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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: MARCH 31, 2003
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 | |
Indicate by check mark whether the registrant is an accelerated filer (As
defined in Rule 12b-2 of the Act). Yes | | No |X|
1
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
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS PAGE
Unaudited Consolidated Statements of Earnings .............. 4
Unaudited Consolidated Statements of Comprehensive Income .. 5
Unaudited Consolidated Balance Sheets ...................... 6
Unaudited Consolidated Statements of Cash Flows ............ 7
Notes to Unaudited Consolidated Financial Statements ....... 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................ 24
ITEM 4: CONTROLS AND PROCEDURES .................................... 24
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings .......................................... 25
ITEM 6: Exhibits and Reports on Form 8-K ........................... 28
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
NET REVENUES
Health care services .......................................... $823,760 $784,022
Medical supplies .............................................. 106,041 109,882
-------- --------
929,801 893,904
-------- --------
EXPENSES
Cost of health care services .................................. 586,244 563,655
Cost of medical supplies ...................................... 73,549 73,123
General and administrative expenses ........................... 87,487 76,171
Provision for doubtful accounts ............................... 22,617 21,340
Depreciation and amortization ................................. 31,438 35,435
Research and development ...................................... 2,145 1,998
Interest expense, net, and related financing costs including
$24,890 and $33,679, of interest with affiliates ........... 51,310 55,023
-------- --------
854,790 826,745
-------- --------
INCOME BEFORE INCOME TAXES ........................................ 75,011 67,159
PROVISION FOR INCOME TAXES ......................................... 29,702 26,701
-------- --------
NET INCOME ......................................................... $ 45,309 $ 40,458
======== ========
Basic and fully dilutive net income per share ...................... $ 0.50 $ 0.45
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
MARCH 31,
-----------------------
2003 2002
-------- --------
NET INCOME ....................................... $ 45,309 $ 40,458
Other comprehensive income
Foreign currency translation adjustments ..... 1,342 (432)
Derivative instruments net of deferred tax
(benefit) expense of $(165) and $3,813 ..... (1,995) 5,910
-------- --------
Total other comprehensive income (loss) ...... (653) 5,478
-------- --------
COMPREHENSIVE INCOME ............................. $ 44,656 $ 45,936
======== ========
See accompanying Notes to Unaudited, Consolidated Financial Statements
5
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 38,163 $ 30,013
Accounts receivable, less allowances of $126,122 and
$121,620 ................................................... 498,046 387,222
Inventories ................................................... 187,491 185,892
Deferred income taxes ......................................... 152,836 157,353
Other current assets .......................................... 136,340 128,619
----------- -----------
Total Current Assets ..................................... 1,012,876 889,099
----------- -----------
Properties and equipment, net ..................................... 532,831 531,081
----------- -----------
Other Assets:
Goodwill ...................................................... 2,932,465 2,934,581
Other intangible assets, net of accumulated amortization of
$305,007 and $299,917 ..................................... 508,201 491,988
Other assets and deferred charges ............................. 188,853 163,595
----------- -----------
Total Other Assets ....................................... 3,629,519 3,590,164
----------- -----------
Total Assets ....................................................... $ 5,175,226 $ 5,010,344
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and capitalized lease
obligations ................................................ $ 5,820 $ 2,303
Current portion of borrowing from affiliates .................. 328,975 315,394
Accounts payable .............................................. 111,709 100,603
Accrued liabilities ........................................... 238,558 261,888
Accrued special charge for legal matters ...................... 185,883 191,130
Net accounts payable to affiliates ............................ 31,960 28,897
Accrued income taxes .......................................... 68,830 61,754
----------- -----------
Total Current Liabilities ................................ 971,735 961,969
Long-term debt ..................................................... 717,800 616,900
Non-current borrowings from affiliates ............................. 654,469 654,693
Capitalized lease obligations ...................................... 707 1,120
Deferred income taxes .............................................. 99,754 96,453
Other liabilities .................................................. 180,660 185,200
----------- -----------
Total Liabilities ........................................ 2,625,125 2,516,335
----------- -----------
Mandatorily Redeemable Preferred Securities ........................ 791,681 771,209
----------- -----------
Equity:
Preferred stock, $100 par value ................................ 7,412 7,412
Preferred stock, $.10 par value ................................ -- 8,906
Common stock, $1 par value; 300,000,000 shares
authorized; outstanding 90,000,000 ............................. 90,000 90,000
Paid in capital ................................................ 1,942,755 1,942,755
Retained deficit ............................................... (197,667) (242,846)
Accumulated comprehensive loss ................................. (84,080) (83,427)
----------- -----------
Total Equity .............................................. 1,758,420 1,722,800
----------- -----------
Total Liabilities and Equity ....................................... $ 5,175,226 $ 5,010,344
=========== ===========
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)
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
--------- --------
Cash Flows from Operating Activities:
Net income ............................................................. $ 45,309 $ 40,458
Adjustments to reconcile net income to net cash from
Operating activities:
Depreciation and amortization ..................................... 31,438 35,435
Provision for doubtful accounts ................................... 22,617 21,340
Deferred income taxes ............................................. 7,983 9,728
Loss on disposal of properties and equipment ...................... 255 461
Changes in operating assets and liabilities, net of effects of purchase
acquisitions and foreign exchange:
Decrease (increase) in accounts receivable ........................ 1,012 (21,945)
Increase in inventories ........................................... (1,409) (9,044)
Increase in other current assets .................................. (7,721) (8,981)
Decrease (increase) in other assets and deferred charges .......... 6,038 1,031
Increase in accounts payable ...................................... 11,106 20,043
(Decrease) increase in accrued income taxes ....................... 7,076 (10,899)
Decrease in accrued liabilities ................................... (26,408) (14,770)
Decrease in accrued special charge for legal matters .............. (5,247) (4,296)
Decrease in other long-term liabilities ........................... (4,763) (11,001)
Net changes due to/from affiliates ................................ 3,063 (14,785)
Other, net ........................................................ (4,171) 436
--------- --------
Net cash provided by operating activities .............................. 86,178 33,211
--------- --------
Cash Flows from Investing Activities:
Capital expenditures .............................................. (29,623) (27,364)
Proceeds from sale of property and equipment ...................... 1,116 3,413
Payments for acquisitions, net of cash acquired ................... (15,598) (2,333)
--------- --------
Net cash used in investing activities .................................. (44,105) (26,284)
--------- --------
Cash Flows from Financing Activities:
Net increase in borrowings from affiliates ........................ 13,357 1,084
Cash dividends paid ............................................... (130) (130)
Net (decrease) increase in receivable financing facility .......... (133,000) 29,000
Redemption of Series D Preferred Stock ............................ (8,906) --
Net increase (decrease) in debt and capitalized leases ............ 104,004 (28,837)
Debt issuance costs ............................................... (12,325) --
Other, net ........................................................ 1,735 --
--------- --------
Net cash (used in) provided by financing activities ..................... (35,265) 1,117
--------- --------
Effects of changes in foreign exchange rates ................................ 1,342 (444)
--------- --------
Change in cash and cash equivalents ......................................... 8,150 7,600
Cash and cash equivalents at beginning of period ............................ 30,013 26,786
--------- --------
Cash and cash equivalents at end of period .................................. $ 38,163 $ 34,386
========= ========
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)
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net ............................. $48,306 $75,666
Income taxes paid, net .................... 14,831 27,982
Details for Acquisitions:
Assets acquired ................................ 16,502 3,572
Liabilities assumed ............................ 904 1,239
------- -------
Net cash paid for acquisitions ................. $15,598 $ 2,333
======= =======
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
("FMCAG"). 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., 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 March 31,
2003 and 2002 and for the three month interim periods then ended are unaudited
and should be read in conjunction with the audited, consolidated financial
statements in the Company's 2002 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 for the three month period ended March 31,
2003 are not necessarily indicative of the results of operations for the fiscal
year ending December 31, 2003.
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
MARCH 31,
-------------------
2003 2002
------ ------
The weighted average number of shares of
Common Stock were as follows ....................... 90,000 90,000
====== ======
9
Net income used in the computation of net income per share is as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
-------- --------
Net income ....................................... $ 45,309 $ 40,458
Dividends paid on preferred stocks ............... (130) (130)
-------- --------
Income available to common shareholders .......... $ 45,179 $ 40,328
======== ========
Basic and fully dilutive net income per share .... $ 0.50 $ 0.45
======== ========
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 other obligations 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 $0.1 million ($0.2 million pretax) for the three
months ended March 31, 2003 and after tax gains of $6.3 million ($10.3 million
pretax) for the three months ended March 31, 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 and other obligations.
After tax losses of $0.7 million ($1.1 million pretax) for the three months
ended March 31, 2003 and after tax losses of $0.3 million ($0.5 million pretax)
for the three months ended March 31, 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 losses resulting from the underlying
exposures. After tax losses of $0.2 million ($0.4 million pretax) for the three
months ended March 31, 2003 and after tax losses of $0.1 million ($0.1 million
pretax) for the three months ended March 31, 2002 were deferred in other
comprehensive income. Ineffective amounts had no material impact on earnings for
the three months ended March 31, 2003 and March 31, 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 consolidated balance sheets
at fair value with changes in fair value recognized in earnings. Pre-tax (gains)
losses recorded in the consolidated statements of operations for the three
months ended March 31, 2003 and 2002 were ($4.2) million and $1.9 million,
respectively.
NEW PRONOUNCEMENTS
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 provides that discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have not
yet occurred. SFAS No. 144 was adopted effective January 1, 2002. The adoption
of SFAS 144 did not have an impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement
10
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
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 Company has adopted SFAS No.
145 as related to SFAS No. 4 effective January 1, 2003. In the second quarter
2002, the Company reported an extraordinary loss of $9.8 million for the early
redemption of borrowings from affiliates. This extraordinary loss will be
reclassified and presented as a loss from operating earnings. The Company
adopted the remaining provisions of SFAS 145 effective April 1, 2002.
In June 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 were
adopted effective January 1, 2003 for exit or disposal activities that are
initiated after December 31, 2002. There is no material impact on the Company's
financial statements related to the adoption of SFAS 146.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees of
Indebtedness of Others. FIN 45 requires a guarantor to recognize a liability
measured at fair value at the inception of a guarantee for obligations
undertaken, including its obligation to stand ready to perform over the term of
the guarantee. The initial recognition and measurement provisions are applicable
prospectively to guarantees issued or modified after December 31, 2002. FIN 45
also clarifies and expends the disclosure requirements related to guarantees and
product warranties. The Company adopted those disclosures on December 31, 2002.
There is no material impact on the Company's financial statements related to the
adoption of FIN 45.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123.
SFAS 148 provides alternative methods for a change to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure requirements of SFAS No. 123 to require disclosures in both annual
and interim financial statements of the method of accounting for stock-based
employee compensation and the effect the method used had on reported results.
The Company adopted the annual disclosure requirement on December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46") Consolidation of Variable Interest Entities.
FIN 46 addresses the consolidation of variable interest entities by the primary
beneficiary, when the total equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
support from other parties and/ or the equity investor lacks certain essential
characteristics of a controlling financial interest. FIN 46 requires existing
variable interest entities to be consolidated if those entities do not
effectively disburse risk among the parties involved. The interpretation becomes
effective at various dates in 2003 and provides various transition rules. The
Company is assessing the adoption of FIN 46 on its financial statements.
NOTE 2. INVENTORIES
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Inventories:
Raw materials ............................................ $ 43,916 $ 44,670
Manufactured goods in process ............................ 12,006 11,127
Manufactured and purchased inventory available for sale .. 73,247 70,127
-------- --------
129,169 125,924
Health care supplies .................................... 58,322 59,968
-------- --------
Total ............................................... $187,491 $185,892
======== ========
11
NOTE 3. DEBT
2003 SENIOR CREDIT AGREEMENT
On February 21, 2003, the Company entered into an amended and restated
credit agreement (hereafter "2003 Senior Credit Agreement") with Bank of America
N.A, Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan Chase Bank,
The Bank of Nova Scotia and certain other lenders (collectively, the "Lenders"),
pursuant to which the Lenders have made available to the Company and certain
subsidiaries and affiliates an aggregate of up to $1,500,000 through three
credit facilities:
- - a revolving credit facility of up to $500,000 (of which up to $250,000 is
available for letters of credit, up to $300,000 is available for
borrowings in certain non-U.S. currencies, up to $75,000 is available as
swing lines in U.S. dollars, up to $250,000 is available as a competitive
loan facility and up to $50,000 is available as swing lines in certain
non-U.S. currencies, the total of which cannot exceed $500,000) which will
be due and payable on October 31, 2007.
- - a term loan facility ("Loan A") of $500,000, also scheduled to expire on
October 31, 2007. The terms of the 2003 Senior Credit Agreement require
quarterly payments of $25,000 beginning in the third quarter of 2004 that
permanently reduce the term loan facility. The remaining amount
outstanding is due on October 31, 2007.
- - a term loan facility ("Loan B") of $500,000, scheduled to expire February
21, 2010 with a repayment provision that if the Trust Preferred Securities
due February 1, 2008 are not repaid, refinanced or have their maturity
extended, repayment will be due on October 31, 2007. The terms of the Loan
B require repayments of 0.25% per quarter beginning with the second
quarter of 2003.
Loans under the 2003 Senior Credit Agreement bear interest at a base rate
determined in accordance with the agreement. For the revolving credit facility
and Loan A, interest will be at a rate equal to LIBOR plus an applicable margin,
or an alternate base rate, defined as the higher of the Bank of America prime
rate or the Federal Funds rate plus the applicable margin. The applicable margin
is variable and depends on the ratio of EBITDA and funded debt as defined in the
credit agreement. The interest rate for Loan B is LIBOR plus a percentage in
accordance with the agreement. Fees are also payable at a percentage per annum
on the portion of available borrowings under the 2003 Senior Credit Agreement
that are not used.
In addition to scheduled principal payments, indebtedness under the 2003
Senior Credit Agreement will be reduced by portions of the net cash proceeds
from certain sales of assets, securitization transactions and the issuance of
subordinated debt and equity securities.
The 2003 Senior Credit Agreement includes covenants that require FMCAG to
maintain certain financial ratios or meet other financial tests. Under the
Senior Credit Agreement, FMCAG is obligated to maintain a minimum consolidated
net worth, a minimum consolidated fixed charge ratio (ratio of consolidated
funded debt to EBIDTA) and a maximum leverage ratio. In addition, the 2003
Senior Credit Agreement includes other covenants which, among other things,
restrict or have the effect of restricting the Company's ability to dispose of
assets, incur debt, pay dividends, create liens or make capital expenditures,
investments and acquisitions. The breach of any of the covenants could result
in a default under the 2003 Senior credit Agreement. In default, the
outstanding balance under the 2003 Senior Credit Agreement becomes due and
payable.
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Long-term debt to outside parties consists of:
2003 Senior Credit Agreement .................... $720,000 $616,900
Other ........................................... 3,132 1,840
-------- --------
723,132 618,740
Less amounts classified as current .............. 5,332 1,840
-------- --------
$717,800 $616,900
======== ========
Borrowings (receivables) from affiliates consists of:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Fresenius Medical Care AG borrowings primarily at interest
rates approximating 1.88% and 2.22%, respectively ............. $ 235,000 $214,000
RTC Holdings International, Inc. borrowings at a fixed interest
rate of 2.70% ................................................. 11,000 11,000
Fresenius AG borrowing at interest rates approximating
2.21% and 2.22%, respectively .................................. (1,420) 6,000
Fresenius Medical Care Trust Finance S.a.r.l. borrowings at
fixed interest rates of 8.25% and 8.43%, respectively ......... 654,244 654,244
12
Franconia Acquisition, LLC at interest rates approximating
1.60% and 1.69%, respectively .................................. 83,721 83,721
Other ............................................................ 899 1,122
--------- --------
Total ......................................................... 983,444 970,087
Less amounts classified as current ............................... 328,975 315,394
--------- --------
Total Long-term .................................................. $ 654,469 $654,693
========= ========
NOTE 4. 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 FMCAG for proceeds totaling $392,037 in
2001 and $305,500 in 2000. No Redeemable Preferred Securities were issued during
the three months ended March 31, 2003. The table below provides information for
Redeemable Preferred Securities for the periods indicated.
MARCH 31, DECEMBER 31,
MANDATORILY REDEEMABLE PREFERRED SECURITIES 2003 2002
--------- ------------
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 .................. 94,144 73,672
-------- --------
Total ...................................... $791,681 $771,209
======== ========
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 among the various series corresponds to
the alphabetical order of 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% of the
purchase price 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% of the issue price
in the aggregate.
Redeemable Preferred Securities (Series A and C) originally due to be sold
to the Company in 2002 for Euro 341,385 had their redemption dates extended
until October and November 2003, respectively. The other 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 160,388 (Series B and F) and US
dollars $245,000 (Series D and E) plus any accrued and unpaid dividends.
Redeemable Preferred Securities (Series B, E, and F) have redemption dates in
August 2003. Redeemable Preferred Securities (Series D) are scheduled for
redemption in April 2004. Dividends were recorded and classified as part of
interest expense in the consolidated statement of operations in the amounts of
$9,679 and $9,929 in the three month periods ended March 31, 2003 and 2002,
respectively. During the three months ended March 31, 2003 and 2002, cash
dividend payments were made totaling $8,733 and $29,850, respectively. 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.
13
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
Changes in the carrying amount of goodwill for the three months ended
March 31, 2003 are as follows:
MARCH 31,
2003
---------
Carrying value as of December 31, 2002......... $2,934,581
Goodwill acquired for the three months
ended March 31, 2003.......................... 13,493
Reclassifications.............................. (15,609)
----------
Carrying value as of March 31, 2003............ $2,932,465
==========
At March 31, 2003 and December 31, 2002, other intangible assets consisted
of the following:
MARCH 31, 2003 DECEMBER 31, 2002
-------------------------------------------- --------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
--------- ------------ ---------- --------- ------------ ----------
AMORTIZABLE INTANGIBLE ASSETS:
Patient Relationships $ 237,262 $(193,703) $ 43,559 $ 236,446 $(189,277) $ 47,169
Other Intangibles $ 108,754 $ (58,020) $ 50,734 $ 108,982 $ (57,356) $ 51,626
--------- --------- ---------- --------- --------- ----------
$ 346,016 $(251,723) $ 94,293 $ 345,428 $(246,633) $ 98,795
========= ========= ========== ========= ========= ==========
NON-AMORTIZABLE INTANGIBLE ASSETS
Tradename $ 241,513 $ (31,376) $ 210,137 $ 241,513 $ (31,376) $ 210,137
Management Contracts $ 225,679 $ (21,908) $ 203,771 $ 204,964 $ (21,908) $ 183,056
--------- --------- ---------- --------- --------- ----------
$ 467,192 $ (53,284) $ 413,908 $ 446,477 $ (53,284) $ 393,193
========= ========= ========== ========= ========= ==========
Amortization expense for amortizable intangible assets at March 31, 2003
is estimated to be $15,600 for the remaining nine months of 2003, $16,500 for
2004, $15,100 for 2005, $10,600 for 2006, and $7,900 for 2007.
NOTE 6: 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 and legal expenses arising in connection with the Grace
Chapter 11 Proceedings and the cost of resolving pending litigation and other
disputes with certain commercial insurers (see Note 9).
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 Grace's Chapter 11 Proceedings. In addition, that amount
included the estimated costs of defending the Company in all litigation arising
out of Grace's Chapter 11 Proceedings (see Note 9).
The Company included $55 million in the special charge to provide for
settlement obligations, legal expenses and the resolution of disputed accounts
receivable relating to various insurance companies. The remaining amount of the
special charge ($30 million) was accrued mainly 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.
At March 31, 2003, there is a remaining balance of $186 million for the
accrual for the special charge for legal matters. The Company believes that
these reserves are adequate for the settlement of all matters described above.
During the three months ended March 31, 2003, $5 million in charges were applied
against the accrued special charge for legal matters.
14
NOTE 7. EQUITY
CLASS D PREFERRED STOCK
On February 4, 2003, the Company announced the exercise of its right to
redeem all of its outstanding shares of the Class D Preferred Stock ("Class D
Shares"). The Class D Shares were issued to the common shareholders of W.R.
Grace & Co. in connection with the 1996 reorganization involving W. R. Grace and
Fresenius Medical Care.
Commencing on March 28, 2003, Class D Shares that were properly
transferred to, and received by, the redemption agent were redeemed at a
redemption price of $0.10 per share. Upon completion of the redemption, FMCH
will have redeemed the 89 million outstanding Class D Shares at a total cash
outflow of $8,906. This transaction had no earnings impact for the Company.
After March 28, 2003 the Class D Shares ceased to be deemed issued and
outstanding shares of the Company's capital stock and were restored to the
status of authorized but unissued shares of preferred stock.
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.
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. W.R. Grace & Co. and certain of its
subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code (the "Grace Chapter 11 Proceedings") on April 2, 2001.
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. 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");
W. R. Grace & Co. has received the Service's examination report on tax periods
1993 to 1996; that during those years Grace deducted approximately $122,100 in
interest attributable to corporate owned life insurance ("COLI") policy loans;
that W.R. Grace & Co. has paid $21,200 of tax and interest related to COLI
deductions taken in tax years prior to 1993; that a U.S. District Court ruling
has denied interest deductions of a taxpayer in a similar situation and that
W.R. Grace & Co. is seeking a settlement of the Service's claims. Subject to
certain representations made by W.R. Grace & Co., the Company and Fresenius AG,
W.R. Grace & Co. and certain of its affiliates agreed to indemnify the Company
against this and other pre-Merger and Merger related tax liabilities.
Prior to and after the commencement of the Grace Chapter 11 Proceedings,
class action complaints were filed against W.R. Grace & Co. and the Company by
plaintiffs claiming to be creditors of W.R. Grace & Co.- Conn., and by the
asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy
estate in the Grace Chapter 11 Proceedings, alleging among other things that the
Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act
and constituted a conspiracy. All such cases have been stayed and transferred to
or are pending before the U.S. District Court as part of the Grace Chapter 11
Proceedings.
On February 6, 2003, the Company reached a definitive agreement with the
asbestos creditors' committees on behalf of the W.R. Grace and Co. bankruptcy
estate in the matters pending in the Grace Chapter 11 Proceedings for the
settlement of all fraudulent conveyance claims against it and other claims
related to the Company that arise out of the bankruptcy of W.R. Grace & Co.
Subsequently, the settlement agreement was amended and W.R. Grace was added as a
settling party. Under the terms of the settlement
15
agreement as amended (the "Settlement Agreement"), fraudulent conveyance and
other claims raised on behalf of asbestos claimants will be dismissed with
prejudice and the Company will receive protection against existing and potential
future W.R. Grace & Co. related claims, including fraudulent conveyance and
asbestos claims, and indemnification against income tax claims related to the
non-NMC members of the W.R. Grace & Co. consolidated tax group upon confirmation
of a W.R. Grace & Co. bankruptcy reorganization plan that contains such
provisions. Under the Settlement Agreement, the Company will pay a total of
$115,000 to the W.R. Grace & Co. bankruptcy estate, or as otherwise directed by
the Court, upon plan confirmation. No admission of liability has been or will be
made. The Settlement Agreement is subject to the approval of the U.S. District
Court. On April 15, 2003, W.R. Grace & Co. and the asbestos creditors'
committees filed a motion before the U.S. District Court, seeking court approval
of the Settlement Agreement and entry of a court order implementing the
settlement. The foregoing summary of the material terms of the settlement is
qualified in its entirety by reference to the full text of the Settlement
Agreement. The Settlement Agreement has been filed with the Securities and
Exchange Commission.
Subsequent to the Merger, W.R. Grace & Co. 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. Under the Settlement Agreement, upon
confirmation of a plan that satisfies the conditions to the Company's payment
obligation, this litigation will be dismissed with prejudice.
In April 2003, the Company, NMC, and certain NMC subsidiaries agreed to
settle all litigation filed by a group of insurance companies concerning
allegations of inappropriate billing practices and misrepresentations and the
Company's counterclaims against the plaintiffs in these matters based on
inappropriate claim denials and delays in claim payments. The costs of the
settlement will be charged against previously established accruals. See "Accrued
Special Charge for Legal Matters" below. Other private payors have contacted the
Company regarding similar claims and may file their own lawsuit seeking
reimbursement and other damages. Although the ultimate outcome on the Company of
any such 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.
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 Anti-Kickback Statute, the False Claims Act,
the Stark Statute, 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. 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 expects 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 many 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 the False Claims Act, among other
laws.
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
16
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 $258,000
to reflect anticipated expenses associated with the continued defense and
resolution of pre-Merger tax claims, Merger-related claims, and commercial
insurer claims. The costs associated with the Settlement Agreement and
settlement with insurers are charged against this accrual. While the Company
believes that its remaining accruals reasonably estimate the Company's currently
anticipated costs related to the continued defense and resolution of the
remaining matters, no assurances can be given that the actual costs incurred by
the Company will not exceed the amount of these accruals.
17
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 months ended March 31, 2003
and 2002 pertaining to the Company's two industry segments.
LESS
DIALYSIS DIALYSIS INTERSEGMENT TOTAL
SERVICES PRODUCTS SALES
---------- -------- ------------ ----------
NET REVENUES FOR THREE MONTHS ENDED
3/31/03 $ 828,164 $190,602 $88,965 $ 929,801
3/31/02 $ 788,533 $183,207 $77,836 $ 893,904
OPERATING EARNINGS FOR THREE MONTHS ENDED
3/31/03 100,083 34,559 -- 134,642
3/31/02 93,192 35,330 -- 128,522
ASSETS AT
3/31/2003 2,677,659 621,217 -- 3,298,876
12/31/2002 2,657,692 635,778 -- 3,293,470
DEPRECIATION AND AMORTIZATION FOR THE THREE MONTHS ENDED
3/31/2003 25,723 4,369 -- 30,092
3/31/2002 25,627 4,357 -- 29,984
Total assets at March 31, 2003 of $5,175,226 is comprised of total assets
for reportable segments, $3,298,876; intangible assets not allocated to
segments, $1,876,570; accounts receivable financing agreement ($312,249); and
other corporate assets, $312,029.
The table below provides the reconciliations of reportable segment operating
earnings to the Company's consolidated totals.
THREE MONTHS ENDED
SEGMENT RECONCILIATION MARCH 31,
---------------------- --------------------------
2003 2002
--------- ---------
INCOME BEFORE INCOME TAXES:
Total operating earnings for reportable segments $ 134,642 $ 128,522
Corporate G&A (4,830) 1,109
Corporate depreciation and amortization (1,346) (5,451)
Research and development expense (2,145) (1,998)
Net interest expense (51,310) (55,023)
--------- ---------
Income Before Income Taxes $ 75,011 $ 67,159
========= =========
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 report and in other Company 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
MARCH 31,
---------------------
(DOLLARS IN MILLIONS)
2003 2002
----- -----
NET REVENUES
Dialysis Services ........... $ 828 $ 789
Dialysis Products ........... 191 183
Intercompany Eliminations ... (89) (78)
----- -----
Total Net Revenues .............. $ 930 $ 894
===== =====
Operating Earnings:
Dialysis Services ........... $ 100 $ 93
Dialysis Products ........... 34 35
----- -----
Total Operating Earnings ........ 134 128
----- -----
Other Expenses:
General Corporate ........... $ 6 $ 4
Research & Development ...... 2 2
Interest Expense, Net ....... 51 55
----- -----
Total Other Expenses ............ 59 61
----- -----
Earnings Before Income Taxes .... 75 67
Provision for Income Taxes ...... 30 27
----- -----
Net Income ...................... $ 45 $ 40
===== =====
19
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net revenues for the first three months of 2003 increased by 4% ($36
million) over the comparable period in 2002. Net income for the first three
months of 2003 increased by 12% to $45 million as compared to $40 million in
2002. This increase was due to increased operating earnings ($6 million), and
decreased interest expense ($4 million), partially offset by increased general
corporate expenses ($2 million) and increased income taxes ($3 million).
DIALYSIS SERVICES
Dialysis Services net revenues for the first three months of 2003
increased by 5% to $824 million (net of $5 million of intercompany sales). The
growth in dialysis services revenue resulted primarily from a 7% increase in
treatment volume reflecting base business growth (3%); the impact of 2003 and
2002 acquisitions (2%), and the transfer of billing for some Medicare peritoneal
dialysis patients from Dialysis Products (Method II billing) to Dialysis
Services (Method I billing) (2%). The increase in revenue was partially offset
by a decrease in revenue per treatment from $284 in the first quarter of 2002 to
$278 in the first quarter of 2003. The decrease in revenue rate per treatment is
primarily due to the change from Method II to Method I billing and decreased
ancillary revenues associated with new billing procedures for ancillary drugs
(Zemplar and Vitamin D).
Dialysis Services operating earnings for the first three months of 2003
increased by 7% ($7 million) as compared to the comparable period of 2002
resulting in an increased operating margin from 11.9% in the first quarter of
2002 to 12.1% in the first quarter of 2003. The increase in operating margin is
primarily due to one-time severance and other payroll costs related to workforce
reductions incurred in 2002, partially offset by lower ancillary margins in 2003
versus 2002.
DIALYSIS PRODUCTS
Dialysis Products gross revenues increased by 4% to $191 million in the
first quarter 2003 as compared to $183 million in the comparable period 2002.
Internal sales to Dialysis Services increased by 16% to $85 million and were
partially offset by a decrease in external sales of 4% to $106 million. Dialysis
Product external sales the first quarter of both 2003 and 2002 include the sales
of machines to a third party leasing company which are leased back by Dialysis
Services. Dialysis Product external sales in the first quarter 2002 also
includes Method II PD revenues for Dialysis Services patients. Method II
patients were transferred to Method I effective January 1, 2003 therefore there
were no similar Method II revenues recorded in the first quarter 2003. Dialysis
Products measures its external sales performance based on its sales to the "net
available external market." The net available external market excludes machine
sales and Method II revenues involving Dialysis Services as well as sales to
other vertically integrated dialysis companies. Net available external market
sales increased by 6% to $95 million in the first quarter of 2003 as compared to
$89 million in 2002.
The Company uses net available external market as a key operating metric
as it eliminates the impact of internal sales and activity with another
vertically integrated company to provide a true measure of product that is sold
into the market. The following is a reconciliation of gross product revenues to
net available market for the quarter ended March 31, 2003 and 2002,
respectively:
Three Months Ended
March 31,
-------------------------
(dollars in millions)
2003 2002
-------- --------
Gross product revenues.............. $191 $183
Intercompany eliminations........... (85) (75)
---- ----
Net product revenues................ 106 108
Machine sales....................... (8) (6)
Vertically integrated dialysis
company sales...................... (3) (3)
Method II sales..................... - (10)
---- ----
Net available external markets...... $ 95 $ 89
==== ====
Dialysis Products operating earnings for the first three months of 2003
decreased by 3% to $34 million from $35 million in the comparable period of
2002. This decrease was primarily due to lower gross margins resulting from
higher manufacturing costs.
OTHER EXPENSES
The Company's other expenses for the first three months of 2003 decreased
by 3% to $59 million as compared to $61 million in the comparable period of 2002
due to a decrease of $4 million in interest expense partially offset by an
increase of $2 million in general corporate expenses. The increase in general
corporate overhead is primarily due a one-time gain on pension curtailment of
$13 million that was realized in the first quarter 2002 and higher general costs
incurred in the first quarter 2003 as compared to the comparable period 2002
partially offset by favorable fluctuations in foreign currency of $8 million
(gains realized in the three months of 2003 as compared to losses of $2 million
incurred in the comparable period 2002) and reduced amortization expense of $4
million.
INCOME TAX RATE
The effective tax rate from operations for the first three months of 2003
(39.6%) is lower than the rate for the comparable period of 2002 (39.8%) due to
reductions in state taxes.
20
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31,
2002.
The Company's cash requirements for the first three months of 2003
and 2002 were funded by cash from operations, additional intercompany
borrowings, borrowings under its credit facility and proceeds from a receivable
financing facility.
OPERATING ACTIVITIES
The Company generated cash from operations of $86 million in the first
quarter of 2003 as compared to $33 million in the first quarter of 2002. The
increase in operating cash of $53 million is primarily related to lower interest
payments of $27 million, decreased tax payments of $13 million, improvements in
accounts receivable of $24 million resulting from favorable cash collections,
and improvements in inventory management of $8 million partially offset by net
other working capital $19 million.
INVESTING ACTIVITIES
Net cash used in investing activities was $44 million in the first
quarter of 2003 as compared to $26 million in the first quarter of 2002. The
Company funded its acquisitions and capital expenditures primarily through cash
flows from operations in 2003 and 2002. The increases in cash used in investing
related to increased acquisition spending ($13 million) and increases in net
capital expenditures ($5 million). Acquisition spending in the first quarter of
2003 and 2002 was approximately $16 million and $2 million respectively with no
individually significant transactions. Capital expenditures totaling $30 million
in the first quarter of 2003 and $27 million in the first quarter of 2002
respectively, were made for new clinics, improvements to existing clinics and
maintenance of production facilities.
FINANCING ACTIVITIES
On February 21, 2003 the Company and FMCAG entered into an amended and
restated credit agreement ("2003 Senior Credit Agreement") with the Bank of
America N.A., Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan
Chase Bank, the Bank of Nova Scotia, and certain subsidiaries and affiliates an
aggregate of up to $1.5 billion through three credit facilities. The three
facilities include a revolving facility of $500 million and two term loan
facilities of $500 million each. The Company used the initial borrowings under
the 2003 Senior Credit Agreement to refinance outstanding borrowings under our
prior senior credit agreement and for general corporate purposes (See Note 3 of
the Consolidated Financial Statements).
Net cash flows used in financing activities were $35 million in the first
quarter of 2003 as compared to cash flows provided by financing activities of $1
million in the first quarter of 2002 for a change of $36 million. Net cash used
in financing activities in the first quarter of 2003 is principally related to
an increase in borrowing from affiliates of $13 million, along with
approximately $104 million in increases in borrowings from the Company's 2003
Senior Credit Facility.
The Company has an asset securitization facility (the "Accounts Receivable
Facility") whereby receivables are sold to NMC Funding Corporation (the
"Transferor"), a wholly owned subsidiary of the Company, and subsequently the
Transferor transfers and assigns percentage ownership interests in receivables
to certain bank investors. The maximum securitization limit under the Accounts
Receivable Facility is $560 million at March 31, 2003. The facility has a term
of 364 days and matures on October 23, 2003. The Company has historically
renewed this facility for a new 364 day term upon maturity.
For the three months ended March 31, 2003, the Company decreased its sales
under the Accounts Receivable Facility by $133 million primarily using funds
drawn under the 2003 Senior Credit Agreement. Accounts receivable on the face of
the balance sheet are shown net of the Account Receivable Facility.
Approximately $9 million of cash was paid to redeem the Company's Series D
Preferred Stock (See Note 7 of the Consolidated Financial Statements). In
addition, approximately $12 million was used for payment of debt issuance costs
related to the Company's 2003 Senior Credit Agreement.
Cash from short-term borrowings can be generated by borrowings under the
Accounts Receivable Facility and through borrowings from affiliates. Long-term
financing is provided by the revolving credit portion of our senior credit
facility. We believe that our existing credit facility, cash generated from
operations and other current sources of financing are sufficient to meet our
foreseeable cash requirements.
21
The 2003 Senior Credit Agreement includes covenants that require FMCAG to
maintain certain financial ratios or meet other financial tests. Under the
Senior Credit Agreement, FMCAG is obligated to maintain a minimum consolidated
net worth, a minimum consolidated fixed charge ratio (ratio of consolidated
funded debt to EBIDTA) and a maximum leverage ratio. In addition, the 2003
Senior Credit Agreement includes other covenants which, among other things,
restrict or have the effect of restricting the Company's ability to dispose of
assets, incur debt, pay dividends, create liens or make capital expenditures,
investments and acquisitions. The breach of any of the covenants could result in
a default under the 2003 Senior Credit Agreement. In default, the outstanding
balance under the 2003 Senior Credit Agreement becomes due and payable.
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 understand
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 2002 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 intangibles. At March 31, 2003, the carrying
amount of net intangible assets amounted to $3,441 million representing
approximately 66% 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 at least once a year, at the end of the year,
or whenever events or changes in circumstances indicate that the carrying amount
of assets might be impaired.
To comply with the provisions of SFAS No. 142, the fair value of the
reporting unit is compared to the reporting unit's carrying amount. The Company
estimates the fair value of each reporting unit using estimated future cash
flows for the unit discounted by a weighted average cost of capital specific to
that unit. Estimated cash flows are based on our budgets for the next three
years, and projections for the following years based on an expected growth rate.
The growth rate is based on industry and internal projections. The discount
rates reflect any inflation in local cash flows and risks inherent to each
reporting unit.
If the fair value of the reporting unit is less than its carrying value, a
second step is performed which compares the fair value of the reporting unit's
goodwill to the carrying value of its goodwill. If the fair value of the
goodwill is less than its carrying value, the difference is recorded as an
impairment charge.
A prolonged downturn in the healthcare industry with lower than expected
increases in reimbursement rates and/or higher than expected costs for providing
healthcare services could adversely affect our estimated future cashflows.
Future adverse changes in a reporting unit's economic environment might affect
the discount rate. A decrease in our estimated future cash flows and/or a
decline in the macroeconomic environment could result in impairment charges to
goodwill and other intangible assets which could materially and adversely affect
our future financial position and operating results.
LEGAL CONTINGENCIES
The Company is a party to certain litigation 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 8 "Commitments and Contingencies"
in the Company's Consolidated Financial Statements. The outcome of these matters
may have a material effect on the Company's financial position, results of
operations or 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. 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.
22
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. 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. 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.
A significant change in collection experience, a deterioration of the
aging of accounts receivable, or a significant change in the mix of payers may
adversely affect the Company's estimate of the allowance for doubtful accounts.
Consequently, it is possible that our future operating results could be
materially and adversely affected by additional charges for bad debt and our
cash flows may be reduced by lower collection of receivables.
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 $7.9
million and $6.7 million for the three months ended March 31, 2003 and 2002,
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 March 31, 2003, the fair value of the Company's interest rate
agreements, which consisted entirely of interest rate swaps, is recorded as a
liability valued at approximately $99.4 million and the fair value of the
Company's foreign exchange contracts, which consisted entirely of forward
agreements, is recorded as an asset valued at approximately $109.7 million. The
Company had outstanding contracts covering the purchase of 623.3 million Euros
("EUR") at an average contract price of $.8693 per EUR, for delivery between
April 2003 and May 2004, contracts for the purchase of 127 million Mexican Pesos
at an average contract price of 10.8344 pesos per US dollar, and contracts for
the purchase of $10.4 million US dollars at an average contract price of $.6401
per Canadian Dollar.
ITEM 4: CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures within 90 days prior to filing of
this report as contemplated by Securities Exchange Act Rule 13a-14. Based on
that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in alerting
them in a timely manner that all material information required to be filed in
this annual report has been made known to them. There have been no significant
changes to internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation.
PART II
OTHER INFORMATION
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. W.R. Grace & Co. and certain of its
subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code (the "Grace Chapter 11 Proceedings") on April 2, 2001.
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. 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");
W. R. Grace & Co. has received the Service's examination report on tax periods
1993 to 1996; that during those years Grace deducted approximately $122,100 in
interest attributable to corporate owned life insurance ("COLI") policy loans;
that W.R. Grace & Co. has paid $21,200 of tax and interest related to COLI
deductions taken in tax years prior to 1993; that a U.S. District Court ruling
has denied interest deductions of a taxpayer in a similar situation and that
W.R. Grace & Co. is seeking a settlement of the Service's claims. Subject to
certain representations made by W.R. Grace & Co., the Company and Fresenius AG,
W.R. Grace & Co. and certain of its affiliates agreed to indemnify the Company
against this and other pre-Merger and Merger related tax liabilities.
Prior to and after the commencement of the Grace Chapter 11 Proceedings,
class action complaints were filed against W.R. Grace & Co. and the Company by
plaintiffs claiming to be creditors of W.R. Grace & Co.- Conn., and by the
asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy
estate in the Grace Chapter 11 Proceedings, alleging among other things that the
Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act
and constituted a conspiracy. All such cases have been stayed and transferred to
or are pending before the U.S. District Court as part of the Grace Chapter 11
Proceedings.
On February 6, 2003, the Company reached a definitive agreement with the
asbestos creditors' committees on behalf of the W.R. Grace and Co. bankruptcy
estate in the matters pending in the Grace Chapter 11 Proceedings for the
settlement of all fraudulent conveyance claims against it and other claims
related to the Company that arise out of the bankruptcy of W.R. Grace & Co.
Subsequently, the settlement agreement was amended and W.R. Grace was added as a
settling party. Under the terms of the settlement agreement as amended (the
"Settlement Agreement"), fraudulent conveyance and other claims raised on behalf
of asbestos claimants will be dismissed with prejudice and the Company will
receive protection against existing and potential future W.R. Grace & Co.
related claims, including fraudulent conveyance and asbestos claims, and
indemnification against income tax claims related to the non-NMC members of the
W.R. Grace & Co. consolidated tax group upon confirmation of a W.R. Grace & Co.
bankruptcy reorganization plan that contains such provisions. Under the
Settlement Agreement, the Company will pay a total of $115,000 to the W.R. Grace
& Co. bankruptcy estate, or as otherwise directed by the Court, upon plan
confirmation. No admission of liability has been or will be made. The Settlement
Agreement is subject to the approval of the U.S. District Court. On April 15,
2003, W.R. Grace & Co. and the asbestos creditors' committees filed a motion
before the U.S. District Court, seeking court approval of the Settlement
Agreement and entry of a court order implementing the settlement. The foregoing
summary of the material terms of the settlement is qualified in its entirety by
reference to the full text of the Settlement Agreement. The Settlement Agreement
has been filed with the Securities and Exchange Commission.
Subsequent to the Merger, W.R. Grace & Co. 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. Under the Settlement Agreement, upon
confirmation of a plan that satisfies the conditions to the Company's payment
obligation, this litigation will be dismissed with prejudice.
In April 2003, the Company, NMC, and certain NMC subsidiaries agreed to
settle all litigation filed by a group of insurance companies concerning
allegations of inappropriate billing practices and misrepresentations and the
Company's counterclaims against the plaintiffs in these matters based on
inappropriate claim denials and delays in claim payments. The costs of the
settlement will be
25
charged against previously established accruals. See "Accrued Special Charge for
Legal Matters" below. Other private payors have contacted the Company regarding
similar claims and may file their own lawsuit seeking reimbursement and other
damages. Although the ultimate outcome on the Company of any such 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.
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 Anti-Kickback Statute, the False Claims Act,
the Stark Statute, 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. 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 expects 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 many 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 the False Claims Act, among other
laws.
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
$258,000 to reflect anticipated expenses associated with the continued defense
and resolution of pre-Merger tax claims, Merger-related claims, and commercial
insurer claims. The costs associated with the Settlement Agreement and
settlement with insurers are charged against this accrual. While the Company
believes that its remaining accruals reasonably estimate the Company's currently
anticipated costs related to the continued defense and resolution of the
remaining matters, no assurances can be given that the actual costs incurred by
the Company will not exceed the amount of these accruals.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
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* Amended and Restated Credit Agreement dated as of February 21,
2003 among Fresenius Medical Care AG, Fresenius Medical Care
Holdings, Inc., and the agents and lenders named therein.
(filed herewith)
Exhibit 4.2 Fresenius Medical Care AG 1996 Stock Incentive Plan
(incorporated herein by reference to the Fresenius Medical
Care AG's Registrant Statement on Form S-8 dated October 1,
1996).
Exhibit 4.3 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 4.4 Fresenius Medical Care AG 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)).
Exhibit 4.5 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 4.6 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).
27
Exhibit 4.7 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 4.8 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* 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 10.2 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 10.3 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 10.4 Second Amended and Restated Transfer and Administrative
agreement dated as of September 24, 2002 among NMC Funding
Corporation, National Medical Care, Inc., Enterprise Funding
Corporation, Compass US Acquisition, LLC, Giro Multifunding
Corporation, the Bank Investors listed therein, WestLB AG, New
York Branch (formerly known as 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-Q of
Registrant filed with Commission on November 14, 2002).
Exhibit 10.5 Amendment No.1 dated as of October 22, 2002 to the Second
Amended and Restated Transfer and Administrative agreement
dated as of September 24, 2002 among NMC Funding Corporation,
National Medical Care, Inc., Enterprise Funding Corporation,
Compass US Acquisition, LLC, Giro Multifunding Corporation,
the Bank Investors listed therein, WestLB AG, New York Branch
(formerly known as 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-Q of Registrant filed with Commission
on November 14, 2002).
Exhibit 10.6 Amendment No.2 dated as of November 8, 2002 to the Second
Amended and Restated Transfer and Administrative agreement
dated as of September 24, 2002 among NMC Funding Corporation,
National Medical Care, Inc., Enterprise Funding Corporation,
Compass US Acquisition, LLC, Giro Multifunding Corporation,
Asset One Securitization, LLC, the Bank Investors listed
therein, WestLB AG, New York Branch (formerly known as
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 17,
2003).
Exhibit 10.7 Amendment No.3 dated as of December 18, 2002 to the Second
Amended and Restated Transfer and Administrative agreement
dated as of September 24, 2002 among NMC Funding Corporation,
National Medical Care, Inc., Enterprise Funding Corporation,
Compass US Acquisition, LLC, Giro Multifunding Corporation,
Asset One Securitization, LLC, the Bank Investors listed
therein, WestLB AG, New York Branch (formerly known as
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 17,
2003).
Exhibit 10.8 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).
28
Exhibit 10.9 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 10.10 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 10.11 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 10.12 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 10.13 Employment Agreement dated January 1, 2002 by and between
Robert "Rice" M. Powell, Jr. and National Medical Care, Inc.
(filed herewith).
Exhibit 10.14 Employment Agreement dated July 1, 2002 by and between John F.
Markus and National Medical Care, Inc. (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on August 14, 2002).
Exhibit 10.15 Employment Agreement dated October 15, 2002 by and between
Mats Wahlstrom and National Medical Care, Inc. (incorporated
herein by reference to the Form 10-K of Registrant filed with
Commission on March 17, 2003).
Exhibit 10.16 Subordinated Promissory 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 10.18 First Amended Settlement Agreement dated April 14, 2003 by and
among the Company, National Medical Care, Inc., the Official
Committee of Asbestos Personal Injury Claimants, and the
Official Committee of Asbestos Property Damage Claimants of
W.R. Grace & Co., W.R. Grace & Co. and W.R. Grace & Co. - Conn
(incorporated herein by reference to the Form 8-K of
Registrant filed with Commission on April 21, 2003).
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On February 12, 2003, the Company filed a current report on Form 8-K
announcing the execution of a settlement agreement with the asbestos
creditors' committees on behalf of the W.R. Grace Co. bankruptcy estate.
On April 21, 2003, the Company filed a current report on Form 8-K with
respect to (i) the amendment of Registrant's settlement agreement with the
asbestos creditors' committees on behalf of the W.R. Grace & Co.
bankruptcy estate and (ii) the announcement of the settlement of certain
commercial health insurer litigation.
* Confidential treatment has been requested as to certain portions of this
Exhibit
29
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: May 15, 2003 /s/ Ben J. Lipps
----------------------------------------
NAME: Ben J. Lipps
TITLE: President (Chief Executive
Officer)
DATE: May 15, 2003 /s/ Jerry A. Schneider
----------------------------------------
NAME: Jerry Schneider
TITLE: Chief Financial Officer
30
CERTIFICATIONS
CHIEF EXECUTIVE OFFICER
I, Ben J. Lipps, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Fresenius
Medical Care Holdings, Inc.
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Quarterly Report.
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this Quarterly Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this Quarterly
Report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this Quarterly
Report (the "Evaluation Date"); and
c. presented in this Quarterly Report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this Quarterly Report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Ben J. Lipps
----------------------------------------
Ben J. Lipps
President and
Chief Executive Officer
31
CHIEF FINANCIAL OFFICER
I, Jerry A. Schneider, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Fresenius
Medical Care Holdings, Inc.
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Quarterly Report.
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this Quarterly Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this Quarterly
Report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this Quarterly
Report (the "Evaluation Date"); and
c. presented in this Quarterly Report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this Quarterly Report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Jerry A. Schneider
----------------------------------------
Jerry A. Schneider
Chief Financial Officer
32