Securities have
a par value of $.01 per share.
Upon liquidation or dissolution or winding up of the issuer of the
Redeemable Preferred Securities, the holders of the Redeemable Preferred
Securities are entitled to an amount equal to the liquidation preference for
each share of stock plus an amount equal to all accrued and unpaid dividends
thereon through the date of distribution. The liquidation preference is the sum
of the issuance price plus, for each year or portion thereof, an amount equal to
one-half of one percent of the issue price, not to exceed 5%.
The Redeemable Preferred Securities will be sold back to the Company two
years from their respective date of issuance for a total amount equal to Euros
501,773 (Series A, B, C, and F) and US dollars $245,000 (Series D and E) plus
any accrued and unpaid dividends. For the three months ended June 30, 2002 and
2001, dividends of $10,646 and $5,860 and for the six months ended June 30, 2002
and 2001 dividends of $20,575 and $11,060, respectively, were recorded and
classified as part of interest expense in the consolidated statement of
operations. During the three months ended March 31, 2002, a cash dividend
payment was made totaling $29,850. Accordingly, the Euro Redeemable Preferred
Securities are deemed to be a Euro liability and the risk of foreign currency
fluctuations are hedged through forward currency contracts.
The Company records mark to market adjustments based on fluctuations in
currency rates and records the offset to accumulated comprehensive income.
The holders of the Redeemable Preferred Securities have the same
participation rights as the holders of all other classes of capital stock of the
issuing subsidiary.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
Net income and net income adjusted to exclude amortization expense
(including any related tax effect) recognized in those periods relating to
goodwill and specific intangible assets that are no longer being amortized.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
($000 EXCEPT FOR EARNINGS PER SHARE) 2002 2001 2002 2001
------------- -------------- ------------ -------------
Net Income $ 34,694 $ 31,475 $ 75,152 $ 53,921
Net Income Adjusted $ 34,694 $ 51,424 $ 75,152 $ 98,150
Reconciliation of net income to adjusted net income and net income per
share to adjusted net income per share.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------- ----------------------------------
($000 EXCEPT FOR NET INCOME PER SHARE) 2002 2001 2002 2001
--------------- -------------- -------------- ---------------
Reported Net Income $ 34,694 $ 31,475 $ 75,152 $ 53,921
Addback: Amortization -- 19,949 -- 44,229
--------------- --------------- -------------- ---------------
Adjusted Net Income $ 34,694 51,424 $ 75,152 $ 98,150
=============== =============== ============== ===============
BASIC AND FULLY DILUTIVE NET INCOME PER
SHARE:
Reported $ 0.38 $ 0.35 $ 0.83 $ 0.60
Addback: Amortization -- 0.22 -- 0.49
--------------- --------------- -------------- ---------------
Adjusted net income per share $ 0.38 $ 0.57 $ 0.83 $ 1.09
=============== =============== ================ ================
14
The total pre-tax amortization expense associated with goodwill and
specific intangible assets recognized during the three months and six months
ended June 30, 2001 totaled $25,789 and $55,348, respectively. The effective tax
rate for restatement of amortization was 20.1%. The effective tax rate is less
than the corporate statutory rate primarily due to permanent differences related
to non-deductible goodwill.
The gross carrying value and accumulated amortization of amortizable
intangible assets is as follows:
JUNE 30, 2002 DECEMBER 31, 2001
----------------------------------- -------------------- -------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
VALUE AMORTIZATION VALUE AMORTIZATION
---------------- ----------------- ------------------ -------------------
Patient Relationships $ 243,837 $ (175,738) $ 233,490 $ (155,769)
Other Intangibles $ 107,477 $ (54,136) $ 109,545 $ (50,406)
Amortization expense for amortizable intangible assets at June 30, 2002 is
estimated to be $18,900 for the remainder of 2002, $21,700 for 2003, $17,700 for
2004, $14,100 for 2005, and $11,000 for 2006.
NOTE 7. SPECIAL CHARGE FOR LEGAL MATTERS
In the fourth quarter of 2001, the Company recorded a $258 million ($177
million after tax) special charge to address 1996 merger related legal matters,
estimated liabilities including legal expenses arising in connection with the
W.R. Grace Chapter 11 proceedings and the cost of resolving pending litigation
and other disputes with certain commercial insurers. In January 2002, the
Company reached an agreement in principle to resolve pending litigation with
Aetna Life Insurance Company (Aetna). The special charge is primarily comprised
of three major components relating to (i) the W.R. Grace bankruptcy, (ii)
litigation with commercial insurers and (iii) other legal matters.
The Company has assessed the extent of potential liabilities as a result
of the W.R. Grace Chapter 11 proceedings. The Company accrued $172 million
principally representing a provision for income taxes payable for the years
prior to the 1996 merger for which the Company has been indemnified by W.R.
Grace, but may ultimately be obligated to pay as a result of W.R. Grace's
Chapter 11 filing. In addition, that amount included the costs of defending the
Company in litigation arising out of W.R. Grace's Chapter 11 filing.
The Company has finalized a settlement with Aetna Life Insurance Company
and certain of its affiliates ("Aetna") in regards to billing practice
litigation. The Company included in the special charge the amount of $55 million
to provide for settlement obligations, legal expenses and the resolution of
disputed accounts receivable for Aetna and the other commercial litigants. The
Company believes that the accrual reasonably estimates the costs and expenses
associated with Aetna's settlement.
The remaining amount of $31 million pre-tax was accrued for (i) assets and
receivables that are impaired in connection with other legal matters and (ii)
anticipated expenses associated with the continued defense and resolution of the
legal matters. See also Note 9 "Commitment and Contingencies- Legal
Proceedings."
At June 30, 2002, there is a remaining balance of approximately $213
million for the accrued special charge for legal matters. During the three and
six months ended June 30, 2002, approximately $7 million and $11 million,
respectively in payments have been applied against the accrued special charge
for legal matters.
NOTE 8. PENSION PLANS
During the first quarter of 2002, the Company recorded a gain of
approximately $13.1 million resulting from the curtailment of the Company's
defined benefit and supplemental executive retirement plans. The Company has
retained all employee pension obligations as of the closing date for the
fully-vested and frozen benefits for all employees.
15
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
The Company was formed as a result of a series of transactions pursuant to
the Agreement and Plan of Reorganization (the "Merger") dated as of February 4,
1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the
Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and
continues to have, significant potential liabilities arising out of
product-liability related litigation, pre-Merger tax claims and other claims
unrelated to NMC, which was Grace's dialysis business prior to the Merger. In
connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the
Company and NMC against all liabilities of W.R. Grace & Co., whether relating to
events occurring before or after the Merger, other than liabilities arising from
or relating to NMC's operations. Proceedings have been brought against W.R.
Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace
& Co.-Conn., principally alleging that the Merger was a fraudulent conveyance,
violated the uniform fraudulent transfer act, and constituted a conspiracy. See
discussion of "Mesquita v. W.R. Grace and Company" below.
Pre-Merger tax claims or tax claims that would arise if events were to
violate the tax-free nature of the Merger, could ultimately be the obligation of
the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its
filings with the Securities and Exchange Commission that: its tax returns for
the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the
"Service"); Grace has received the Service examinaiton report on tax periods
1993 to 1996; that during those years Grace deducted approximately $122.1
million in interest attributable to corporate owned life insurance ("COLI")
policy loans; that Grace has paid $21.2 million of tax and interest related to
COLI deductions taken in tax years prior to 1993; and that a U.S. District Court
ruling has denied interest deductions of a taxpayer in a similar situation.
Subject to certain representations made by Grace, the Company and Fresenius AG,
Grace and certain of its affiliates agreed to indemnify the Company against this
and other pre-Merger and Merger related tax liabilities.
Subsequent to the Merger, Grace was involved in a multi-step transaction
involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The
Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to
confirm the Company's entitlement to indemnification from Sealed Air for all
losses and expenses incurred by the Company relating to pre-Merger tax
liabilities and Merger-related claims.
Subsequent to the Sealed Air transaction, Grace and certain of its
subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. The Company intends to continue to pursue vigorously its rights to
indemnification from Grace and its insurers and former and current affiliates,
including Sealed Air, for all costs incurred by the Company relating to
pre-Merger tax and Merger-related claims.
Since 1997, the Company, NMC, and certain NMC subsidiaries have been
engaged in litigation with Aetna Life Insurance Company and certain of its
affiliates ("Aetna") concerning allegations of inappropriate billing practices
for nutritional therapy and diagnostic and clinical laboratory tests and
misrepresentations. In July 2002, the Company and Aetna agreed to settle and
dismiss these claims and the Company's counterclaims relating to overdue
payments for services rendered by the Company to Aetna's beneficiaries. The
costs of the Aetna settlement will be charged against previously established
accruals. (See "Accrued Special Charge for Legal Matters" below.)
Other insurance companies have filed claims against the Company, similar
to those filed by Aetna, that seek unspecified damages and costs. The Company,
NMC and its subsidiaries believe that there are substantial defenses to the
claims asserted, and intend to vigorously defend all lawsuits. The Company has
filed counterclaims against the plaintiffs in these matters based on
inappropriate claim denials and delays in claim payments. Other private payors
have contacted the Company and may assert that NMC received excess payments and,
similarly, may join the lawsuits or file their own lawsuit seeking reimbursement
and other damages. Although the ultimate outcome on the Company of these
proceedings cannot be predicted at this time, an adverse result could have a
material adverse effect on the Company's business, financial condition and
results of operations.
On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al.
(Sup. Court of Calif., S.F. County, #315465) was filed as a class action by
plaintiffs claiming to be creditors of W. R. Grace & Co.-Conn ("Grace
Chemicals") against Grace Chemicals, the Company and other defendants,
principally alleging that the Merger which resulted in the original formation of
the Company was a fraudulent transfer, violated the uniform fraudulent transfer
act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R.
Grace & Company, et al.) and additional class actions were filed subsequently
with substantially similar allegations; all cases
16
have been stayed and transferred to the U.S. District Court, have been dismissed
without prejudice or are pending before the U.S. Bankruptcy Court in Delaware in
connection with Grace's Chapter 11 proceeding. The Company has requested
indemnification from Grace Chemicals and Sealed Air Corporation pursuant to the
Merger agreements. If the Merger is determined to have been a fraudulent
transfer, if material damages are proved by the plaintiffs, and if the Company
is not able to collect, in whole or in part on the indemnity, from W.R. Grace &
Co., Sealed Air Corporation, or their affiliates or former affiliates or their
insurers, and if the Company is not able to collect against any party that may
have received distributions from W.R. Grace & Co., a judgment could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company is confident that no fraudulent transfer or
conspiracy occurred and intends to defend the cases vigorously.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. anti-kickback statute, the False Claims
Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable
laws or regulations may be amended, or enforcement agencies or courts may make
interpretations that differ from the Company's or the manner in which the
Company conduct its business. In the U.S., enforcement has become a high
priority for the federal government and some states. In addition, the provisions
of the False Claims Act authorizing payment of a portion of any recovery to the
party bringing the suit encourage private plaintiffs to commence "whistle
blower" actions. By virtue of this regulatory environment, as well as our
corporate integrity agreement with the government, the Company expects that its
business activities and practices will continue to be subject to extensive
review by regulatory authorities and private parties, and continuing inquiries,
claims and litigation relating to its compliance with applicable laws and
regulations. The Company may not always be aware that an inquiry or action has
begun, particularly in the case of "whistle blower" actions, which are initially
filed under court seal.
The Company operates a large number facilities throughout the U.S. In such
a decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliated companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws,
and the Company cannot predict whether law enforcement authorities may use such
information to initiate further investigations of the business practices
disclosed or any of its other business activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
17
ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS
At December 31, 2001, the Company recorded a pre-tax special charge of
$258 million to reflect anticipated expenses associated with the continued
defense and resolution of pre-Merger tax claims, Merger-related claims, the
Aetna litigation and other commercial insurer claims. While the Company believes
that its accruals reasonably estimate the Company's currently anticipated costs
in connection with the continued defense and resolution of these claims, no
assurances can be given that the actual costs incurred by the Company will not
exceed the amount of these accruals.
NOTE 10. INDUSTRY SEGMENTS INFORMATION
The Company's reportable segments are Dialysis Services and Dialysis
Products. For purposes of segment reporting, the Dialysis Services Division and
Spectra Renal Management are combined and reported as Dialysis Services. These
divisions are aggregated because of their similar economic classifications.
These include the fact that they are both health care service providers whose
services are provided to a common patient population, and both receive a
significant portion of their net revenue from Medicare and other government and
non-government third party payors. The Dialysis Products segment reflects the
activity of the Dialysis Products Division only.
The table below provides information for the three and six months ended June 30,
2002 and 2001 pertaining to the Company's two industry segments.
LESS
DIALYSIS DIALYSIS INTERSEGMENT
SERVICES PRODUCTS SALES TOTAL
-------- -------- ----- -----
NET REVENUES
Three Months Ended ................ 6/30/02 $ 818,666 $191,507 $ 79,773 $ 930,400
Three Months Ended ................ 6/30/01 783,928 189,791 69,928 903,791
Six Months Ended .................. 6/30/02 $1,607,199 $374,714 $ 157,609 $1,824,304
Six Months Ended .................. 6/30/01 1,542,436 368,470 138,839 1,772,067
OPERATING EARNINGS
Three Months Ended ................ 6/30/02 $ 103,548 $ 35,201 -- $ 138,749
Three Months Ended ................ 6/30/01 114,716 35,440 -- 150,156
Six Months Ended .................. 6/30/02 $ 196,740 $ 70,531 -- $ 267,271
Six Months Ended .................. 6/30/01 217,489 65,058 -- 282,547
TOTAL ASSETS ...................... 6/30/02 $2,665,353 648,299 -- $3,313,652
12/31/01 2,650,561 645,956 -- 3,296,517
Total assets of $5,024,005 is comprised of total assets for
reportable segments, $3,313,652; intangible assets not allocated to segments,
$1,880,581 accounts receivable financing agreement ($450,000); and other
corporate assets, $279,772.
The table below provides the reconciliations of reportable segment operating
earnings to the Company's consolidated totals.
THREE MONTHS ENDED SIX MONTHS ENDED
SEGMENT RECONCILIATION JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM:
Total operating earnings for reportable segments .................. $ 138,749 $ 150,156 $ 267,271 $ 282,547
Corporate G&A ..................................................... (7,418) (32,721) (11,760) (65,593)
Research and development expense .................................. (2,007) (1,162) (4,005) (2,246)
Net interest expense .............................................. (55,818) (55,148) (110,841) (110,627)
--------- --------- --------- ---------
Income before income taxes and extraordinary
item ............................................................ $ 73,506 $ 61,125 $ 140,665 $ 104,081
========= ========= ========= =========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company. The discussion should be read in conjunction with the
consolidated financial statements included elsewhere in this document.
This section contains certain forward-looking statements that are subject
to various risks and uncertainties. Such statements include, without limitation,
discussions concerning the outlook of the Company, government reimbursement,
future plans and management's expectations regarding future performance. Actual
results could differ materially from those contained in these forward-looking
statements due to certain factors including, without limitation, changes in
business, economic and competitive conditions, regulatory reforms, foreign
exchange rate fluctuations, uncertainties in litigation or investigative
proceedings, the realization of anticipated tax deductions, and the availability
of financing. These and other risks and uncertainties, which are more fully
described elsewhere in this Item 2 and in the Company's reports filed from time
to time with the Securities and Exchange Commission, could cause the Company's
results to differ materially from the results that have been or may be projected
by or on behalf of the Company.
RESULTS OF OPERATIONS
The following table summarizes certain operating results of the Company by
principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Dialysis Products to Dialysis
Services.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------------
2002 2001 2002 2001
----- ----- ------- -------
NET REVENUES
Dialysis Services .............................. $ 819 $ 784 $ 1,607 $ 1,542
Dialysis Products .............................. 191 190 375 368
Intercompany Eliminations ...................... (80) (70) (158) (138)
----- ----- ------- -------
Total Net Revenues ................................ $ 930 $ 904 $ 1,824 $ 1,772
===== ===== ======= =======
Operating Earnings:
Dialysis Services .............................. $ 104 $ 115 $ 197 $ 217
Dialysis Products .............................. 35 35 71 65
----- ----- ------- -------
Total Operating Earnings .......................... 139 150 268 282
----- ----- ------- -------
Other Expenses:
General Corporate .............................. $ 7 $ 33 $ 12 $ 65
Research & Development ......................... 2 1 4 2
Interest Expense, Net .......................... 56 55 112 111
----- ----- ------- -------
Total Other Expenses .............................. 65 89 128 178
----- ----- ------- -------
Earnings Before Income Taxes and Extraordinary Item 74 61 140 104
Provision for Income Taxes ........................ 30 30 56 50
----- ----- ------- -------
Net Income Before Extraordinary Item .............. $ 44 $ 31 $ 84 $ 54
Extraordinary Loss ................................ 9 -- 9 --
----- ----- ------- -------
Net Income ........................................ $ 35 $ 31 $ 75 $ 54
===== ===== ======= =======
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net revenues for the second quarter of 2002 increased by 3% ($26 million)
over the comparable period in 2001. Net income for the second quarter of 2002
increased by 13% ($4 million) over the comparable period in 2001 primarily as a
result of decreased general corporate expenses ($26 million) and partially
offset by decreased operating earnings ($11 million) and a extraordinary loss,
net of tax benefit for a premium payment on the early redemption of intercompany
debt ($9 million).
Had the adoption of SFAS 142 been effective January 1, 2001, net income
would have decreased 33% ($17 million) over the comparable period in 2001.
19
DIALYSIS SERVICES
Dialysis Services net revenues for the second quarter of 2002 increased by
4% to $814 million (net of $5 million of intercompany sales) primarily
attributable to base business revenue growth. The increase in dialysis service
revenue growth resulted primarily from a 4% increase in treatment volume,
reflecting both base business growth and the impact of 2002 and 2001
acquisitions. Revenue was also favorably impacted by increased ancillary
services in 2002 as compared to 2001.
Dialysis Services operating earnings for the second quarter of 2002
decreased 10% ($11 million) over the comparable period in 2001, primarily due to
Amgen price increases ($5 million), expenses associated with Company's
conversion from re-use to single use dialyzers ($5 million), higher provisions
for doubtful accounts ($7 million) and higher general and administrative costs
($5 million). These increases were partially offset by lower amortization
expenses ($7 million) as a result of the adoption of SFAS 142, which became
effective January 1, 2002, and improved treatment volume ($4 million).
DIALYSIS PRODUCTS
Dialysis Products gross revenues increased 1% to $191 million in the
second quarter of 2002 as compared to $190 million in the comparable period of
2001. Internal sales to Dialysis Services increased by 15% to $75 million and
were partially offset by a decrease in external sales of 7% to $115 million.
Dialysis Products external sales include both (i) sales of machines to a third
party leasing company which are leased back by Dialysis Services (ii) and Method
II PD revenues for Dialysis Services patients. Dialysis Products measures its
external sales performance based on sales to the "net available external
market". The net available external market excludes machines sales and Method II
revenues involving the Dialysis Services Division as well as sales to other
vertically integrated dialysis companies. Net available external market sales
increased by 3% to $92 million in the second quarter 2002 over the comparable
period of 2001.
Dialysis Products operating earnings for the second quarter of 2002
remained constant ($35 million) over the comparable period of 2001. Lower gross
margins ($2 million primarily as a result of the Company's conversion from
re-use to single use dialyzers) were primarily offset by lower amortization
expense ($2 million) as a result of the adoption of SFAS 142, which became
effective January 1, 2002.
OTHER EXPENSES
The Company's other expenses for the second quarter of 2002 decreased by
27% ($24 million) over the comparable period of 2001. General corporate expenses
decreased by $26 million and interest expense increased $1 million. The decrease
in general corporate expenses was primarily due to foreign exchange fluctuations
($13 million resulting from $10 million foreign exchange gains for the second
quarter of 2002 versus $3 million foreign exchange losses for the second quarter
of 2001) and decreased amortization expenses ($16 million, primarily resulting
from the adoption of SFAS 142) offset somewhat by increases in other general
corporate expenses ($3 million).
EXTRAORDINARY LOSS
On June 27, 2002 the Company repaid its intercompany debt to FMC Finance
S.a.r.l. in the amount of $351 million, originally due in 2006, utilizing funds
borrowed under its senior credit facility. An extraordinary loss of $9 million,
net of a tax benefit of $7 million, was recorded for the premium owed to FMC
Finance S.a.r.l. for the early retirement of this obligation in accordance with
the terms of the intercompany debt agreement.
INCOME TAX RATE
The effective tax rate from operations for the second quarter of 2002
(39.4%) is lower than the rate for the comparable period of 2001 (48.5%) due to
the expected higher earnings and the adoption of SFAS 142 which eliminates the
amortization on non-deductible goodwill.
20
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net revenues for the first six months of 2002 increased by 3% ($56
million) over the comparable period in 2001. Net income for the first six months
of 2002 increased by 39% ($21 million) over the comparable period in 2001
primarily as a result of decreased general corporate expenses ($53 million).
These decreases were partially offset by decreased operating earnings ($14
million), an extraordinary loss, net of tax benefit, for a premium payment on
the early redemption of debt ($9 million) and increased income taxes ($6
million). Had the adoption of SFAS 142 been effective January 1, 2001, net
income would have decreased 23% ($23 million) over the comparable period in
2001.
DIALYSIS SERVICES
Dialysis Services net revenues for the first six months of 2002 increased
by 4% to $1,598 million (net of $9 million of intercompany sales) primarily
attributable to base business revenue growth. The increase in dialysis service
revenue resulted primarily from a 4% increase in treatment volume, reflecting
both base business growth and the impact of 2002 and 2001 acquisitions. Revenue
was also favorably impacted by increased ancillary services in 2002 as compared
to 2001.
Dialysis Services operating earnings for the first six months of 2002
decreased 9% ($20 million) over the comparable period in 2001, primarily due to
Amgen price increases ($10 million), higher provisions for doubtful accounts ($9
million), expenses associated with Company's conversion from re-use to single
use dialyzers ($7 million), the impact of one less dialysis treatment day ($4
million), higher facility lease and certification costs ($5 million), and
severance and payroll costs for workforce reductions ($7 million). These
increases were partially offset by general cost reductions ($4 million) and
lower amortization expenses ($18 million) as a result of the adoption of SFAS
142 which became effective January 1, 2002.
DIALYSIS PRODUCTS
Dialysis Products gross revenues increased 2% to $375 million in the first
six months of 2002 as compared to $368 million in the comparable period of 2001.
Internal sales to Dialysis Services increased by 14% to $149 million and were
partially offset by a decrease in external sales of 6% to $225 million. Net
available external market sales increased by 5% to $180 million in the first six
months of 2002 over the comparable period of 2001.
Dialysis Products operating earnings for the first six months of 2002
increased 9% ($6 million) over the comparable period of 2001. This was primarily
due to improvements in gross margins and reductions in other manufacturing costs
($2 million, partially offset by the Company's conversion from re-use to single
use dialyzers), as well as lower amortization expenses ($4 million) as a result
of the adoption of SFAS 142 which became effective January 1, 2002.
OTHER EXPENSES
The Company's other expenses for the first six months of 2002 decreased by
28% ($50 million) over the comparable period of 2001. General corporate expenses
decreased by $53 million and interest expense increased $1 million. The decrease
in general corporate expenses were primarily due to foreign exchange
fluctuations ($19 million resulting from $8 million foreign exchange gains for
the first six months of 2002 versus $11 million foreign exchange losses for the
first six months of 2001), a gain on the curtailment of the Company's defined
benefit and supplement executive retirement plan ($13 million) and decreased
amortization expenses ($33 million, resulting from the adoption of SFAS 142)
offset by increases in amortization of specific intangible assets ($5 million)
other general corporate expenses ($7 million).
EXTRAORDINARY LOSS
On June 27, 2002 the Company repaid its intercompany debt to FMC Finance
S.a.r.l. in the amount of $351 million, originally due in 2006, utilizing funds
borrowed under its senior credit facility. An extraordinary loss of $9 million,
net of a tax benefit of $7 million, was recorded for the premium owed to FMC
Finance S.a.r.l. in the event of the early retirement of this obligation in
accordance with the terms of the intercompany debt agreement.
21
INCOME TAX RATE
The effective tax rate from operations for the first six months of 2002
(39.6%) is lower than the rate for the comparable period of 2001 (48.2%) due to
the expected higher earnings and the adoption of SFAS 142 which eliminates the
amortization on non-deductible goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Cash from operations increased by $25 million from $125 million for the
six months ended June 30, 2001 to $150 million for the six months ended June 30,
2002. The increase is primarily related to favorable changes in operating assets
and liabilities ($25 million), increased earnings of $21 million and partially
offset by decreases in net income adjustments ($21 million).
Increases in accounts receivable of $30 million for the six months ended
June 30, 2002 are primarily due to the Company's revenue growth and impact of
acquisitions. Increases in accounts payable were primarily due to timing of
disbursements. Cash on hand was $30 million and $46 million at June 30, 2002 and
2001, respectively.
Net cash flows used in investing activities totaled $69 million in 2002
compared to $342 million in 2001. The Company funded its acquisitions and
capital expenditures primarily through cash flows from operations and
intercompany borrowings. Cash expenditures for acquisitions totaled $23 million
and $273 million in 2002 and 2001, respectively, net of cash acquired. The
decrease in acquisition spending in 2002 over the comparable period in 2001 is
primarily due to the Everest acquisition in 2001. In January 2001, the Company
completed the acquisition of Everest. Approximately $99 million was funded by
the issuance of 2.25 million FMC preference shares to Everest. The remaining
purchase price was paid with cash of $260 million including assumed debt.
Capital expenditures of $45 million and $61 million in 2002 and 2001,
respectively, were made for new clinics, improvements to existing clinics, and
expansion and maintenance of production facilities.
For the six months ended June 30, 2002, net cash flows used by financing
activities totaled $79 million in 2002 compared to net cash flows provided of
$229 million for the comparable period of 2001. The Company increased its
borrowings under its accounts receivable facility (the "Accounts Receivable
Facility") by $8 million to $450 million at June 30, 2002. Debt and capital
lease obligations in 2002 increased by $321 million primarily due to higher
borrowings under the Company's credit facility in order to fund the early
repayment of intercompany borrowings and the premium on the early redemption of
this intercompany obligation.
Outstanding amounts under the Accounts Receivable Facility are reflected
as reductions in accounts receivable. The Company's capacity to generate cash
flow from the accounts receivable facility depends on the availability of
sufficient accounts receivable that meet certain criteria defined in the
agreement with the third party funding corporation. A lack of availability of
such accounts receivable may have a material impact on the Company's ability to
utilize the facility for its financial needs.
CRITICAL ACCOUNTING POLICIES
The Company has identified the following selected accounting policies and
issues that the Company believes are critical to understand the financial
reporting risks presented in the current economic environment. These matters and
judgments, and uncertainties affecting them, are also essential to understanding
the Company's reported and future operating results. See Notes to Consolidated
Financial Statements - Note 2, "Summary of Significant Accounting Policies"
included in the Company's 2001 report on Form 10 K.
RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS
The growth of the Company's business through acquisitions has created a
significant amount of intangible assets, including goodwill, patient
relationships, tradenames and other. At June 30, 2002, the carrying amount of
net intangible assets amounted to $3,430 million representing approximately 68%
of the Company's total assets. In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company reviews the carrying value of our long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. As discussed in Note 2 to
the Consolidated Financial Statements, any impairment is tested by a comparison
of the carrying amount of intangible assets to future net cash flows expected to
be generated. If such intangible assets are considered impaired, the impairment
recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
22
A prolonged downturn in the healthcare industry with lower than expected
increases in reimbursement rates and/or higher than expected costs for providing
our healthcare services could adversely affect the Company's estimates of future
net cash flows in any segment. Consequently, it is possible that the Company's
future operating results could be materially and adversely affected by
impairment charges related to goodwill or other indefinite lived intangibles.
LEGAL CONTINGENCIES
The Company is a party to litigation relating to a number of matters,
including the commercial insurer litigation, W.R. Grace & Co. bankruptcy and
Sealed Air Corporation indemnification litigation and other litigation arising
in the ordinary course of the Company's business as described in Note 9
"Commitments and Contingencies" in the Company's Consolidated Financial
Statements. Any adverse outcome in any of these matters would have a material
adverse effect on the Company's financial position, results of operations and
cash flows.
The Company regularly analyzes current information relating to these
litigation matters and provides accruals for probable contingent losses
including the estimated legal expenses to resolve the matter. The Company's
internal legal department and external lawyers participate in the assessments.
In its decisions regarding the recording of litigation accruals, the Company
considers the probability of an unfavorable outcome and its ability to make a
reasonable estimate of the amount of contingent loss.
If an unfavorable outcome is probable but the amount of loss cannot be
reasonably estimated by management, appropriate disclosure is provided, but no
contingent losses are accrued. The mere filing of a suit or formal assertion of
a claim or assessment does not necessarily require the recording of an accrual.
REVENUE RECOGNITION
Revenues are recognized on the date services and related products are
provided/shipped and are recorded at amounts estimated to be received under
reimbursement arrangements with third-party payors, including Medicare and
Medicaid. The Company records an allowance for estimated uncollectible accounts
receivable based upon an analysis of historical collection experience. The
analysis considers differences in collection experience by payor mix and aging
of the accounts receivable. From time to time, the Company reviews the accounts
receivable for changes in historical collection experience to ensure the
appropriateness of the allowances. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and adjusted in
future periods as final settlements are determined.
Net Revenues from machine sales to a third party leasing company where
there is a leaseback of the machines by the Dialysis Services Division were $9.2
million and $15.9 million for the three months ended June 30, 2002 and 2001 and
$13.2 million and $23.5 million for the six months ended June 30, 2002 and 2001,
respectively. The profits on these sales are deferred and amortized to earnings
over the lease terms.
SELF INSURANCE PROGRAMS
The Company is self-insured for professional, product and general
liability, auto and worker's compensation claims up to predetermined amounts
above which third party insurance applies. Estimates include ultimate costs for
both reported and incurred but not reported claims.
IMPACT OF INFLATION
A substantial portion of the Company's net revenue is subject to
reimbursement rates which are regulated by the federal government and do not
automatically adjust for inflation. Moreover, non-governmental payors continue
to exert downward pressure on reimbursement levels. Increased operating costs
that are subject to inflation, such as labor and supply costs, without a
compensating increase in reimbursement rates, may adversely affect the Company's
business and results of operations.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due to changes in interest rates
and foreign currency rates. The Company uses derivative financial instruments,
including interest rate swaps and foreign exchange contracts, as part of its
market risk management strategy. These instruments are used as a means of
hedging exposure to interest rate and foreign currency fluctuations in
connection with debt obligations and purchase commitments. The Company does not
hold or issue derivative instruments for trading or speculative purposes.
Hedge accounting is applied if the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge. Additionally,
changes in the value of the derivative must result in payoffs that are highly
correlated to the changes in value of the hedged item. Derivatives are measured
for effectiveness both at inception and on an ongoing basis.
The Company enters into foreign exchange contracts that are designated as,
and effective as, hedges for forecasted purchase transactions. Also, since the
Company carries a substantial amount of floating rate debt, the Company uses
interest rate swaps to synthetically change certain variable-rate debt
obligations to fixed-rate obligations to mitigate the impact of interest rate
fluctuations.
Gains and losses on foreign exchange contracts accounted for as hedges are
deferred in other assets or liabilities. The deferred gains and losses are
recognized as adjustments to the underlying hedged transaction when the future
sales or purchases are recognized. Interest rate swap payments and receipts are
recorded as part of interest expense. The fair value of the swap contracts is
recognized in other liabilities in the financial statements. Cash flows from
derivatives are recognized in the consolidated statement of cash flows in the
same category as the item being hedged.
At June 30, 2002, the fair value of the Company's interest rate agreements,
which consisted entirely of interest rate swaps, is approximately ($72.8
million) and the fair value of the Company's foreign exchange contracts, which
consisted entirely of forward agreements, is valued at approximately ($49.1
million). The Company had outstanding contracts covering the purchase of 651.5
million Euros ("EUR") at an average contract price of $.9080 per EUR, for
delivery between July 2002 and November 2003, contracts for the purchases of
57.0 million Mexican Pesos at an average contract price of 10.2207 pesos per US
dollar, and contracts for the delivery of 13.0 million Canadian Dollars at an
average contract price of $.6437 per Canadian Dollar.
24
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
The Company was formed as a result of a series of transactions pursuant to
the Agreement and Plan of Reorganization (the "Merger") dated as of February 4,
1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the
Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and
continues to have, significant potential liabilities arising out of
product-liability related litigation, pre-Merger tax claims and other claims
unrelated to NMC, which was Grace's dialysis business prior to the Merger. In
connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the
Company and NMC against all liabilities of W.R. Grace & Co., whether relating to
events occurring before or after the Merger, other than liabilities arising from
or relating to NMC's operations. Proceedings have been brought against W.R.
Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace
& Co.-Conn., principally alleging that the Merger was a fraudulent conveyance,
violated the uniform fraudulent transfer act, and constituted a conspiracy. See
discussion of "Mesquita v. W.R. Grace and Company" below.
Pre-Merger tax claims or tax claims that would arise if events were to
violate the tax-free nature of the Merger, could ultimately be the obligation of
the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its
filings with the Securities and Exchange Commission that: its tax returns for
the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the
"Service"); Grace has received the Service examination report on tax periods
1993 to 1996; that during those years Grace deducted approximately $122.1
million in interest attributable to corporate owned life insurance ("COLI")
policy loans; that Grace has paid $21.2 million of tax and interest related to
COLI deductions taken in tax years prior to 1993; and that a U.S. District Court
ruling has denied interest deductions of a taxpayer in a similar situation.
Subject to certain representations made by Grace, the Company and Fresenius AG,
Grace and certain of its affiliates agreed to indemnify the Company against this
and other pre-Merger and Merger related tax liabilities.
Subsequent to the Merger, Grace was involved in a multi-step transaction
involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The
Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to
confirm the Company's entitlement to indemnification from Sealed Air for all
losses and expenses incurred by the Company relating to pre-Merger tax
liabilities and Merger-related claims.
Subsequent to the Sealed Air transaction, Grace and certain of its
subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. The Company intends to continue to pursue vigorously its rights to
indemnification from Grace and its insurers and former and current affiliates,
including Sealed Air, for all costs incurred by the Company relating to
pre-Merger tax and Merger-related claims.
Since 1997, the Company, NMC, and certain NMC subsidiaries have been
engaged in litigation with Aetna Life Insurance Company and certain of its
affiliates ("Aetna") concerning allegations of inappropriate billing practices
for nutritional therapy and diagnostic and clinical laboratory tests and
misrepresentations. In July 2002, the Company and Aetna agreed to settle and
dismiss these claims and the Company's counterclaims relating to overdue
payments for services rendered by the Company to Aetna's beneficiaries. The
costs of the Aetna settlement will be charged against previously established
accruals. (See "Accrued Special Charge for Legal Matters" below.)
Other insurance companies have filed claims against the Company, similar
to those filed by Aetna, that seek unspecified damages and costs. The Company,
NMC and its subsidiaries believe that there are substantial defenses to the
claims asserted, and intend to vigorously defend all lawsuits. The Company has
filed counterclaims against the plaintiffs in these matters based on
inappropriate claim denials and delays in claim payments. Other private payors
have contacted the Company and may assert that NMC received excess payments and,
similarly, may join the lawsuits or file their own lawsuit seeking reimbursement
and other damages. Although the ultimate outcome on the Company of these
proceedings cannot be predicted at this time, an adverse result could have a
material adverse effect on the Company's business, financial condition and
results of operations.
On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al.
(Sup. Court of Calif., S.F. County, #315465) was filed as a class action by
plaintiffs claiming to be creditors of W. R. Grace & Co.-Conn ("Grace
Chemicals") against Grace Chemicals, the Company and other defendants,
principally alleging that the Merger which resulted in the original formation of
the Company was a fraudulent transfer, violated the uniform fraudulent transfer
act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R.
Grace & Company, et al.) and additional class actions were filed subsequently
with substantially similar allegations; all cases have been stayed and
transferred to the U.S. District Court, have been dismissed without prejudice or
are pending before the U.S.
25
Bankruptcy Court in Delaware in connection with Grace's Chapter 11 proceeding.
The Company has requested indemnification from Grace Chemicals and Sealed Air
Corporation pursuant to the Merger agreements. If the Merger is determined to
have been a fraudulent transfer, if material damages are proved by the
plaintiffs, and if the Company is not able to collect, in whole or in part on
the indemnity, from W.R. Grace & Co., Sealed Air Corporation, or their
affiliates or former affiliates or their insurers, and if the Company is not
able to collect against any party that may have received distributions from W.R.
Grace & Co., a judgment could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is
confident that no fraudulent transfer or conspiracy occurred and intends to
defend the cases vigorously.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. anti-kickback statute, the False Claims
Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable
laws or regulations may be amended, or enforcement agencies or courts may make
interpretations that differ from the Company's or the manner in which the
Company conduct its business. In the U.S., enforcement has become a high
priority for the federal government and some states. In addition, the provisions
of the False Claims Act authorizing payment of a portion of any recovery to the
party bringing the suit encourage private plaintiffs to commence "whistle
blower" actions. By virtue of this regulatory environment, as well as our
corporate integrity agreement with the government, the Company expects that its
business activities and practices will continue to be subject to extensive
review by regulatory authorities and private parties, and continuing inquiries,
claims and litigation relating to its compliance with applicable laws and
regulations. The Company may not always be aware that an inquiry or action has
begun, particularly in the case of "whistle blower" actions, which are initially
filed under court seal.
The Company operates large number facilities throughout the U.S. In such a
decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliated companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws,
and the Company cannot predict whether law enforcement authorities may use such
information to initiate further investigations of the business practices
disclosed or any of its other business activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS
At December 31, 2001, the Company recorded a pre-tax special charge of
$258 million to reflect anticipated expenses associated with the continued
defense and resolution of pre-Merger tax claims, Merger-related claims, the
Aetna litigation and other commercial
26
insurer claims. While the Company believes that its accruals reasonably estimate
the Company's currently anticipated costs in connection with the continued
defense and resolution of these claims, no assurances can be given that the
actual costs incurred by the Company will not exceed the amount of these
accruals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting. The shareholders of the Company acted by majority
written consent in lieu of an annual meeting of shareholders on May
24, 2002 (the "Shareholder Action").
(b) Election of Directors. Pursuant to the Shareholder Action, the
shareholders elected Ben J. Lipps, Jerry Schneider and Ronald
Kuerbitz to serve as directors until the next annual meeting of
shareholders. Shares representing 90,000,000 votes were voted in
favor of the election of Messrs. Lipps, Schneider, Kuerbitz to the
Board of Directors. There were no votes against their election, no
abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and
Fresenius AG (incorporated herein by reference to Appendix A to the Joint Proxy
Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc.
dated August 2, 1996 and filed with the Commission on August 5, 1996).
Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius
AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to
the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and
Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996).
Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn.
dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint
Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA,
Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996).
Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace &
Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988
(incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988).
Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care
Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation
Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference
to the Form 8-K of the Company filed on May 9, 1988).
Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care
Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation
Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company
filed with the Commission on October 15, 1996).
Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care
Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation
Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings,
Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission
on October 15, 1996).
Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc.
under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius
Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with
the Commission on August 14, 1997).
27
Exhibit 3.6 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. dated
July 6, 2001 (authorizing action by majority written consent of the shareholders) (incorporated herein by
reference to the Form 10-Q of the Company filed with the Commission on August 14, 2001).
Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the
Form 10-Q of the Company filed with the Commission on August 14, 1997).
Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein,
NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and
Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference
to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15,
1996).
Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996,
incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996).
Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of
September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with
the Commission on March 31, 1997).
Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996,
among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain
Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.),
as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of
the Registrant filed with the Commission on November 14, 1997).
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996,
among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain
Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.),
as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on November 14, 1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27,
1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America,
N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The
Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form
10-K of Registrant filed with Commission on March 23, 1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit
Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain
Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying
agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by
reference to the Form 10-K of Registrant filed with Commission on March 23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit Agreement dated as of
September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of
America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia,
The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of America, N.A. (formerly known as
NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference
to the Form 10-Q of Registrant filed with Commission on November 12, 1998).
28
Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit Agreement dated as of September 27,
1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates Guarantors , the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A.), paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A. G. and Bank of America, N.A. (formerly known as NationsBank,
N.A.). as Managing Agents, (incorporated herein by reference to the Form 10-K of registrant
filed with Commission on March 9, 1999).
Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit Agreement dated as of September 27,
1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed
with Commission on March 30, 2000).
Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit Agreement dated as of September
27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed
with Commission on March 30, 2000).
Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit Agreement dated as of September
27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed
with Commission on November 11, 2000).
Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit Agreement dated as of September 27,
1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A). as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of
Fresenius Medical Care AG (Registration No. 333-66558)).
Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit Agreement dated as of September 27,
1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of
Fresenius Medical Care AG (Registration No. 333-66558)).
Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit Agreement dated as of September
27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A.
(formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank,
N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of Registrant filed
with Commission on April 1, 2001).
Exhibit 4.16 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended effective as of August 3, 1998
(incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on
May 14, 1998).
Exhibit 4.17 Fresenius Medical Care Aktiengesellschaft 2001 International Stock Incentive Plan (incorporated
by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG filed
August 2, 2001 (Registration No. 333-66558)).
29
Exhibit 4.18 Senior Subordinated Indenture dated November 27, 1996,
among Fresenius Medical Care AG, State Street Bank and Trust
Company, as successor to Fleet National Bank, as Trustee and
the Subsidiary Guarantors named therein (incorporated herein
by reference to the Form 10-K of Registrant filed with the
Commission on March 31, 1997).
Exhibit 4.19 Senior Subordinated Indenture dated as of February 19,
1998, among Fresenius Medical Care AG, State Street Bank and
Trust Company as Trustee and Fresenius Medical Care Holdings,
Inc., and Fresenius Medical Care AG, as Guarantors with
respect to the issuance of 7 7/8% Senior Subordinated Notes
due 2008 (incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on March 23, 1998).
Exhibit 4.20 Senior Subordinated Indenture dated as of February 19,
1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer,
State Street Bank and Trust Company as Trustee and Fresenius
Medical Care Holdings, Inc., and Fresenius Medical Care AG, as
Guarantors with respect to the issuance of 7 3/8% Senior
Subordinated Notes due 2008 (incorporated herein by reference
to the Form 10-K of Registrant filed with Commission on March
23, 1998).
Exhibit 4.21 Senior Subordinated Indenture dated as of June 6, 2001
among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l.
Luxemborg - III, Fresenius Medical Care Holdings, Inc.,
Fresenius Medical Care Deutschland GmbH and State Street Bank
and Trust Company with respect to 7 7/8% Senior Subordinated
Notes due 2011 (incorporated herein by reference to the
Registration Statement on Form F-4 of Fresenius Medical Care
AG dated August 2, 2001 (Registration No. 333-66558)).
Exhibit 4.22 Senior Subordinated Indenture dated as of June 15, 2001
among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l.
Luxemborg - III, Fresenius Medical Care Holdings, Inc.,
Fresenius Medical Care Deutschland GmbH and State Street Bank
and Trust Company with respect to 7 7/8% Senior Subordinated
Notes due 2011 (incorporated herein by reference to the
Registration Statement on Form F-4 of Fresenius Medical Care
AG dated August 2, 2001 (Registration No. 333-66558)).
Exhibit 10.1 Employee Benefits and Compensation Agreement dated September 27,
1996 by and among W. R. Grace & Co., National Medical Care, Inc.,
and W. R. Grace & Co.-- Conn. (incorporated herein by reference
to the Registration Statement on Form F-1 of Fresenius Medical
Care AG, as amended (Registration No. 333-05922), dated
November 22, 1996 and the exhibits thereto).
Exhibit 10.2 Purchase Agreement, effective January 1, 1995, between
Baxter Health Care Corporation and National Medical Care,
Inc., including the addendum thereto (incorporated by
reference to the Form SE of Fresenius Medical Care dated July
29, 1996 and the exhibits thereto).
Exhibit 10.3* Product Purchase Agreement effective January 1, 2002 between
Amgen USA, Inc. and National Medical Care, Inc. (incorporated
by reference to the Form 10-Q of the Registrant filed with the
Commission on May 15, 2002).
Exhibit 10.4 Receivables Purchase Agreement dated August 28, 1997 between
National Medical Care, Inc. and NMC Funding Corporation
(incorporated herein by reference to the Form 10-Q of the
Registrant filed with the Commission on November 14, 1997).
Exhibit 10.5 Amendment dated as of September 28, 1998 to the
Receivables Purchase Agreement dated as of August 28, 1997, by
and between NMC Funding Corporation, as Purchaser and National
Medical Care, Inc., as Seller (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on November 12, 1998).
Exhibit 10.6 Amended and Restated Transfer and Administration
Agreement dated as September 27, 1999 among Compass US
Acquisition, LLC, NMC Funding Corporation, National Medical
Care, Inc., Enterprise Funding Corporation, the Bank Investors
listed therein, Westdeutsche Landesbank Girozentrale, New York
Branch, as an administrative agent and Bank of America, N.A.,
as an administrative agent (incorporated herein by reference
to the Form 10-K of Registrant filed with Commission on March
30, 2000).
30
Exhibit 10.7 Amendment No. 2 to Amended and Restated Transfer and
Administration Agreement dated as October 26, 2000 among
Compass US Acquisition, LLC, NMC Funding Corporation, National
Medical Care, Inc., Enterprise Funding Corporation, the Bank
Investors listed therein, Westdeutsche Landesbank
Girozentrale, New York Branch, as an administrative agent and
Bank of America, N.A., as an administrative agent
(incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on April 2, 2001).
Exhibit 10.8 Amendment No. 5 to Amended and Restated Transfer and
Administration Agreement dated as December 21, 2001 among
Compass US Acquisition, LLC, NMC Funding Corporation, National
Medical Care, Inc., Enterprise Funding Corporation, the Bank
Investors listed therein, Westdeutsche Landesbank
Girozentrale, New York Branch, as an administrative agent and
Bank of America, N.A., as an administrative agent
(incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on April 1, 2001).
Exhibit 10.9 Employment Agreement dated January 1, 1992 by and between
Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by
reference to the Annual Report on Form 10-K of Fresenius USA,
Inc., for the year ended December 31, 1992).
Exhibit 10.10 Modification to FUSA Employment Agreement effective as
of January 1, 1998 by and between Ben J. Lipps and Fresenius
Medical Care AG (incorporated herein by reference to the Form
10-Q of Registrant filed with Commission on May 14, 1998).
Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between
Jerry A. Schneider and National Medical Care, Inc
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between
Ronald J. Kuerbitz and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.13 Employment Agreement dated March 15, 2000 by and between
J. Michael Lazarus and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.14 Employment Agreement dated March 15, 2000 by and between
Robert "Rice" M. Powell, Jr. and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-K of Registrant
filed with Commission on April 2, 2001).
Exhibit 10.15 Employment Agreement dated -July 1, 2002 by and between John
F. Markus and National Medical Care, Inc. filed herewith.
Exhibit 10.16 Subordinated Loan Note dated as of May 18, 1999, among
National Medical Care, Inc. and certain Subsidiaries with
Fresenius AG as lender (incorporated herein by reference to
the Form 10-Q of Registrant filed with Commission on November
22, 1999).
Exhibit 10.17 Corporate Integrity Agreement between the Offices of
Inspector General of the Department of Health and Human
Services and Fresenius Medical Care Holdings, Inc. dated as of
January 18, 2000 (incorporated herein by reference to the Form
8-K of the Registrant filed with the Commission on January 21,
2000).
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 99.1 Certification of Chief Executive Officer
Exhibit 99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
On June 4, 2002, the Company filed a current report on Form 8-K dated May
13, 2002, with respect to the judgment in the OBRA '93 litigation.
* Confidential treatment has been requested as to certain portions of this
Exhibit
31
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fresenius Medical Care Holdings, Inc.
DATE: August 14, 2002 /s/Ben J. Lipps
--------------- -----------------------------------------
NAME: Ben J. Lipps
TITLE: President (Chief Executive Officer)
DATE: August 14, 2002 /s/Jerry A. Schneider
--------------- -----------------------------------------
NAME: Jerry Schneider
TITLE: Chief Financial Officer
32