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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: SEPTEMBER 30, 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
PAGE
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Operations.......................... 4
Unaudited Consolidated Statements of Comprehensive Income................ 5
Unaudited Consolidated Balance Sheets.................................... 6
Unaudited Consolidated Statements of Cash Flows.......................... 7
Notes to Unaudited Consolidated Interim Financial Statements............. 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 26
ITEM 4: CONTROLS AND PROCEDURES.................................................. 27
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings........................................................ 28
ITEM 6: Exhibits and Reports on Form 8-K......................................... 30
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET REVENUES
Health care services................................ $ 872,581 $ 834,079 $ 2,541,997 $ 2,432,365
Medical supplies.................................... 105,556 114,566 321,285 340,584
----------- ----------- ----------- -----------
978,137 948,645 2,863,282 2,772,949
----------- ----------- ----------- -----------
EXPENSES
Cost of health care services........................ 612,850 592,293 1,801,094 1,731,217
Cost of medical supplies............................ 70,244 79,660 218,569 234,278
General and administrative expenses................. 101,121 101,065 278,284 256,905
Provision for doubtful accounts..................... 25,677 24,482 73,635 71,820
Depreciation and amortization....................... 29,434 36,049 90,474 108,122
Research and development............................ 2,166 2,758 6,294 6,763
Interest expense, net and related financing costs
including $24,511 and $26,119 for the three
months and $74,251 and $109,785 for the nine
months ended, respectively, of interest with
affiliates....................................... 47,858 50,543 148,015 177,684
----------- ----------- ----------- -----------
889,350 886,850 2,616,365 2,586,789
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............................ 88,787 61,795 246,917 186,160
PROVISION FOR INCOME TAXES............................. 33,808 25,387 92,884 74,600
----------- ----------- ----------- -----------
NET INCOME............................................. 54,979 36,408 154,033 111,560
Basic and fully dilutive net income per share.......... $ 0.61 $ 0.40 $ 1.71 $ 1.24
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- ---------
NET INCOME .............................................. $ 54,979 $ 36,408 $154,033 $ 111,560
Other comprehensive income
Foreign currency translation adjustments ............. (1003) (363) 467 750
Derivative instruments net of deferred tax (provision)
benefit of ($10,344) and $6,797 for the three months
and ($5,892) and $7,955 for the nine months ended,
respectively ....................................... 15,516 (7,802) 8,838 (13,724)
-------- -------- -------- ---------
Total other comprehensive income (loss) .............. 14,513 (8,165) 9,305 (12,974)
-------- -------- -------- ---------
COMPREHENSIVE INCOME .................................... $ 69,492 $ 28,243 $163,338 $ 98,586
-------- -------- -------- ---------
See accompanying Notes to Unaudited, Consolidated Financial Statements.
5
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 26,581 $ 30,013
Accounts receivable, less allowances of
$122,106 and $121,620........................ 587,300 387,222
Inventories.................................... 189,591 185,892
Deferred income taxes.......................... 154,897 157,353
Other current assets........................... 130,587 128,619
----------- -----------
Total Current Assets....................... 1,088,956 889,099
----------- -----------
Properties and equipment, net..................... 524,417 531,081
----------- -----------
Other Assets:
Goodwill....................................... 2,946,875 2,934,581
Other intangible assets, net of
accumulated amortization of $260,125 and
$246,633..................................... 504,367 491,988
Other assets and deferred charges.............. 238,456 163,595
----------- -----------
Total Other Assets......................... 3,689,698 3,590,164
----------- -----------
Total Assets...................................... $ 5,303,071 $ 5,010,344
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and
capitalized lease obligations............... 29,987 2,303
Current portion of borrowing from affiliates... 261,866 315,394
Current portion of mandatorily redeemable
preferred securities........................ 829,665 771,209
Accounts payable............................... 71,338 100,603
Accrued liabilities............................ 274,946 261,888
Accrued special charge for legal matters....... 174,549 191,130
Net accounts payable to affiliates............. 54,802 28,897
Accrued income taxes........................... 83,403 61,754
----------- -----------
Total Current Liabilities................... 1,780,556 1,733,178
Long-term debt.................................... 641,358 616,900
Non-current borrowings from affiliates............ 654,470 654,693
Capitalized lease obligations..................... 650 1,120
Non-current portion of mandatorily redeemable
preferred securities........................... 38,189 --
Deferred income taxes............................. 134,430 96,453
Other liabilities................................. 161,485 185,200
----------- -----------
Total Liabilities.............................. 3,411,138 3,287,544
----------- -----------
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................................... 1,976,017 1,942,755
Retained deficit.................................. (107,374) (242,846)
Accumulated comprehensive loss.................... (74,122) (83,427)
----------- -----------
Total Equity................................... 1,891,933 1,722,800
----------- -----------
Total Liabilities and Equity...................... $ 5,303,071 $ 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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2003 2002
----------- -----------
Cash Flows from Operating Activities:
Net Income................................................... $ 154,033 $ 111,560
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 90,474 108,122
Provision for doubtful accounts........................... 73,635 71,820
Deferred income taxes..................................... 39,135 37,898
(Gain) loss on disposal of properties and equipment....... (1,563) 1,707
Changes in operating assets and liabilities, net of effects of
purchase acquisitions and foreign exchange:
Increase in accounts receivable.............................. (4,482) (32,623)
(Increase) decrease in inventories........................... (293) 8,839
Decrease (increase) in other current assets.................. 1,179 (3,567)
Decrease (increase) in other assets and deferred charges..... 1,060 (7,558)
Decrease in accounts payable................................. (29,141) (25,325)
Increase in accrued income taxes............................. 21,649 711
Increase in accrued liabilities.............................. 6,817 20,963
Decrease in accrued special charge for legal matters......... (16,581) (19,854)
Decrease in other long-term liabilities...................... (12,601) (14,076)
Net changes due to/from affiliates........................... 24,213 4,349
Other, net................................................... (9,893) (6,142)
----------- -----------
Net cash provided by operating activities....................... 337,641 256,824
----------- -----------
Cash Flows from Investing Activities:
Capital expenditures......................................... (71,978) (87,382)
Proceeds from sale of property and equipment................. 6,541 5,486
Payments for acquisitions, net of cash acquired.............. (24,349) (35,747)
Increase in other assets..................................... -- (1,000)
----------- -----------
Net cash used in investing activities........................... (89,786) (118,643)
----------- -----------
Cash flows from Financing Activities:
Net decrease in borrowings from affiliates................... (53,751) (376,942)
Cash dividends paid.......................................... (390) (390)
Net (decrease) increase in receivable financing facility..... (265,683) 14,000
Proceeds from mandatorily redeemable preferred securities.... 37,400 --
Redemption of Series D Preferred Stock....................... (8,906) --
Net increase in debt and capitalized leases.................. 51,511 234,283
Debt issuance costs.......................................... (13,693) --
Other, net................................................... (13) --
----------- -----------
Net cash used in financing activities........................... (253,525) (129,049)
----------- -----------
Effects of changes in foreign exchange rates.................... 2,238 732
----------- -----------
Change in cash and cash equivalents............................. (3,432) 9,864
----------- -----------
Cash and cash equivalents at beginning of period................ 30,013 26,786
----------- -----------
Cash and cash equivalents at end of period...................... $ 26,581 $ 36,650
=========== ===========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2003 2002
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net........................................ $ 116,926 $ 174,613
========= =========
Income taxes paid, net............................... $ 32,333 $ 36,000
========= =========
Details for Acquisitions:
Assets acquired......................................... $ 27,009 $ 38,159
Liabilities assumed..................................... (2,660) (2,412)
--------- ---------
Net cash paid for acquisitions....................... $ 24,349 $ 35,747
========= =========
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 kidney dialysis treatment.
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION
The consolidated financial statements in this report at September 30,
2003 and 2002 and for the three and nine 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 and nine month periods ended
September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ ------
The weighted average number of shares of
Common Stock were as follows........................ 90,000 90,000 90,000 90,000
====== ====== ====== ======
9
Net income used in the computation of earnings per share was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2003 2002 2003 2002
---------- ----------- ---------- ---------
Net income........................................ $ 54,979 $ 36,408 $ 154,033 $ 111,560
Dividends paid on preferred stocks................ (130) (130) (390) (390)
---------- ----------- ---------- ---------
Net income available to common shareholders....... $ 54,849 $ 36,278 $ 153,643 $ 111,170
========== =========== ========== =========
Basic and fully dilutive net income per share..... $ 0.61 $ 0.40 $ 1.71 $ 1.24
========== =========== ========== =========
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 gains of $14.4 million ($24.0 million pretax) for the three
months ended September 30, 2003 and after tax gains of $6.7 million ($11.1
million pretax) for the nine months ended September 30, 2003 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 gains of $0.5 million ($0.8 million pretax) for the three months ended
September 30, 2003 and after tax losses of $0.4 million ($0.7 million pretax)
for the nine months ended September 30, 2003 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 $0.9 million ($1.6 million pretax) for the three
months ended September 30, 2003 and after tax losses of $3.4 million ($5.6
million pretax) for the nine months ended September 30, 2003 were deferred in
other comprehensive income.
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 and
nine months ended September 30, 2003 were ($1.6) million and ($11.1) million,
respectively.
NEW PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections ("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the
criteria under Opinion 30 to determine if losses from extinguishment of debt
should be classified as extraordinary items. SFAS 145 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 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 has been reclassified and
presented as a loss from operating earnings. The Company adopted the remaining
provisions of SFAS 145 effective April 1, 2002.
10
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 expands 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 disclosure requirement on December 31, 2002.
There is no material impact on the Company's financial statements related to the
adoption of this standard.
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 impact of the adoption of FIN 46 on its financial
statements. (See Note 9)
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
financial reporting for derivative instruments. This statement is effective for
contracts entered into or modified after June 30, 2003. There is no material
impact on the Company's financial statements related to the adoption of this
standard.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments. This statement is effective for financial instruments
entered into or modified after May 31, 2003 and for existing instruments
effective July 1, 2003. Upon adoption of SFAS 150, the Company will reclassify
its mandatorily redeemable preferred securities, entered into with FMCAG, to
liabilities. The Company has reclassified its mandatorily redeemable preferred
securities to the liability section and has classified them as short-term or
long-term as appropriate.
NOTE 2. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Inventories:
Raw materials............................................... $ 49,058 $ 44,670
Manufactured goods in process............................... 13,242 11,127
Manufactured and purchased inventory available for sale..... 72,051 70,127
--------- ---------
134,351 125,924
Health care supplies....................................... 55,240 59,968
--------- ---------
Total.................................................. $ 189,591 $ 185,892
========= =========
11
NOTE 3. DEBT
2003 SENIOR CREDIT AGREEMENT
On February 21, 2003, the Company and FMCAG 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 credit facilities available
to the Company and certain subsidiaries and affiliates.
On August 22, 2003, the Company and FMCAG entered into their Amendment
No. 1 to the 2003 Senior Credit Agreement with the Lenders pursuant to which the
Lenders have made available to the Company and FMCAG a Tranche C Loan ("Loan C")
in the amount of $400,000. The proceeds of Loan C, together with cash flow from
operations, were used to voluntarily and permanently pay off the $500,000 Loan B
under the 2003 Senior Credit Agreement. The Company has the following credit
facilities in an aggregate of up to $1.4 billion at September 30, 2003:
- - 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 C") of $400,000, scheduled to expire
February 21, 2010 subject to an early repayment requirement on October
1, 2007 if the FMCAG Trust Preferred Securities due February 1, 2008
are not repaid, refinanced or have their maturity extended on or before
October 1, 2007. The terms of the Loan C require quarterly repayments
of $1,000 per quarter beginning with the third 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 payable 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 (other than
the Company's existing accounts receivable financing facility) 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 and a maximum leverage
ratio (ratio of consolidated funded debt to EBIDTA). 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 immediately due and
payable at the option of the Lenders. FMCAG is in compliance with all financial
covenants under the 2003 Senior Credit Agreement as of September 30, 2003.
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Long-term debt to outside parties consists of:
2003 Senior Credit Agreement ................................. $ 669,900 $ 616,900
Other ........................................................ 1,099 1,840
---------- ---------
670,999 618,740
Less amounts classified as current ........................... 29,641 1,840
---------- ---------
$ 641,358 $ 616,900
========== =========
12
Borrowings from affiliates consists of:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
FMCAG borrowings primarily at interest
rates approximating 1.11% and 2.22%, respectively............. $ 124,243 $ 214,000
RTC Holdings International, Inc. borrowings at a fixed interest
rate of 1.49% and 2.7%, respectively........................... 11,302 11,000
Fresenius AG borrowing at interest rates approximating
1.13% and 2.73%, respectively.................................. 80,000 6,000
Fresenius Medical Care Trust Finance S.a.r.l. borrowings at...... 654,244 654,244
interest rates ranging between 8.25% and 9.25%, respectively..
Franconia Acquisition, LLC at interest rates approximating
1.37% and 2.40%, respectively................................ 46,321 83,721
Other............................................................ 226 1,122
--------- ---------
Less amounts classified as current............................... 916,336 970,087
Total............................................................ 261,866 315,394
--------- ---------
$ 654,470 $ 654,693
========= =========
NOTE 4. TRANSACTONS UNDER COMMON CONTROL
Effective April 1, 2003, FMCH acquired, through a transfer, legal
ownership of the North American operations of the adsorber business of Fresenius
AG. Net assets of $17,246 were transferred at their carrying value since the
subsidiaries remain under control of a common parent. The results of operations
and cash flows of the adsorber business are included prospectively in these
financial statements effective as the date of transfer.
NOTE 5. MANDATORILY REDEEMABLE PREFERRED SECURITIES
During 2001 and 2000, a wholly-owned subsidiary of the Company issued
shares of various series of Preferred Stock ("Redeemable Preferred Securities")
to NMC which were then transferred to FMCAG for proceeds totaling $392,037 in
2001 and $305,500 in 2000. During the third quarter of 2003, proceeds from the
issuance of Series G Redeemable Preferred Securities totaled $37,400. The table
below provides information for Redeemable Preferred Securities for the periods
indicated.
SEPTEMBER 30, 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
Series G Preferred Stock, 330 shares........................ 37,400 --
------------ -----------
734,937 697,537
Mark to Market Adjustment................................... 132,917 73,672
------------ -----------
Total....................................................... $ 867,854 $ 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 G. 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
13
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. Series A was redeemed using
financing provided by intercompany borrowings in October 2003. 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 and D) have
redemption dates in November 2003 and April 2004, respectively. Redeemable
Preferred Securities (Series E and F) have redemption dates in August 2004.
Redeemable Preferred Securities (Series G) were offered in August 2003 by the
Company in the amount of Euros 32,774 and have a redemption date in August 2006.
The Company expects that all securities will be extended or refinanced for a
term of up to three years upon their maturity.
Dividends were recorded and classified as part of interest expense in
the consolidated statement of operations in the amounts of $10,205 and $10,892
in the three month periods ended September 30, 2003 and 2002, respectively and
$30,234 and $31,467 in the nine month periods ended September 30, 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. No
dividend payments were made in the three months ended September 30, 2003 and
2002. The Euro Redeemable Preferred Securities are deemed to be a Euro liability
and the risk of foreign currency fluctuations are hedged through forward
currency contracts.
The Company records mark to market adjustments based on fluctuations in
currency rates and records the offset to accumulated comprehensive income.
The holders of the Redeemable Preferred Securities have the same
participation rights as the holders of all other classes of capital stock of the
issuing subsidiary.
NOTE 6: RETIREMENT OF INTERCOMPANY DEBT
On June 27, 2002 the Company repaid its intercompany debt to FMC
Finance S.a.r.l in the amount of $350,995, originally due in 2006, utilizing
funds borrowed under its senior credit facility. At that time, an extraordinary
loss of $9,780, net of a tax benefit of $6,530 was recorded for the premium owed
to FMC Finance S.a.r.l for the early retirement of this obligation in accordance
with the terms of the intercompany debt agreement.
As of January 1, 2003, the Company adopted SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections in regard to SFAS No. 4. As a result, the loss is no
longer presented as an extraordinary loss and has been reclassified to interest
expense. The related income tax benefit is included in the provision for income
taxes.
NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
Changes in the carrying amount of goodwill for the nine months ended
September 30, 2003 are as follows:
SEPTEMBER 30,
2003
-------------
Carrying value as of December 31, 2002........................ $ 2,934,581
Goodwill acquired for the nine months
ended September 30, 2003................................. 17,177
Reclassifications............................................. (4,883)
------------
Carrying value as of September 30, 2003....................... $ 2,946,875
============
14
At September 30, 2003 and December 31, 2002, other intangible assets consisted
of the following:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------ ------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
--------- ------------ --------- --------- ------------ ---------
AMORTIZABLE INTANGIBLE ASSETS:
Patient Relationships $ 238,133 $ (200,167) $ 37,966 $ 236,446 $(189,277) $ 47,169
Other Intangibles $ 109,042 $ (59,958) $ 49,084 $ 108,982 $ (57,356) $ 51,626
--------- ---------- --------- --------- --------- ---------
$ 347,175 $ (260,125) $ 87,050 $ 345,428 $(246,633) $ 98,795
========= ========== ========= ========= ========= =========
NON-AMORTIZABLE INTANGIBLE ASSETS
Tradename $ 210,155 $ -- $ 210,155 $ 210,137 $ -- $ 210,137
Management Contracts $ 207,162 $ -- $ 207,162 $ 183,056 $ -- $ 183,056
--------- ---------- --------- --------- --------- ---------
$ 417,317 $ -- $ 417,317 $ 393,193 $ -- $ 393,193
========= ========== ========= ========= ========= =========
NET INTANGIBLES $ 764,492 $ (260,125) $ 504,367 $ 738,621 $(246,633) $ 491,988
========= ========== ========= ========= ========= =========
Amortization expense for amortizable intangible assets at September 30,
2003 is estimated to be $5,700 for the remaining three months of 2003, $16,600
for 2004, $15,300 for 2005, $10,800 for 2006, and $8,100 for 2007.
NOTE 8. SPECIAL CHARGE FOR LEGAL MATTERS
In the fourth quarter of 2001, the Company recorded a $258 million
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 12).
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. During the second quarter of 2003, the
court supervising Grace's Chapter 11 Proceedings approved the definitive
settlement agreement entered into among the Company, the committees representing
asbestos creditors and W.R. Grace.
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. In November 2003, the
Company settled without litigation all claims by the final group of insurance
companies who had contacted the Company concerning allegations of inappropriate
billing practices and misrepresentations. The costs of the settlement will be
charged against previously established accruals (see Note 12).
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.
Based on these developments, the Company has reduced its estimate for
the settlement and related costs of the Grace Chapter 11 Proceedings by $39
million. This reduction of the provision for the Grace matter has been applied
to the other components of the special charge (i.e., reserves for settlement
obligations and disputed accounts receivable from the commercial insurers and
other merger-related legal matters). At September 30, 2003, there was a
remaining balance of $175 million for the accrual for the special
15
charge for legal matters. The Company believes that this reserve is adequate for
the settlement of all matters described above.
During the three and nine months ended September 30, 2003, $5 million
and $17 million, respectively in charges were applied against the accrued
special charge for legal matters.
NOTE 9. VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities. FIN 46 explains the concept of a variable interest entity and
requires consolidation by the primary beneficiary where the variable interest
entity does not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parties or the equity
investors lack the essential characteristics of a controlling financial
interest. This interpretation applies immediately to variable interests in
variable interest entities created after January 31, 2003, and applies in the
first year or interim period ending after December 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company enters into various arrangements with
certain dialysis clinics to provide management services, financing and products.
Some of these clinics are variable interest entities. Under FIN 46 these clinics
are consolidated if the Company is determined to be the primary beneficiary. The
Company, however, has not completed its analysis. The Company also participates
in a joint venture which is engaged in the perfusion industry. The arrangements
with the joint venture partner are such that it qualifies as a variable interest
entity and the Company is the primary beneficiary. These variable interest
entities generate approximately $126 million in annual revenue. This includes
approximately $21 million related to variable interest entities in which the
Company is not the primary beneficiary. The Company has investments and accounts
receivable (maximum exposure) of $19 million as a result of its involvement in
variable interest entities.
NOTE 10. 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 11. 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 12. 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.
16
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 has been approved by the U.S. District Court. 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.
On April 4, 2003, the Company filed a suit in the United States
District Court for the Northern District of California, Fresenius USA, Inc., et
al., v. Baxter International Inc., et al., Case No. C 03-1431, seeking a
declaratory judgment that the Company does not infringe on patents held by
Baxter International, Inc. and its subsidiaries and affiliates ("Baxter"), that
the patents are invalid, and that Baxter is without right or authority to
threaten or maintain suit against the Company for alleged infringement of
Baxter's patents. In general, the alleged patents concern touch screens,
conductivity alarms, power failure data storages, and balance chambers for
hemodialysis machines. Baxter has filed counterclaims against the Company
seeking monetary damages and injunctive relief, and alleging that the Company
willfully infringes on the Baxter patents. The Company believes its claims are
meritorious, although the ultimate outcome of any such proceedings cannot be
predicted at this time and an adverse result could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
In November 2003, the Company settled without litigation all claims
raised by the final group of insurance companies who had contacted the Company
concerning allegations of inappropriate billing practices and
misrepresentations. The costs of the settlement will be charged against
previously established accruals. See "Accrued Special Charge for Legal Matters"
below.
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
17
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.
NOTE 12. INDUSTRY SEGMENTS INFORMATION
The Company's reportable segments are Dialysis Services and Dialysis
Products. For purposes of segment reporting, the Dialysis Services Division and
Spectra Renal Management are combined and reported as Dialysis Services. These
divisions are aggregated because of their similar economic classifications.
These include the fact that they are both health care service providers whose
services are provided to a common patient population, and both receive a
significant portion of their net revenue from Medicare and other government and
non-government third party payors. The Dialysis Products segment reflects the
activity of the Dialysis Products Division only.
The table below provides information for the three and nine months ended
September 30, 2003 and 2002 pertaining to the Company's two industry segments.
LESS
DIALYSIS DIALYSIS INTERSEGMENT
SERVICES PRODUCTS SALES TOTAL
------------ --------- ------------ -----------
NET REVENUES
Three Months Ended 9/30/03 $ 877,636 $ 194,456 $ 93,955 $ 978,137
Three Months Ended 9/30/02 838,241 193,292 82,888 948,645
Nine Months Ended 9/30/03 $ 2,555,847 $ 580,785 $273,350 $ 2,863,282
Nine Months Ended 9/30/02 2,445,440 568,007 240,498 2,772,949
OPERATING EARNINGS
Three Months Ended 9/30/03 $ 113,618 $ 38,251 -- $ 151,869
Three Months Ended 9/30/02 101,246 35,117 -- 136,363
Nine Months Ended 9/30/03 $ 318,695 $ 109,124 -- $ 427,819
Nine Months Ended 9/30/02 297,986 105,648 -- 403,634
ASSETS 9/30/03 $ 2,601,142 $ 620,642 $ 3,221,784
12/31/02 2,657,692 635,778 -- 3,293,470
18
DEPRECIATION AND AMORTIZATION
Three Months Ended 9/30/03 $ 23,575 $ 4,512 -- $ 28,087
Three Months Ended 9/30/02 26,778 4,379 -- 31,157
Nine Months Ended 9/30/03 $ 72,958 $ 13,477 -- $ 86,435
Nine Months Ended 9/30/02 79,256 13,061 -- 92,317
Total assets at September 30, 2003 of $5,303,071 is comprised of total
assets for reportable segments, $3,221,784; intangible assets not allocated to
segments, $1,876,149; accounts receivable financing agreement ($179,566); and
other corporate assets, $384,704.
Total assets at December 31, 2002 of $5,010,344 is comprised of total
assets for reportable segments, $3,293,470; intangible assets not allocated to
segments, $1,876,780; accounts receivable financing agreement ($445,249); and
other corporate assets, $285,343.
The table below provides the reconciliations of reportable segment operating
earnings to the Company's consolidated totals.
THREE MONTHS ENDED NINE MONTHS ENDED
SEGMENT RECONCILIATION SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ---------- ----------- ----------
INCOME BEFORE INCOME TAXES:
Total operating earnings for reportable segments.. $ 151,869 $ 136,363 $ 427,819 $ 403,634
Corporate G&A .................................... (11,711) (16,375) (22,554) (17,222)
Corporate depreciation and amortization .......... (1,347) (4,892) (4,039) (15,805)
Research and development expense.................. (2,166) (2,758) (6,294) (6,763)
Net interest expense.............................. (47,858) (50,543) (148,015) (177,684)
----------- ---------- ----------- ----------
Income Before Income Taxes......................... $ 88,787 $ 61,795 $ 246,917 $ 186,160
=========== ========== =========== ==========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
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
unaudited 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
-------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
NET REVENUES
Dialysis Services............................ $ 878 $ 838 $ 2,556 $ 2,445
Dialysis Products............................ 194 193 581 568
Intercompany Eliminations.................... (94) (82) (274) (240)
--------- --------- --------- ---------
Total Net Revenues.............................. $ 978 $ 949 $ 2,863 $ 2,773
========= ========= ========= =========
Operating Earnings:
Dialysis Services............................ $ 114 $ 101 $ 319 $ 298
Dialysis Products............................ 38 35 109 106
--------- --------- --------- ---------
Total Operating Earnings........................ 152 136 428 404
--------- --------- --------- ---------
Other Expenses:
General Corporate............................ $ 13 $ 21 $ 27 $ 33
Research & Development....................... 2 3 6 7
Interest Expense, Net........................ 48 50 148 178
--------- --------- --------- ---------
Total Other Expenses............................ 63 74 181 218
--------- --------- --------- ---------
Earnings Before Income Taxes ................... 89 62 247 186
Provision for Income Taxes...................... 34 26 93 75
--------- --------- --------- ---------
Net Income...................................... $ 55 $ 36 $ 154 $ 111
========= ========= ========= =========
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net revenues for the third quarter of 2003 increased by 3% ($29
million) over the comparable period in 2002. Net income for the third quarter of
2003 increased by 51% ($19 million) to $55 million as compared to $36 million in
2002. This increase was due to increased operating earnings ($16 million),
decreased general corporate expenses ($8 million), decreased interest expense
($2 million) and decreased research and development expense ($1 million),
partially offset by increased provision for income taxes ($8 million).
DIALYSIS SERVICES
Dialysis Services net revenues for the third quarter of 2003 increased
by 5% to $873 million (net of $5 million of intercompany sales). The growth in
dialysis services revenue resulted primarily from a 6% increase in treatment
volume reflecting base business growth (5%); the impact of 2003 and 2002
acquisitions (1%), and the transfer of billing for some Medicare peritoneal
dialysis patients from Dialysis Products (Method II billing) to Dialysis
Services (Method I billing) (1%). The increase in treatment volume was partially
offset by a decrease in revenue per treatment from $282 in the third quarter of
2002 to $279 in the third 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.
20
Dialysis Services operating earnings for the third quarter of 2003
increased by 13% ($13 million) as compared to the comparable period of 2002. The
operating margin increased from 13.0% in the third quarter of 2002 to 13.1% in
the third quarter of 2003 primarily from the increased treatment volume,
decreases in amortization expense related to patient relations, and improvements
in the operating cost per treatment from $248 in 2002 to $243 in 2003.
DIALYSIS PRODUCTS
Dialysis Products gross revenues increased by 1% to $194 million in the
third quarter of 2003 as compared to $193 million in the comparable period of
2002. Internal sales to Dialysis Services increased by 12% to $88 million and
were partially offset by a decrease in external sales of 8% to $105 million.
Dialysis Product external sales in the third 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 third 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 third 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 4% to $96 million in the third quarter of 2003 as
compared to $92 million in 2002.
The Company uses net available external market as a key operating
metric as it eliminates the impact of internal sales to another vertically
integrated dialysis company to provide a measure of product that is sold into
the market. The following is a reconciliation of gross product revenues to the
net available external market for the quarter ended September 30, 2003 and 2002.
Three Months Ended
September 30,
--------------------
(dollars in millions)
2003 2002
----- -----
Gross product revenues ........................... $ 194 $ 193
Intercompany eliminations ........................ (89) (79)
----- -----
External revenues ................................ 105 114
Machine sales .................................... (7) (9)
Vertically integrated dialysis company sales ..... (2) (3)
Method II sales .................................. - (10)
----- -----
Net available external market sales .............. $ 96 $ 92
===== =====
Dialysis Products operating earnings for the third quarter of 2003
increased by 9% to $38 million from $35 million in the comparable period of
2002. The operating margin increased from 30.7% in the third quarter of 2002 to
37.0% in the third quarter of 2003 primarily resulting from lower manufacturing
costs in 2003 versus 2002.
OTHER EXPENSES
The Company's other expenses for the third quarter of 2003 decreased by
15% to $63 million as compared to $74 million in the comparable period of 2002
due to a decrease in general corporate expenses of $8 million, interest expense
decreased by $2 million and decreased research and development decreased by $1
million. General corporate expenses decreased for the three months ended
September 30, 2003 and 2002 resulting from reduced amortization expense of $3
million and lower general corporate costs of $3 million and favorable
fluctuations in foreign currency of $2 million .
INCOME TAX RATE
The effective tax rate from operations for the third quarter of 2003
(38.1%) is lower than the rate for the comparable period of 2002 (41.1%) due to
tax benefits related to the special charge for legal matters partially offset by
additional provisions for tax related matters.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net revenues for the first nine months of 2003 increased by 3% ($90
million) over the comparable period in 2002. Net income for the first nine
months of 2003 increased by 39% to $154 million as compared to $111 million in
2002. This increase was due to increased operating earnings ($24 million), and
decreased interest expense ($30 million) and decreased general corporate
expenses ($6 million), partially offset by increased income taxes ($18 million).
21
DIALYSIS SERVICES
Dialysis Services net revenues for the first nine months of 2003
increased by 5% to $2,542 million (net of $14 million of intercompany sales).
The growth in dialysis services revenue resulted primarily from a 7% increase in
treatment volume reflecting base business growth (5%); the impact of 2003 and
2002 acquisitions (1%), and the transfer of billing for some Medicare peritoneal
dialysis patients from Dialysis Products (Method II billing) to Dialysis
Services (Method I billing) (1%). The increase in treatment volume was partially
offset by a decrease in revenue per treatment from $284 in the first nine months
of 2002 to $278 in the first nine months 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.
Dialysis Services operating earnings for the first nine months of 2003
increased by 7% to $319 million from $298 million in the comparable period of
2002. The operating margin increased from 12.3% in the first nine months of 2002
to 12.5% in the first nine months of 2003 primarily due to the increased
treatment volume, improved dialysis rates, reduced amortization of patient
relations, and reduced costs per treatment from $249 in 2002 to $243 in 2003
partially offset by reduced ancillary margins.
DIALYSIS PRODUCTS
Dialysis Products gross revenues increased by 2% to $581 million for
the first nine months of 2003 as compared to $568 million in the comparable
period 2002. Internal sales to Dialysis Services increased by 14% to $260
million and were partially offset by a decrease in external sales of 6% to $321
million. Dialysis Product external sales the first nine months 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
nine months of 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 third
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 5% to $287 million in the first
nine months of 2003 as compared to $274 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 external market for the nine months ended September 30, 2003 and
2002.
Nine Months Ended
September 30,
--------------------
(dollars in millions)
2003 2002
----- -----
Gross product revenues ........................... $ 581 $ 568
Intercompany eliminations ........................ (260) (227)
----- -----
External revenues ................................ 321 341
Machine sales .................................... (25) (28)
Vertically integrated dialysis company sales ..... (9) (9)
Method II sales .................................. - (30)
----- -----
Net available external market sales .............. $ 287 $ 274
===== =====
Dialysis Products operating earnings for the first nine months of 2003
increased by 3% to $109 million from $106 million in the comparable period of
2002. The operating margin increased from 31.1% in the first nine months of 2002
to 34.0% in the first nine months of 2003 primarily resulting from lower
manufacturing costs in 2003 versus 2002.
22
OTHER EXPENSES
The Company's other expenses for the first nine months of 2003
decreased by 17% to $181 million as compared to $218 million in the comparable
period of 2002 due to a decrease in interest expense of $30 million, decreased
general corporate expenses ($6 million) and research and development charges ($1
million). The decrease in interest expense is primarily the result of lower
intercompany borrowings ($11 million) and a non-recurring charge for the early
retirement of intercompany borrowings in the third quarter of 2002 ($16
million). In the second quarter of 2002, the Company repaid its intercompany
debt to FMC Finance S.a.r.l. in the amount of approximately $351 million. At the
time, an extraordinary loss of approximately $10 million, net of a tax benefit
of $6 million was recorded for the premium owed to FMC Finance S.a.r.l. for the
early retirement of this obligation. With the adoption of SFAS 145, the loss has
been reclassified to interest expense ($16 million) and the related tax benefit
($6 million) has been included in the provision for income taxes. (See Note 6 to
Unaudited Consolidated Financial Statements.)
The decrease in general corporate expenses is primarily due to a
one-time gain on pension curtailment of $13 million that was realized in the
first quarter of 2002 partially offset by favorable fluctuations in foreign
currency of $6 million ($13 million in gains realized in the nine months ended
September 30, 2003 as compared to $7 million in gains in the comparable period
of 2002) and reduced amortization expense of $11 million.
INCOME TAX RATE
The effective tax rate from operations for the first nine months of
2003 (37.6%) is lower than the rate for the comparable period of 2002 (40.1%)
due to tax benefits related to the special charge for legal matters partially
offset by additional provisions for tax related matters.
23
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002.
The Company's cash requirements for the first nine months of 2003 and
2002 were funded primarily by cash from operations.
OPERATING ACTIVITIES
The Company generated cash from operations of $338 million in the first
nine months of 2003 as compared to $257 million in the comparable period of
2002. The increase in operating cash of $81 million is primarily related to
lower interest payments of $58 million, decreased tax payments of $4 million,
improvements in accounts receivable of $30 million resulting from favorable cash
collections, partially offset by decreases in net other working capital of $11
million.
INVESTING ACTIVITIES
Net cash used in investing activities was $90 million in the first nine
months of 2003 as compared to $119 million in the first nine months of 2002. The
Company funded its acquisitions and capital expenditures primarily through cash
flows from operations in 2003 and 2002. The decreases in cash used in investing
activities related to decreased acquisition spending ($12 million) and decreases
in net capital expenditures ($17 million). Acquisition spending in the first
nine months of 2003 and 2002 was approximately $24 million and $36 million,
respectively, with no individually significant transactions. Capital
expenditures totaling $72 million in the first nine months of 2003 and $87
million in the first nine months 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 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 $1.4 billion
through three credit facilities. The three facilities include a revolving
facility of $500 million and two term loan facilities of $500 million and $400
million. 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 $254 million in the
first nine months of 2003 as compared to $129 million in the comparable period
of 2002 for a change of $125 million. Increase in net cash used in financing
activities in the first nine months of 2003 is principally related to a decrease
in borrowing from affiliates of $54 million, along with approximately $52
million in increases in borrowings from the Company's 2003 Senior Credit
Facility. During the third quarter of 2003, the Company issued Series G
mandatorily redeemable preferred securities to FMCAG to generate proceeds of
$37.4 million. Debt and capital lease obligations in 2002 increased by $234
million primarily due to higher borrowings under the Company's credit facility
in order to fund the early repayment of intercompany debt and the premium on the
early redemption of this intercompany obligation. (See Note 6 of the
Consolidated Financial Statements).
During the third quarter 2003 the Company adopted the provisions of
SFAS 150 and accordingly has reclassified its mandatorily redeemable preferred
securities to the liabilities section of the statement of financial position
(Note 5). All instruments have been issued to FMCAG. Approximately $830 million
of these instruments are classified as current as they have maturity dates on
or before September 30, 2004. The Company expects that each of these
instruments will be extended or refinanced upon their maturity.
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 sells, transfers and assigns undivided percentage ownership
interests in the receivables to certain bank investors. The maximum
securitization limit under the Accounts Receivable Facility is $560 million at
September 30, 2003. The facility has a term of 364 days and matures on October
22,2004. The Company has historically renewed this facility for a new 364 day
term upon maturity.
For the nine months ended September 30, 2003, the Company decreased its
sales under the Accounts Receivable Facility by $266 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 receivable interests sold under
the Accounts Receivable Facility.
Approximately $9 million of cash was paid to redeem the Company's
Series D Preferred Stock (See Note 9 of the Consolidated Financial Statements).
In addition, approximately $14 million was used for payment of debt issuance
costs related to the Company's 2003 Senior Credit Agreement.
Short-term borrowings are made under the Accounts Receivable Facility
and 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.
24
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 immediately due and
payable at the option of the Lenders. FMCAG is in compliance with all financial
covenants under the 2003 Senior Credit Agreement as of September 30, 2003.
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 September 30, 2003, the
carrying amount of net intangible assets amounted to $3,451 million representing
approximately 65% of the Company's total assets. SFAS 144 "Accounting for the
Impairment or Disposal of Long Lived Assets, requires assessment of long lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of assets might be impaired. In accordance with SFAS 142,
Goodwill and Other Intangible Assets, goodwill is reviewed for impairment at
least once a year, at the end of the year.
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 W.R. Grace &
Co. bankruptcy and Sealed Air Corporation indemnification litigation, Baxter
patent litigation and other litigation arising in the ordinary course of the
Company's business as described in Note 11 "Commitments and Contingencies" in
the Company's Unaudited 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. The mere filing of a suit or formal
assertion of a claim or assessment does not necessarily require the recording of
an accrual.
25
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 $6.6
million and $8.4 million for the three months ended September 30, 2003 and 2002,
and $24.8 million and $23 million for the nine months ended September 30, 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.
TAX MATTERS
The Internal Revenue Service has proposed federal income tax
deficiencies for the years 1997 and 1998. The Company is contesting these
proposed deficiencies and believes that adequate provision has been made for any
adjustment that may result from this tax examination.
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.
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
26
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 September 30, 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 $88.0 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 $159.9 million. The
Company had outstanding contracts covering the purchase of 638.6 million Euros
("EUR") at an average contract price of $1.069 per EUR, for delivery between
October 2003 and August 2006, contracts for the purchase of 161 million Mexican
Pesos at an average contract price of 11.1892 pesos per US dollar, and contracts
for the purchase of $3.9 million US dollars at an average contract price of
$.6437 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 the
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 quarterly 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.
27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
The Company was formed as a result of a series of transactions pursuant
to the Agreement and Plan of Reorganization (the "Merger") dated as of February
4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the
Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and
continues to have, significant potential liabilities arising out of
product-liability related litigation, pre-Merger tax claims and other claims
unrelated to NMC, which was Grace's dialysis business prior to the Merger. In
connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the
Company, and NMC against all liabilities of W.R. Grace & Co., whether relating
to events occurring before or after the Merger, other than liabilities arising
from or relating to NMC's operations. 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 has been approved by the U.S. District Court. 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.
On April 4, 2003, the Company filed a suit in the United States
District Court for the Northern District of California, Fresenius USA, Inc., et
al., v. Baxter International Inc., et al., Case No. C 03-1431, seeking a
declaratory judgment that the Company does not infringe on patents held by
Baxter International, Inc. and its subsidiaries and affiliates ("Baxter"), that
the patents are invalid, and that Baxter is without right or authority to
threaten or maintain suit against the Company for alleged infringement of
Baxter's patents. In general, the alleged patents concern touch screens,
conductivity alarms, power failure data storages, and balance chambers for
hemodialysis machines. Baxter has filed counterclaims against the Company
seeking monetary damages and injunctive relief, and alleging that the Company
willfully infringes on the Baxter patents. The Company believes its claims are
meritorious, although the ultimate outcome of any such proceedings cannot be
predicted at this time and an adverse result could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
In November 2003, the Company settled without litigation all claims
raised by the final group of insurance companies who had
28
contacted the Company concerning allegations of inappropriate billing practices
and misrepresentations. The costs of the settlement will be charged against
previously established accruals. See "Accrued Special Charge for Legal Matters"
below.
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.
29
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. (incorporated herein by reference to the Form 10-Q of
Registrant filed with the Commission on May 15, 2003).
Exhibit 4.2 Amendment No. 1 dated as of August 22, 2003 to the 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 4.3 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 4.4 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 the
Commission on May 14, 1998).
Exhibit 4.5 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 4.6 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 the Commission on March 23, 1998).
Exhibit 4.7 Senior Subordinated Indenture dated as of February 19, 1998
among FMC Trust Finance S.a.r.l. Luxemborg, as
30
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 the
Commission on March 23, 1998).
Exhibit 4.8 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 4.9 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 the 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 the 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
the 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 the 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 the 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).
31
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 the Commission on May 14, 1998).
Exhibit 10.11 Employment Agreement dated January 1, 2003 by and between
Ronald J. Kuerbitz and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with the Commission on August 14, 2003).
Exhibit 10.12 Employment Agreement dated June 1, 2003 by and between J.
Michael Lazarus and National Medical Care, Inc. (incorporated
herein by reference to the Form 10-Q of Registrant filed with
the Commission on August 14, 2003).
Exhibit 10.13 Employment Agreement dated January 1, 2003 by and between
Robert "Rice" M. Powell, Jr. and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with the Commission on August 14, 2003).
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
the Commission on August 14, 2002).
Exhibit 10.15 Employment Agreement dated February 4, 2003 by and between
Mats Wahlstrom and National Medical Care, Inc. (incorporated
herein by reference to the Form 10-Q of Registrant filed with
the Commission on August 14, 2003).
Exhibit 10.16 Employment Agreement dated June 1, 2003 by and between Michael
Brosnan and National Medical Care, Inc. (incorporated herein
by reference to the Form 10-Q of Registrant filed with
the Commission on August 14, 2003).
Exhibit 10.17 Retention Bonus Agreement dated October 25, 2002, by and
between Fresenius Medical Care North America and Rice Powell
(incorporated herein by reference to the Form 10-Q of
Registrant filed with the Commission on August 14, 2003).
Exhibit 10.18 Retention Bonus Agreement dated June 20, 2003, by and between
Fresenius Medical Care North America and Michael Brosnan
(incorporated herein by reference to the Form 10-Q of
Registrant filed with the Commission on August 14, 2003).
Exhibit 10.19 Retention Bonus Agreement dated August 8, 2003 by and between
Fresenius Medical Care North America and Ronald Kuerbitz
(incorporated herein by reference to the Form 10-Q of
Registrant filed with the Commission on August 14, 2003).
Exhibit 10.20 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 the Commission on
November 22, 1999).
Exhibit 10.21 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 10.22 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 the Commission on April 21, 2003).
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 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 32.2 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.
32
(b) Reports on Form 8-K
On September 9, 2003, the Company filed a current report on Form 8-K
with the Commission disclosing the execution of Amendment No. 1 to the
2003 Senior Credit Agreement. The Amendment No. 1 is filed as Exhibit
4.2 to this report.
* Confidential treatment has been requested as to certain portions of this
Exhibit
33
SIGNATURES
Pursuant to the requirements 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: November 13, 2003 /s/ Ben J. Lipps
-----------------------------------------
NAME: Ben J. Lipps
TITLE: President (Chief Executive Officer)
34