10-Q 1 b44502fme10vq.txt FRESENIUS MEDICAL CARE HOLDINGS, INC. 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, 2002 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________________TO__________________ COMMISSION FILE NUMBER: 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. ------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-3461988 -------- ---------- (State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.) 95 HAYDEN AVENUE, LEXINGTON, MA 02420 ------------------------------- ----- (Address of Principal Executive Office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 781-402-9000 ---------------------------------------------------------------- --------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicated by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ 1 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of the date hereof, 90,000,000 shares of common stock, par value $1.00 per share, are outstanding, all of which are held by Fresenius Medical Care AG. 2 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES TABLE OF CONTENTS PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PAGE Unaudited Consolidated Statements of 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........................................ 26 PART II: OTHER INFORMATION ITEM 1: Legal Proceedings.............................................. 27 ITEM 6: Exhibits and Reports on Form 8-K............................... 29 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ------------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- NET REVENUES Health care services................................ $ 834,079 $ 794,908 $ 2,432,365 $ 2,328,721 Medical supplies.................................... 114,566 121,600 340,584 359,855 ----------- ----------- ----------- ----------- 948,645 916,508 2,772,949 2,688,576 ----------- ----------- ----------- ----------- EXPENSES Cost of health care services........................ 592,293 548,856 1,731,217 1,597,208 Cost of medical supplies............................ 79,660 84,674 234,278 258,174 General and administrative expenses................. 101,065 68,769 256,905 240,444 Provision for doubtful accounts..................... 24,482 28,859 71,820 65,981 Depreciation and amortization....................... 36,049 63,355 108,122 187,819 Research and development............................ 2,758 1,373 6,763 3,620 Interest expense, net and related financing costs including $26,119 and $37,757 for the three months and $93,485 and $99,861 for the nine months ended, respectively, of interest with affiliates........................................ 50,543 59,457 161,384 170,085 ----------- ----------- ----------- ----------- 886,850 855,343 2,570,489 2,523,331 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ..... 61,795 61,165 202,460 165,245 PROVISION FOR INCOME TAXES............................. 25,387 29,219 81,120 79,379 ----------- ----------- ----------- ----------- NET INCOME BEFORE EXTRAORDINARY ITEM................... 36,408 31,946 121,340 85,866 Extraordinary loss on early redemption of borrowings from affiliates, net of tax benefit of $6,520....... -- -- 9,780 -- ----------- ----------- ----------- ----------- NET INCOME ............................................ $ 36,408 $ 31,946 $ 111,560 $ 85,866 =========== =========== =========== =========== Basic and fully dilutive net income before extraordinary item per share......................... $ 0.40 $ 0.35 $ 1.34 $ 0.95 Basic and fully dilutive net income per share.......... $ 0.40 $ 0.35 $ 1.24 $ 0.95
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, -------------------------- --------------------------- 2002 2001 2002 2001 -------- --------- --------- --------- NET INCOME....................................... $ 36,408 $ 31,946 $ 111,560 $ 85,866 Other comprehensive income Foreign currency translation adjustments...... (363) 171 750 55 Derivative instruments (net of deferred tax benefit of $6,797 and $16,702 for the three months and $7,955 and $33,031 for the nine months ended, respectively)......... (7,802) (24,551) (13,724) (48,446) -------- --------- --------- -------- Total other comprehensive income.......... (8,165) (24,380) (12,974) (48,391) -------- --------- --------- -------- COMPREHENSIVE INCOME............................. $ 28,243 $ 7,566 $ 98,586 $ 37,475 ======== ========= ========= ========
See accompanying Notes to Unaudited, Consolidated Financial Statements. 5 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------ ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents...................... $ 36,650 $ 26,786 Accounts receivable, less allowances of $113,522 and $103,859........................ 370,611 423,912 Inventories.................................... 193,403 202,221 Deferred income taxes.......................... 173,912 196,831 Other current assets........................... 123,159 119,592 ----------- ----------- Total Current Assets....................... 897,735 969,342 ----------- ----------- Properties and equipment, net..................... 541,520 520,620 ----------- ----------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $753,909 and $718,939................................ 3,424,086 3,418,544 Other assets and deferred charges.............. 129,337 94,460 ----------- ----------- Total Other Assets................................ 3,553,423 3,513,004 ----------- ----------- Total Assets...................................... $ 4,992,678 $ 5,002,966 =========== =========== LIABILITIES AND EQUITY Current Liabilities: Current portion of long-term debt and capitalized lease obligations............... 688,217 152,046 Current portion of borrowing from affiliates... 268,819 291,360 Accounts payable............................... 100,204 125,530 Accrued liabilities............................ 252,401 229,153 Accrued special charge for legal matters....... 203,561 224,037 Net accounts payable to affiliates............. 44,283 39,934 Accrued income taxes........................... 84,365 83,654 ----------- ----------- Total Current Liabilities................... 1,641,850 1,145,714 Long-term debt.................................... -- 300,600 Non-current borrowings from affiliates............ 651,268 1,005,669 Capitalized lease obligations..................... 1,812 1,675 Deferred income taxes............................. 120,071 113,046 Other liabilities................................. 141,971 146,170 ----------- ----------- Total Liabilities.............................. 2,556,972 2,712,874 ----------- ----------- Mandatorily Redeemable Preferred Securities....... 739,748 692,330 ----------- ----------- Equity: Preferred stock, $100 par value................ 7,412 7,412 Preferred stock, $.10 par value ............... 8,906 8,906 Common stock, $1 par value; 300,000,000 shares authorized; outstanding 90,000,000............. 90,000 90,000 Paid in capital................................... 1,945,014 1,945,014 Retained deficit.................................. (291,579) (402,749) Accumulated comprehensive loss.................... (63,795) (50,821) ----------- ------------ Total Equity................................... 1,695,958 1,597,762 ----------- ----------- Total Liabilities and Equity...................... $ 4,992,678 $ 5,002,966 =========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements. 6 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 2002 2001 ----------- ----------- Cash Flows from Operating Activities: Net Income................................................... $ 111,560 $ 85,866 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization............................. 108,122 187,819 Provision for doubtful accounts........................... 71,820 65,981 Deferred income taxes..................................... 37,898 33,277 Loss on disposal of properties and equipment.............. 1,707 283 Extraordinary loss on early redemption of borrowings from affiliates, net........................................ 9,780 -- Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable.............................. (32,623) (118,484) Decrease (increase) in inventories........................... 8,839 (25,073) Increase in other current assets............................. (3,567) (6,487) Decrease in IDPN accounts receivable......................... -- 5,189 (Increase) decrease in other assets and deferred charges...... (7,558) 990 Decrease in accounts payable................................. (25,325) (15,765) Increase in accrued income taxes............................. 7,231 32,667 Increase (decrease) in accrued liabilities................... 20,963 (20,956) Decrease in accrued special charge for legal matters......... (19,854) -- Decrease in other long-term liabilities...................... (14,076) (2,712) Net changes due to/from affiliates........................... 4,349 27,184 Other, net................................................... (656) (11,416) ------------ ----------- Net cash provided by operating activities....................... 278,610 238,363 ----------- ----------- Cash Flows from Investing Activities: Capital expenditures......................................... (87,382) (84,439) Payments for acquisitions, net of cash acquired.............. (35,747) (376,273) Increase in other assets..................................... (1,000) (17,925) ------------ ------------ Net cash used in investing activities........................... (124,129) (478,637) ------------ ------------ Cash flows from Financing Activities: Payments on settlement of investigation...................... -- (85,920) Net (decrease) increase in borrowings from affiliates........ (376,942) 189,029 Premium on early redemption of debt.......................... (16,300) -- Cash dividends paid.......................................... (390) (390) Proceeds from receivable financing facility.................. 14,000 2,700 Proceeds from mandatorily redeemable preferred securities.... -- 383,882 Net increase (decrease) on debt and capitalized leases....... 234,283 (242,657) Other net.................................................... -- 2,627 ----------- ----------- Net cash (used in) provided by financing activities............. (145,349) 249,271 ----------- ----------- Effects of changes in foreign exchange rates.................... 732 115 ----------- ----------- Change in cash and cash equivalents............................. 9,864 9,112 ----------- ----------- Cash and cash equivalents at beginning of period................ 26,786 33,327 ----------- ----------- Cash and cash equivalents at end of period...................... $ 36,650 $ 42,439 =========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements 7 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2002 2001 --------- --------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest....................................... $ 174,613 $ 151,954 Income taxes paid, net......................... 36,000 5,621 Details for Acquisitions: Assets acquired................................... 38,159 423,583 Liabilities assumed............................... (2,412) (47,310) --------- --------- Net cash paid for acquisitions.................... $ 35,747 $ 376,273 ========= ========= 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" or "Fresenius Medical Care"). The Company conducts its operations through five principal subsidiaries, National Medical Care, Inc. ("NMC"); Fresenius USA Marketing, Inc., Fresenius USA Manufacturing, Inc., and SRC Holding Company, Inc. ("SRC"), all Delaware corporations and Fresenius USA, Inc., a Massachusetts corporation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and those financial statements where the Company controls professional corporations in accordance with Emerging Issues Task Force Issue 97-2. The Company is primarily engaged in (i) providing kidney dialysis services, and clinical laboratory testing, and (ii) manufacturing and distributing products and equipment for dialysis treatment. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at September 30, 2002 and 2001 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 2001 report on Form 10-K. Such interim financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented. Certain amounts in the prior periods' consolidated financial statements have been reclassified to conform to the current periods' basis of presentation. The results of operations and cash flows for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results of operations and cash flows for the fiscal year ending December 31, 2002. All intercompany transactions and balances have been eliminated in consolidation. NET INCOME PER SHARE Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted net income per share includes the effect of all dilutive potential common shares that were outstanding during the year. The number of shares used to compute basic and diluted net income per share was 90,000 in all periods as there were no potential common shares and no adjustments to income available to common shareholders to be considered for purposes of the diluted net income per share calculation.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 2002 2001 2002 2001 ------ ------ ------ ------ The weighted average number of shares of Common Stock were as follows.............. 90,000 90,000 90,000 90,000 ====== ====== ====== ======
9 Net income used in the computation of earnings per share were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- -------------------------- 2002 2001 2002 2001 ------- ------- -------- ------- NET INCOME BEFORE EXTRAORDINARY ITEM Net income before extraordinary item........ $36,408 $31,946 $121,340 $85,866 Dividends paid on preferred stock........... (130) (130) (390) (390) ------- ------- -------- ------- Income available to common shareholders..... $36,278 $31,816 $120,950 $85,476 ======= ======= ======== ======= Basic and fully dilutive net income before extraordinary item per share............... $ 0.40 $ 0.35 $ 1.34 $ 0.95 ======= ======= ======== =======
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------ 2002 2001 2002 2001 ------- ------- -------- ------- NET INCOME Net income.................................. $36,408 $31,946 $111,560 $85,866 Dividends paid on preferred stock........... (130) (130) (390) (390) ------- ------- -------- ------- Income available to common shareholders..... $36,278 $31,816 $111,170 $85,476 ======= ======= ======== ======= Basic and fully dilutive net income per share..................................... $ 0.40 $ 0.35 $ 1.24 $ 0.95 ======= ======= ======== =======
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and the related amendments of SFAS No. 138. The cumulative effect of adopting SFAS 133 as of January 1, 2001 was not material to the Company's consolidated financial statements. The Company is exposed to market risk due to changes in interest rates and foreign currencies. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations, forecasted raw material purchases and other obligations and Euro denominated mandatorily redeemable preferred stock. The interest rate swaps are designated as cash flow hedges effectively converting certain variable interest rate payments into fixed interest rate payments. After tax losses of $10.7 million ($17.8 million pretax) for the three months ended September 30, 2002 and after tax losses of $14.5 million ($24.2 million pretax) for the nine months ended September 30, 2002 were deferred in other comprehensive income. Interest payable and receivable under the swap terms are accrued and recorded as adjustments to interest expense at each reporting date. The Company enters into forward rate agreements that are designated and effective as hedges of forecasted raw material purchases and other obligations. After tax gains of $0.7 million ($1.1 million pretax) for the three months ended September 30, 2002 and after tax gains of $0.4 million ($0.6 million pretax) for the nine months ended September 30, 2002 were deferred in other comprehensive income and will be reclassified into cost of sales in the period during which the hedged transactions affect earnings. All deferred amounts will be reclassified into earnings within the next twelve months. The Company enters into forward rate agreements that are designated and effective as hedges of changes in the fair value of the Euro denominated mandatorily redeemable preferred stock. Changes in fair value are recorded in earnings and offset against gains and losses resulting from the underlying exposures. After tax losses of $1.3 million ($2.2 million pretax) for the three months ended September 30, 2002 and after tax gains of $0.4 million ($0.7 million pretax) for the nine months ended September 30, 2002 were 10 deferred in other comprehensive income. Ineffective amounts had no material impact on earnings for the three and nine months ended September 30, 2002. Periodically, the Company enters into derivative instruments with related parties to form a natural hedge for currency exposures on intercompany obligations. These instruments are reflected in the balance sheet at fair value with changes in fair value recognized in earnings. Pre-tax charges (gains) recorded in the consolidated statement of operations for the three and nine months ended September 30, 2002 were $0.7 million and ($7.6 million), respectively. EVEREST ACQUISITION On January 8, 2001, FMC acquired Everest Healthcare Services Corporation (now known as Everest Healthcare Holdings, Inc., "Everest") through a merger of Everest into a subsidiary of FMC at a purchase price of $365 million. Approximately $99 million of the purchase price was funded by the issuance of 2.25 million FMCAG preference shares to the Everest shareholders. The remaining purchase price was paid with cash of $266 million, including assumed debt. Everest owned, operated or managed approximately 70 clinic facilities providing therapy to approximately 6,800 patients in the United States. Everest also operated extracorporeal blood services and acute dialysis businesses that provide acute dialysis, apheresis and hemoperfusion services to approximately 100 hospitals. On August 22, 2001 FMC transferred its interests in Everest to the Company at its book value. There was no gain or loss recorded on this sale as it is a transfer between entities under common control. The consolidated operations and cash flows of the Company for the comparable periods in 2001 include the consolidated operations and cash flows of Everest retroactive to January 1, 2001. NEW PRONOUNCEMENTS In July 2001, the FASB issued SFAS No.141, Business Combinations ("SFAS 141"), and SFAS No.142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after September 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company adopted the provisions of SFAS 141 immediately, and adopted SFAS 142 effective January 1, 2002. Accordingly, any goodwill or intangible asset determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001 has not been amortized, but has been evaluated for impairment in accordance with SFAS 142. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 were amortized through December 31, 2001. SFAS 141 requires that the Company evaluate existing intangible assets and goodwill that were acquired in prior purchase business combinations, and that it make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. The Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS 142. In connection with the transitional goodwill impairment evaluation, SFAS 142 requires that the Company perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company then has up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss should be recognized as the cumulative effect 11 of a change in accounting principle in its statement of operations. The Company has completed the impairment tests for indefinite lived specific intangibles and goodwill and has determined that there is no impairment of these assets as of the transition date. However, based on our current assessments and subject to continuing analysis, had SFAS 142 been effective as of January 1, 2001 the Company estimates that there would have been a favorable impact to pre-tax earnings for fiscal year 2001 of approximately $107 million. The favorable impact in fiscal year 2002 should approximate $97 million. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting requirements for the retirement of tangible long-lived assets and asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently estimating the impact of SFAS 143 on the Company's financial statements, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. Management does not believe that transitional impairment losses will be incurred. In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less selling costs. SFAS 144 also broadens the reporting of discontinued operations and provides that discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 31, 2001. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under Opinion 30 to determine if losses from extinguishment of debt should be classified as extraordinary items. SFAS 145 amends Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback arrangements be accounted for in a similar manner as sale-leaseback transactions. The provisions of this Statement related to the rescission of Statement 4 is effective for fiscal years beginning after May 15, 2002. The provisions of this Statement related to Statement 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of this statement shall be effective for financial statements issued on or after May 15, 2002. The Company will be required to reclassify the extraordinary loss recorded in the nine months ended September 30, 2002 as a separate expense within operations once this Statement is adopted in fiscal year 2003. There is no material impact to the Company for those provisions effective for the periods ended September 30, 2002. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The principal difference between this statement and EITF 94-3 relates to the requirements for the recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. 12
NOTE 2. INVENTORIES SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ----------- Inventories: Raw materials.......................................... $ 43,951 $ 40,834 Manufactured goods in process.......................... 13,212 11,053 Manufactured and purchased inventory available for sale............................................. 80,014 84,789 -------- -------- 137,177 136,676 Health care supplies.................................. 56,226 65,545 -------- -------- Total............................................. $193,403 $202,221 ======== ========
NOTE 3. REPAYMENT OF INTERCOMPANY DEBT On June 27, 2002 the Company repaid its intercompany debt to Fresenius Medical Care Trust Finance S.a.r.l. in the amount of $350,995 originally due in 2006, utilizing funds borrowed under its senior credit facility. An extraordinary loss of $9,780, net of a $6,520 tax benefit, was recorded for the premium owed to Fresenius Medical Care Trust Finance S.a.r.l. in the event of the early retirement of this obligation in accordance with the terms of the intercompany debt agreement. NOTE 4. DEBT
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------- Long-term debt to outside parties consists of: NMC Credit Facility ..................................... $ 685,800 $450,600 Other ................................................... 1,836 27 --------- -------- 687,636 450,627 Less amounts classified as current ...................... 687,636 150,027 --------- -------- $ 0 $300,600 ========= ========
All borrowings under the NMC Credit Facility are due and payable at September 30, 2003. Accordingly, the Company has reclassified all outstanding amounts at September 30, 2002 as current obligations. The Company has initiated negotiations with its lenders and expects to enter into a replacement facility during the first quarter 2003. Borrowings from affiliates consists of:
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------- Fresenius Medical Care AG borrowings primarily at interest rates approximating 2.64% and 2.85%, respectively........................................... $ 150,000 $ 191,967 RTC Holdings, Inc. borrowings at interest rates approximating 2.73%.................................... 11,000 -- Fresenius AG borrowing at interest rates approximating 2.64% and 2.73%, respectively.......................... 20,000 15,000 Fresenius Medical Care Trust Finance S.a.r.l. borrowings at interest rates ranging between 8.25% and 9.25%.............................................. 654,244 1,005,239 Franconia Acquisition, LLC at interest rates approximating 2.10% and 2.40%, respectively............ 83,721 83,721 --------- ---------- Other.................................................... 1,122 1,102 --------- ---------- 920,087 1,297,029 Less amounts classified as current 268,819 291,360 --------- ---------- Total................................................... $ 651,268 $1,005,669 ========= ==========
NOTE 5. MANDATORILY REDEEMABLE PREFERRED SECURITIES During 2001 and 2000, a wholly-owned subsidiary of the Company issued shares of various series of Preferred Stock ("Redeemable Preferred Securities") to NMC which were then transferred to FMCAG for proceeds totaling $392,037 in 2001 and $305,500 in 2000. No Redeemable Preferred Securities were issued during the nine months ended September 30, 2002. The table below provides information for Redeemable Preferred Securities for the periods indicated. 13 SEPTEMBER 30, DECEMBER 31, MANDATORILY REDEEMABLE PREFERRED SECURITIES 2002 2001 ------------ ----------- Series A Preferred Stock, 1,000 shares....... $113,500 $ 113,500 Series B Preferred Stock, 300 shares......... 34,000 34,000 Series C Preferred Stock, 1,700 shares....... 192,000 192,000 Series D Preferred Stock, 870 shares......... 97,500 97,500 Series E Preferred Stock, 1,300 shares....... 147,500 147,500 Series F Preferred Stock, 980 shares......... 113,037 113,037 -------- --------- 697,537 697,537 Mark to Market Adjustment.................... 42,211 (5,207) -------- --------- Total........................................ $739,748 $ 692,330 ======== ========= These securities are similar in substance except for the order of preference both as to dividends and liquidation, dissolution or winding-up of the subsidiary. The order of preference among the various series corresponds to the alphabetical order of Series A through Series F. In addition, the holders of the Redeemable Preferred Securities are entitled to receive dividends in an amount of dollars per share that varies from approximately 3% to 8% of the purchase price depending on the Series. The dividends will be declared and paid in cash at least annually. All the Redeemable Preferred Securities have a par value of $.01 per share. Upon liquidation or dissolution or winding up of the issuer of the Redeemable Preferred Securities, the holders of the Redeemable Preferred Securities are entitled to an amount equal to the liquidation preference for each share of stock plus an amount equal to all accrued and unpaid dividends thereon through the date of distribution. The liquidation preference is the sum of the issuance price plus, for each year or portion thereof, an amount equal to one-half of one percent of the issue price, not to exceed 5%. The Redeemable Preferred Securities will be sold back to the Company two years from their respective date of issuance for a total amount equal to Euros 501,773 (Series A, B, C, and F) and US dollars $245,000 (Series D and E) plus any accrued and unpaid dividends. Dividends were recorded and classified as part of interest expense in the consolidated statement of operations in the amounts of $10,892 and $11,397 in the three month periods and $31,468 and $22,457 in the nine month periods ended September 30, 2002 and 2001, respectively. In March 2002, a cash dividend payment was made totaling $29,850. No additional dividend payments have been made during the nine months ended September 30, 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. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142 The table below shows net income as reported for the three and nine months ended September 30, 2002 and net income as adjusted for the three and nine months ended September 30, 2001 as if SFAS 142 has been adopted January 1, 2001. The adjusted amounts have been tax effected.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- --------------------- ($000 EXCEPT FOR EARNINGS PER SHARE) 2002 2001 2002 2001 -------- -------- -------- -------- Net Income $ 36,408 $ 31,946 $111,560 $ 85,866 Net Income Adjusted $ 36,408 $ 54,092 $111,560 $152,242
14 Reconciliation of net income to adjusted net income and net income per share to adjusted net income per share.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ---------------------------- ($000 EXCEPT FOR NET INCOME PER SHARE) 2002 2001 2002 2001 -------- -------- --------- -------- Reported Net Income $ 36,408 $ 31,946 $ 111,560 $ 85,866 Addback: Amortization -- 23,034 -- 69,153 -------- -------- --------- -------- Adjusted Net Income $ 36,408 $ 54,980 $ 111,560 $155,019 ======== ======== ========= ======== BASIC AND FULLY DILUTIVE NET INCOME PER SHARE: Reported $ 0.40 $ 0.35 $ 1.24 $ 0.95 Addback: Amortization -- 0.25 -- 0.77 -------- -------- --------- -------- Adjusted net income per share $ 0.40 $ 0.61 $ 1.24 $ 1.72 ======== ======== ========= ========
The total pre-tax amortization expense associated with goodwill and specific intangible assets recognized during the three months and nine months ended September 30, 2001 totaled $27,633 and $82,981, respectively. The effective tax rate for restatement of amortization was 16.7%. The effective tax rate is less than the corporate statutory rate primarily due to permanent differences related to non-deductible goodwill. The gross carrying value and accumulated amortization of amortizable intangible assets is as follows: SEPTEMBER 30, 2002 DECEMBER 31, 2001 ----------------------- ------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED VALUE AMORTIZATION VALUE AMORTIZATION -------- ------------ -------- ------------ Patient Relationships $242,091 $(184,489) $233,490 $(155,769) Other Intangibles $108,862 $ (56,400) $109,545 $ (50,406) Amortization expense for amortizable intangible assets at September 30, 2002 is estimated to be $7,800 for the remainder of 2002, $21,400 for 2003, $17,400 for 2004, $13,800 for 2005, and $10,700 for 2006. NOTE 7. SPECIAL CHARGE FOR LEGAL MATTERS In the fourth quarter of 2001, the Company recorded a $258 million ($177 million after tax) special charge to address 1996 merger related legal matters, estimated liabilities including legal expenses arising in connection with the W.R. Grace Chapter 11 proceedings and the cost of resolving pending litigation and other disputes with certain commercial insurers. The special charge is primarily comprised of three major components relating to (i) the W.R. Grace bankruptcy, (ii) litigation with commercial insurers and (iii) other legal matters. The Company has assessed the extent of potential liabilities as a result of the W.R. Grace Chapter 11 proceedings. The Company accrued $172 million principally representing a provision for income taxes payable for the years prior to the 1996 merger for which the Company has been indemnified by W.R. Grace, but may ultimately be obligated to pay as a result of W.R. Grace's Chapter 11 filing. In addition, that amount included the costs of defending the Company in litigation arising out of W.R. Grace's Chapter 11 filing. The Company included in the special charge the amount of $55 million to provide for settlement obligations, legal expenses and the resolution of disputed accounts receivable for the commercial insurers in the ongoing billing practice litigation. The Company believes that the accrual reasonably estimates the costs and expenses associated with the continued defense and resolution of this litigation. 15 The remaining amount of $31 million pre-tax was accrued for (i) assets and receivables that are impaired in connection with other legal matters and (ii) anticipated expenses associated with the continued defense and resolution of the legal matters. See also Note 9- "Commitments and Contingencies- Legal Proceedings." At September 30, 2002, there is a remaining balance of approximately $204 million for the accrued special charge for legal matters. During the three and nine months ended September 30, 2002, approximately $9 million and $20 million of this accrual was utilized. NOTE 8. PENSION PLANS During the first quarter of 2002, the Company recorded a gain of approximately $13.1 million resulting from the curtailment of the Company's defined benefit and supplemental executive retirement plans. The Company has retained all employee pension obligations as of the curtailment date for the fully-vested and frozen benefits for all employees. NOTE 9. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS COMMERCIAL LITIGATION The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-Merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. Proceedings have been brought against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.-Conn., principally alleging that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act, and constituted a conspiracy. See discussion of "Mesquita v. W.R. Grace and Company" below. Pre-Merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); Grace has received the Service's examination report on tax periods 1993 to 1996; that during those years Grace deducted approximately $122.1 million in interest attributable to corporate owned life insurance ("COLI") policy loans; that Grace has paid $21.2 million of tax and interest related to COLI deductions taken in tax years prior to 1993; that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation; and that Grace is seeking a settlement of the Service's claims. Subject to certain representations made by Grace, the Company and Fresenius AG, Grace and certain of its affiliates agreed to indemnify the Company against this and other pre-Merger and Merger related tax liabilities. Subsequent to the Merger, Grace was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Subsequent to the Sealed Air transaction, Grace and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company intends to continue to pursue vigorously its rights to indemnification from Grace and its insurers and former and current affiliates, including Sealed Air, for all costs incurred by the Company relating to pre-Merger tax and Merger-related claims. Since 1997, the Company, NMC, and certain NMC subsidiaries have been engaged in litigation with various insurance companies concerning allegations of inappropriate billing practices for nutritional therapy and diagnostic and clinical laboratory tests and misrepresentations. These claims against the Company seek unspecified damages and costs. The Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend all lawsuits. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim 16 payments. Other private payors have contacted the Company and may assert that NMC received excess payments and, similarly, may join the lawsuits or file their own lawsuit seeking reimbursement and other damages. Although the ultimate outcome on the Company of these proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al. (Sup. Court of Calif., S.F. County, #315465) was filed as a class action by plaintiffs claiming to be creditors of W. R. Grace & Co.-Conn ("Grace Chemicals") against Grace Chemicals, the Company and other defendants, principally alleging that the Merger which resulted in the original formation of the Company was a fraudulent transfer, violated the uniform fraudulent transfer act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R. Grace & Company, et al.) and additional class actions were filed subsequently with substantially similar allegations; all cases have been stayed and transferred to the U.S. District Court, have been dismissed without prejudice or are pending before the U.S. Bankruptcy Court in Delaware in connection with Grace's Chapter 11 proceeding. The Company has requested indemnification from Grace Chemicals and Sealed Air Corporation pursuant to the Merger agreements. If the Merger is determined to have been a fraudulent transfer, if material damages are proved by the plaintiffs, and if the Company is not able to collect, in whole or in part on the indemnity, from W.R. Grace & Co., Sealed Air Corporation, or their affiliates or former affiliates or their insurers, and if the Company is not able to collect against any party that may have received distributions from W.R. Grace & Co., a judgment could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is confident that no fraudulent transfer or conspiracy occurred and intends to defend the cases vigorously. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the U.S. Anti-Kickback Statute, the False Claims Act, the Stark 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. In the U.S., enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and 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 a large number facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the U.S. Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws, and the Company cannot predict whether law enforcement authorities may use such information to initiate further investigations of the business practices disclosed or any of its other business activities. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the Company's reputation and business. 17 The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS At December 31, 2001, the Company recorded a pre-tax special charge of $258 million to reflect anticipated expenses associated with the continued defense and resolution of pre-Merger tax claims, Merger-related claims, and commercial insurer claims. While the Company believes that its accruals reasonably estimate the Company's currently anticipated costs in connection with the continued defense and resolution of these claims, no assurances can be given that the actual costs incurred by the Company will not exceed the amount of these accruals. 18 NOTE 10. INDUSTRY SEGMENTS INFORMATION The Company's reportable segments are Dialysis Services and Dialysis Products. For purposes of segment reporting, the Dialysis Services Division and Spectra Renal Management are combined and reported as Dialysis Services. These divisions are aggregated because of their similar economic characteristics. These similarities 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, 2002 and 2001 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT SERVICES PRODUCTS SALES TOTAL ----------- ---------- ------------ ----------- NET REVENUES Three Months Ended 9/30/02 $ 838,241 $ 193,292 $ 82,888 $ 948,645 Three Months Ended 9/30/01 799,484 190,993 73,969 916,508 Nine Months Ended 9/30/02 $ 2,445,440 $ 568,007 $ 240,498 $ 2,772,949 Nine Months Ended 9/30/01 2,341,923 559,463 212,810 2,688,576 OPERATING EARNINGS Three Months Ended 9/30/02 $ 101,246 $ 35,117 -- $ 136,363 Three Months Ended 9/30/01 106,235 38,233 -- 144,468 Nine Months Ended 9/30/02 $ 297,986 $ 105,648 -- $ 403,634 Nine Months Ended 9/30/01 323,724 103,291 -- 427,015 TOTAL ASSETS 9/30/02 $ 2,664,354 650,429 -- $ 3,314,783 12/31/01 2,650,561 645,956 -- 3,296,517
Total assets of $4,992,678 is comprised of total assets for reportable segments, $3,314,783; intangible assets not allocated to segments, $1,876,990; accounts receivable financing agreement ($456,000); and other corporate assets, $256,905. 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, ---------------------- ----------------------------- ------------------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ----------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM: Total operating earnings for reportable segments $ 136,363 $ 144,468 $ 403,634 $ 427,015 Corporate G&A .................................. (21,267) (22,473) (33,027) (88,065) Research and development expense................ (2,758) (1,373) (6,763) (3,620) Net interest expense............................ (50,543) (59,457) (161,384) (170,085) ----------- ---------- ----------- ----------- Income before income taxes and extraordinary item.......................................... $ 61,795 $ 61,165 $ 202,460 $ 165,245 =========== ========== =========== ===========
19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company. The discussion should be read in conjunction with the consolidated financial statements included elsewhere in this document. This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of the Company, government reimbursement, future plans and management's expectations regarding future performance. Actual results could differ materially from those contained in these forward-looking statements due to certain factors including, without limitation, changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, the realization of anticipated tax deductions, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this Item 2 and in the Company's reports filed from time to time with the Securities and Exchange Commission, could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. RESULTS OF OPERATIONS (IN MILLIONS) 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, -------------------------- --------------------------- 2002 2001 2002 2001 --------- --------- --------- --------- NET REVENUES Dialysis Services............................ $ 838 $ 799 $ 2,445 $ 2,342 Dialysis Products............................ 193 191 568 559 Intercompany Eliminations.................... (82) (74) (240) (212) --------- --------- --------- --------- Total Net Revenues.............................. $ 949 $ 916 $ 2,773 $ 2,689 ========= ========= ========= ========= Operating Earnings: Dialysis Services............................ $ 101 $ 106 $ 298 $ 324 Dialysis Products............................ 35 38 106 103 --------- --------- --------- --------- Total Operating Earnings........................ 136 144 404 427 --------- --------- --------- --------- Other Expenses: General Corporate............................ $ 21 $ 23 $ 34 $ 88 Research & Development....................... 3 1 7 4 Interest Expense, Net........................ 50 59 161 170 --------- --------- --------- --------- Total Other Expenses............................ 74 83 202 262 --------- --------- --------- --------- Earnings Before Income Taxes and Extraordinary Item........................................... 62 61 202 165 Provision for Income Taxes...................... 26 29 81 79 --------- --------- --------- --------- Net Income Before Extraordinary Item............ $ 36 $ 32 $ 121 $ 86 Extraordinary Loss ............................. -- -- 9 -- --------- --------- --------- --------- Net Income...................................... $ 36 $ 32 $ 112 $ 86 ========= ========= ========= =========
20 THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 Net revenues for the third quarter of 2002 increased by 4% ($33 million) over the comparable period in 2001. Net income for the third quarter of 2002 increased by 14% ($4 million) over the comparable period in 2001 primarily as a result of decreased general corporate expenses ($2 million), decreased interest expense ($9 million) and a more favorable effective tax rate ($3 million), partially offset by decreased operating earnings ($8 million) and increased research and development costs ($2 million). Had the adoption of SFAS 142 been effective January 1, 2001, net income would have decreased 34% ($19 million) over the comparable period in 2001. DIALYSIS SERVICES Dialysis Services net revenues for the third quarter of 2002 increased by 5% to $834 million (net of $4 million of intercompany sales). The increase in dialysis services revenue resulted primarily from a 6% increase in treatment volume, reflecting both base business growth and the impact of 2002 and 2001 acquisitions, the impact of one more dialysis day, increased ancillary services, and increased laboratory testing revenues. The increase in revenue was partially offset by a decrease in revenue per treatment from $287 in the third quarter 2001 versus $282 in the third quarter of 2002. Dialysis Services operating earnings for the third quarter of 2002 decreased 5% ($5 million) over the comparable period in 2001, primarily due to the lower treatment rate in 2002, Epogen(R) price increases, expenses associated with the Company's conversion from re-use to single use dialyzers, and higher facility leasing costs. These increases were partially offset by lower amortization expenses as a result of the adoption of SFAS 142, which became effective January 1, 2002, decreases in amortization of specific intangible assets and lower provisions for doubtful accounts. DIALYSIS PRODUCTS Dialysis Products gross revenues increased 1% to $193 million in the third quarter of 2002 as compared to $191 million in the comparable period of 2001. Internal sales to Dialysis Services increased by 13% to $79 million and were partially offset by a decrease in external sales of 6% to $114 million. Dialysis Products external sales include both (i) sales of machines to a third party leasing company which are leased back by Dialysis Services and (ii) Method II PD revenues for Dialysis Services patients. Dialysis Products measures its external sales performance based on sales to the "net available external market". The net available external market excludes machines sales and Method II revenues involving the Dialysis Services Division as well as sales to other vertically integrated dialysis companies. Net available external market sales increased by 4% in the third quarter 2002 over the comparable period of 2001. Dialysis Products operating earnings for the third quarter of 2002 decreased 8% to $35 million from $38 million in the comparable period of 2001. Lower gross margins primarily due to higher manufacturing costs were partially offset by lower amortization expense as a result of the adoption of SFAS 142, which became effective January 1, 2002. OTHER EXPENSES The Company's other expenses for the third quarter of 2002 decreased by 11% ($9 million) over the comparable period of 2001. General corporate expenses decreased by $2 million and interest expense decreased $9 million. The decrease in general corporate expenses was primarily due to a reduction in amortization expense primarily resulting from the adoption of SFAS 142 partially offset by foreign exchange fluctuations, increases in worker's compensation and other employee related costs and general increases in other general and administrative costs. INCOME TAX RATE The effective tax rate from operations for the third quarter of 2002 (41.1%) is lower than the rate for the comparable period of 2001 (47.8%) due to the expected higher earnings and the adoption of SFAS 142 which eliminates the amortization on non-deductible goodwill. 21 NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 Net revenues for the first nine months of 2002 increased by 3% ($84 million) over the comparable period in 2001. Net income for the first nine months of 2002 increased by 30% ($26 million) over the comparable period in 2001 primarily as a result of decreased general corporate expenses ($54 million). These decreases were partially offset by decreased operating earnings ($23 million), an extraordinary loss, net of tax benefit, for a premium payment on the early redemption of debt ($9 million) and increased income taxes ($2 million). Had the adoption of SFAS 142 been effective January 1, 2001, net income would have decreased 28% ($43 million) over the comparable period in 2001. DIALYSIS SERVICES Dialysis Services net revenues for the first nine months of 2002 increased by 4% to $2,432 million (net of $13 million of intercompany sales). The increase in dialysis service revenue resulted primarily from a 4% increase in treatment volume, reflecting both base business growth and the impact of 2002 and 2001 acquisitions. Revenue was also favorably impacted by increased ancillary services in 2002 as compared to 2001. Dialysis Services operating earnings for the first nine months of 2002 decreased 8% ($26 million) over the comparable period in 2001, primarily due to decreased ancillary margins, Epogen(R) price increases, higher facility lease costs, expenses associated with the Company's conversion from re-use to single use dialyzers, severance and payroll costs associated with workforce reductions, and higher provisions for doubtful accounts. These unfavorable variances in earnings are partially offset by lower amortization expense as a result of the adoption of SFAS 142 which became effective January 1, 2002, reduced personnel costs associated with new staffing models, and lower amortization of specific intangibles related to the 1996 NMC Merger. DIALYSIS PRODUCTS Dialysis Products gross revenues increased 2% to $568 million in the first nine months of 2002 as compared to $559 million in the comparable period of 2001. Internal sales to Dialysis Services increased by 14% to $227 million and were partially offset by a decrease in external sales of 5% to $340 million. Net available external market sales increased by 5% in the first nine months of 2002 over the comparable period of 2001. Dialysis Products operating earnings for the first nine months of 2002 increased 3% ($3 million) over the comparable period of 2001. This was primarily due to lower amortization expenses as a result of the adoption of SFAS 142 which became effective January 1, 2002 partially offset by slightly unfavorable gross margins and increases in other operating costs. OTHER EXPENSES The Company's other expenses for the first nine months of 2002 decreased by 23% ($60 million) over the comparable period of 2001. General corporate and interest expenses decreased by $54 million and $9 million, respectively, while research and development expense increased by $3 million. The decrease in general corporate expenses was primarily due to decreased amortization expenses, resulting from the adoption of SFAS 142, a gain on the curtailment of the Company's defined benefit and supplement executive retirement plan and foreign exchange fluctuations partially offset by increases in amortization of specific intangible assets and other general and administrative expenses. EXTRAORDINARY LOSS On June 27, 2002 the Company repaid its intercompany debt to Fresenius Medical Care Trust Finance S.a.r.l. in the amount of $351 million, originally due in 2006, utilizing funds borrowed under its senior credit facility. An extraordinary loss of $9 million, net of a tax benefit of $7 million, was recorded for the premium owed to Fresenius Medical Care Trust Finance S.a.r.l. in the event of the early retirement of this obligation in accordance with the terms of the intercompany debt agreement. 22 INCOME TAX RATE The effective tax rate from operations for the first nine months of 2002 (40.0%) is lower than the rate for the comparable period of 2001 (48.0%) due to the expected higher earnings and the adoption of SFAS 142 which eliminates the amortization on non-deductible goodwill. LIQUIDITY AND CAPITAL RESOURCES Cash from operations increased by $40 million from $238 million for the nine months ended September 30, 2001 to $278 million for the nine months ended September 30, 2002. The increase is primarily related to favorable changes in operating assets and liabilities ($72 million), and increased earnings of $26 million partially offset by decreases in non cash adjustments to net income ($58 million). Increases in accounts receivable of $32 million for the nine months ended September 30, 2002 are primarily due to the Company's revenue growth and impact of acquisitions. Increases in accounts payable were primarily due to timing of disbursements. Cash on hand was $37 million and $42 million at September 30, 2002 and 2001, respectively. Net cash flows used in investing activities totaled $124 million in 2002 compared to $479 million in 2001. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations in 2002 and cash flows from operations and intercompany borrowings in 2001. Cash expenditures for acquisitions totaled $36 million and $376 million in 2002 and 2001, respectively, net of cash acquired. The decrease in acquisition spending in 2002 over the comparable period in 2001 is primarily due to the Everest acquisition completed in January 2001. Approximately $99 million of the purchase price was funded by the issuance of 2.25 million FMC preference shares to the Everest shareholders. The remaining purchase price was paid with cash of $260 million including assumed debt. Capital expenditures of $87 million and $84 million in 2002 and 2001, respectively, were made for new clinics, improvements to existing clinics, the buyout of operating leases for dialysis machines, and expansion and maintenance of production facilities. The Company has financed the expansion of its dialyzer production capacity by entering into sales-leaseback transactions with independent financing companies. Under these financing arrangements the assets are sold to the financing company at construction costs and then leased back under operating leases. Under these arrangements, financing of $20 million and $28 million was obtained in the nine month periods ended September 30, 2002 and 2001, respectively. Accordingly, these amounts are not reported as capital expenditures. For the nine months ended September 30, 2002, net cash flows used by financing activities totaled $145 million in 2002 compared to net cash flows provided of $249 million for the comparable period of 2001. The Company increased its borrowings under its accounts receivable facility (the "Accounts Receivable Facility") by $14 million to $456 million at September 30, 2002. 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 borrowings and the premium on the early redemption of this intercompany obligation. All borrowings under the NMC Credit Facility are due and payable at September 30, 2003. Accordingly, the Company has reclassified all outstanding amounts at September 30, 2002 as current obligations. The Company has initiated negotiations with its lenders and expects to enter into a replacement facility during the first quarter 2003. Accounts receivable balances as reflected in the consolidated balance sheets are shown net of receivable sold under the Accounts Receivable Facility. The Company's capacity to generate cash flow from the Accounts Receivable Facility depends on the availability of sufficient accounts receivable that meet certain criteria defined in the agreement with the third party funding corporation. A lack of availability of such accounts receivable may have a material impact on the Company's ability to utilize the facility for its financial needs. 23 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 2001 report on Form 10 K. RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS The growth of the Company's business through acquisitions has created a significant amount of intangible assets, including goodwill, patient relationships, tradenames and other intangibles. At September 30, 2002, the carrying amount of net intangible assets amounted to $3,424 million representing approximately 68% of the Company's total assets. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews the carrying value of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. As discussed in Note 2 to the Consolidated Financial Statements, any impairment is tested by a comparison of the carrying amount of intangible assets to future net cash flows expected to be generated. If such intangible assets are considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. A prolonged downturn in the healthcare industry with lower than expected increases in reimbursement rates and/or higher than expected costs for providing our healthcare services could adversely affect the Company's estimates of future net cash flows in any segment. Consequently, it is possible that the Company's future operating results could be materially and adversely affected by impairment charges related to goodwill or other indefinite lived intangibles. LEGAL CONTINGENCIES The Company is a party to certain litigation including the commercial insurer litigation, W.R. Grace & Co. bankruptcy and Sealed Air Corporation indemnification litigation and other litigation arising in the ordinary course of the Company's business as described in Note 9 "Commitments and Contingencies" in the Company's Consolidated Financial Statements. 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. If an unfavorable outcome is probable but the amount of loss cannot be reasonably estimated by management, appropriate disclosure is provided, but no contingent losses are accrued. The mere filing of a suit or formal assertion of a claim or assessment does not necessarily require the recording of an accrual. REVENUE RECOGNITION Revenues are recognized on the date services and related products are provided/shipped and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare and Medicaid. The Company records an allowance for estimated uncollectible accounts receivable based upon an analysis of historical collection experience. The analysis considers differences in collection experience by payor mix and aging of the accounts receivable. From time to time, the Company reviews the accounts receivable for changes in historical collection experience to ensure the appropriateness of the allowances. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net Revenues from machine sales to a third party leasing company where there is a leaseback of the machines by the Dialysis Services Division were $7.4 million and $13.6 million for the three months ended September 30, 2002 and 2001 and $23.3 million and $37.1 million for the nine months ended September 30, 2002 and 2001, respectively. The profits on these sales are deferred and amortized to earnings over the lease terms. 24 SELF INSURANCE PROGRAMS The Company is self-insured for professional, product and general liability, auto and worker's compensation claims up to predetermined amounts above which third party insurance applies. Estimates include ultimate costs for both reported and incurred but not reported claims. IMPACT OF INFLATION A substantial portion of the Company's net revenue is subject to reimbursement rates which are regulated by the federal government and do not automatically adjust for inflation. Moreover, non-governmental payors continue to exert downward pressure on reimbursement levels. Increased operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, may adversely affect the Company's business and results of operations. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its market risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations and purchase commitments. The Company does not hold or issue derivative instruments for trading or speculative purposes. Hedge accounting is applied if the derivative reduces the risk of the underlying hedged item and is designated at inception as a hedge. Additionally, changes in the value of the derivative must result in payoffs that are highly correlated to the changes in value of the hedged item. Derivatives are measured for effectiveness both at inception and on an ongoing basis. The Company enters into foreign exchange contracts that are designated as, and effective as, hedges for forecasted purchase transactions. Also, since the Company carries a substantial amount of floating rate debt, the Company uses interest rate swaps to synthetically change certain variable-rate debt obligations to fixed-rate obligations to mitigate the impact of interest rate fluctuations. Gains and losses on foreign exchange contracts accounted for as hedges are deferred in other assets or liabilities. The deferred gains and losses are recognized as adjustments to the underlying hedged transaction when the future sales or purchases are recognized. Interest rate swap payments and receipts are recorded as part of interest expense. The fair value of the swap contracts is recognized in other liabilities in the financial statements. Cash flows from derivatives are recognized in the consolidated statement of cash flows in the same category as the item being hedged. At September 30, 2002, 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 $90.8 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 $45.6 million. The Company had outstanding contracts covering the purchase of 666.2 million Euros ("EUR") at an average contract price of $.9099 per EUR, for delivery between October 2002 and May 2004, contracts for the purchases of 28.5 million Mexican Pesos at an average contract price of 10.3324 pesos per US dollar, and contracts for the delivery of 7.1 million Canadian Dollars at an average contract price of $.6444 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, pursuant to 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 ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in 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. 26 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS COMMERCIAL LITIGATION The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-Merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. Proceedings have been brought against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.-Conn., principally alleging that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act, and constituted a conspiracy. See discussion of "Mesquita v. W.R. Grace and Company" below. Pre-Merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); Grace has received the Service's examination report on tax periods 1993 to 1996; that during those years Grace deducted approximately $122.1 million in interest attributable to corporate owned life insurance ("COLI") policy loans; that Grace has paid $21.2 million of tax and interest related to COLI deductions taken in tax years prior to 1993; that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation; and that Grace is seeking a settlement of the Service's claims. Subject to certain representations made by Grace, the Company and Fresenius AG, Grace and certain of its affiliates agreed to indemnify the Company against this and other pre-Merger and Merger related tax liabilities. Subsequent to the Merger, Grace was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Subsequent to the Sealed Air transaction, Grace and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company intends to continue to pursue vigorously its rights to indemnification from Grace and its insurers and former and current affiliates, including Sealed Air, for all costs incurred by the Company relating to pre-Merger tax and Merger-related claims. Since 1997, the Company, NMC, and certain NMC subsidiaries have been engaged in litigation with various insurance companies concerning allegations of inappropriate billing practices for nutritional therapy and diagnostic and clinical laboratory tests and misrepresentations. These claims against the Company seek unspecified damages and costs. The Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend all lawsuits. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. Other private payors have contacted the Company and may assert that NMC received excess payments and, similarly, may join the lawsuits or file their own lawsuit seeking reimbursement and other damages. Although the ultimate outcome on the Company of these proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al. (Sup. Court of Calif., S.F. County, #315465) was filed as a class action by plaintiffs claiming to be creditors of W. R . Grace & Co.-Conn ("Grace Chemicals") against Grace Chemicals, the Company and other defendants, principally alleging that the Merger which resulted in the original formation of the Company was a fraudulent transfer, violated the uniform fraudulent transfer act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R. Grace & Company, et al.) and additional class actions were filed subsequently with substantially similar allegations; all cases have been stayed and transferred to the U.S. District Court, have been dismissed without prejudice or are pending before the U.S. Bankruptcy Court in Delaware in connection with Grace's Chapter 11 proceeding. The Company has requested indemnification from Grace Chemicals and Sealed Air Corporation pursuant to the Merger agreements. If the Merger is determined to have been a fraudulent transfer, if material damages are proved by the plaintiffs, and if the Company is not able to collect, in whole or in part on the indemnity, from W.R. Grace & Co., Sealed Air Corporation, or their affiliates or former affiliates or their insurers, and if the Company 27 is not able to collect against any party that may have received distributions from W.R. Grace & Co., a judgment could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is confident that no fraudulent transfer or conspiracy occurred and intends to defend the cases vigorously. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the U.S. Anti-Kickback Statute, the False Claims Act, the Stark 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. In the U.S., enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and 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 large number facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the U.S. Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws, and the Company cannot predict whether law enforcement authorities may use such information to initiate further investigations of the business practices disclosed or any of its other business activities. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS At December 31, 2001, the Company recorded a pre-tax special charge of $258 million to reflect anticipated expenses associated with the continued defense and resolution of pre-Merger tax claims, Merger-related claims, and commercial insurer claims. While the Company believes that its accruals reasonably estimate the Company's currently anticipated costs in connection with the continued defense and resolution of these claims, no assurances can be given that the actual costs incurred by the Company will not exceed the amount of these accruals. 28 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 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996). Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). 29 Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 1997). Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors , the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A. G. and Bank of America, N.A. (formerly known as NationsBank, N.A.). as Managing Agents, (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 9, 1999). Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on November 11, 2000). 30 Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A). as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 1, 2001). Exhibit 4.16 Amendment No. 14 dated as of February 22, 2002 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N. A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N. A. (formerly known as NationsBank, N. A. ), as Managing Agent (filed herewith). Exhibit 4.17 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended effective as of August 3, 1998 (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 4.18 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 4.19 Senior Subordinated Indenture dated as of February 19, 1998, among Fresenius Medical Care AG, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.20 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 3/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.21 Senior Subordinated Indenture dated as of June 6, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 4.22 Senior Subordinated Indenture dated as of June 15, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). 31 Exhibit 10.1 Purchase Agreement, effective January 1, 1995, between Baxter Health Care Corporation and National Medical Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.2* 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 10.3 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 10.4 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.5 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 (filed herewith). Exhibit 10.6 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 (filed herewith). Exhibit 10.7 Employment Agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992). Exhibit 10.8 Modification to FUSA Employment Agreement effective as of January 1, 1998 by and between Ben J. Lipps and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.9 Employment Agreement dated March 15, 2000 by and between Jerry A. Schneider and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.10 Employment Agreement dated March 15, 2000 by and between Ronald J. Kuerbitz and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between J. Michael Lazarus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.13 Employment Agreement dated July 1, 2002 by and between John F. Markus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on August 14, 2002). 32 Exhibit 10.15 Subordinated Loan Note dated as of May 18, 1999, among National Medical Care, Inc. and certain Subsidiaries with Fresenius AG as lender (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 22, 1999). Exhibit 10.16 Corporate Integrity Agreement between the Offices of Inspector General of the Department of Health and Human Services and Fresenius Medical Care Holdings, Inc. dated as of January 18, 2000 (incorporated herein by reference to the Form 8-K of the Registrant filed with the Commission on January 21, 2000). Exhibit 11 Statement re: Computation of Per Share Earnings. Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Confidential treatment has been requested as to certain portions of this Exhibit (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the period covered by this report. 33 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fresenius Medical Care Holdings, Inc. DATE: NOVEMBER 14, 2002 /s/ Ben J. Lipps ----------------- ----------------------------------------- NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: NOVEMBER 14, 2002 /s/ Jerry A. Schneider ----------------- ------------------------------------------ NAME: Jerry Schneider TITLE: Chief Financial Officer CERTIFICATIONS Chief Executive Officer I, Ben J. Lipps, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Fresenius Medical Care Holdings, Inc. 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report. 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 34 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ BEN J. LIPPS ------------------------------------- Ben J. Lipps President and Chief Executive Officer Chief Financial Officer I, Jerry A. Schneider, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Fresenius Medical Care Holdings, Inc. 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report. 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ JERRY A. SCHNEIDER --------------------------------- Jerry A. Schneider Chief Financial Officer