-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WpmrraveAUl02oBBjCM+oW9Ipk4HkuwCgvFzMubssLQCPF5NO+UhVMblIHRbW2c3 YicxaSbXhk7HPWL+aPHqbw== 0000950135-01-503571.txt : 20020410 0000950135-01-503571.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950135-01-503571 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRESENIUS MEDICAL CARE HOLDINGS INC /NY/ CENTRAL INDEX KEY: 0000042872 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 133461988 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03720 FILM NUMBER: 1790456 BUSINESS ADDRESS: STREET 1: TWO LEDGEMONT CENTER STREET 2: 95 HAYDEN AVE CITY: LEXINGTON STATE: MA ZIP: 02420 BUSINESS PHONE: 6174029000 FORMER COMPANY: FORMER CONFORMED NAME: FRESENIUS NATIONAL MEDICAL CARE HOLDINGS INC DATE OF NAME CHANGE: 19961015 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /NY/ DATE OF NAME CHANGE: 19920703 10-Q 1 b40868fme10-q.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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________________TO__________________ COMMISSION FILE NUMBER: 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) New York 13-3461988 - ---------------------------------------------- ------------------------ (State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.) 95 HAYDEN AVENUE, LEXINGTON, MA 02420 - ---------------------------------------------- ------------------------ (Address of Principal Executive Office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 781-402-9000 - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicated by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of the date hereof, 90,000,000 shares of common stock, par value $1.00 per share, are outstanding, all of which are held by Fresenius Medical Care AG. 2 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES TABLE OF CONTENTS PAGE PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Unaudited Consolidated Statements of Operations.................. 4 Unaudited Consolidated Statements of Comprehensive Income........ 5 Unaudited Consolidated Balance Sheets............................ 6 Unaudited Consolidated Statements of Cash Flows.................. 7 Notes to Unaudited Consolidated Interim Financial Statements..... 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 18 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................................... 22 PART II: OTHER INFORMATION ITEM 1: Legal Proceedings................................................ 23 ITEM 6: Exhibits and Reports on Form 8-K................................. 26 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------------- 2001 2000 2001 2000 -------- -------- ---------- ---------- NET REVENUES Health care services ............................. $794,908 $669,614 $2,328,721 $1,940,284 Medical supplies ................................. 121,600 125,080 359,855 360,249 -------- -------- ---------- ---------- 916,508 794,694 2,688,576 2,300,533 -------- -------- ---------- ---------- EXPENSES Cost of health care services ..................... 548,856 457,381 1,597,208 1,306,030 Cost of medical supplies ......................... 84,674 86,630 258,174 257,333 General and administrative expenses .............. 68,769 67,066 240,444 208,503 Provision for doubtful accounts .................. 28,859 17,301 65,981 44,608 Depreciation and amortization .................... 63,355 55,576 187,819 165,732 Research and development ......................... 1,373 1,001 3,620 3,199 Interest expense, net and related financing costs including $37,749 and $28,459 for the three months and $99,861 and $82,444 for the ninemonths ended, respectively, of interest with affiliates ................................ 59,457 54,843 170,085 165,081 -------- -------- ---------- ---------- 855,343 739,798 2,523,331 2,150,486 -------- -------- ---------- ---------- INCOME BEFORE INCOME TAXES ........................ 61,165 54,896 165,245 150,047 PROVISION FOR INCOME TAXES .......................... 29,219 27,227 79,379 74,114 -------- -------- ---------- ---------- NET INCOME .......................................... $ 31,946 $ 27,669 $ 85,866 $ 75,933 ======== ======== ========== ========== Basic and fully dilutive net income per share ....... $ 0.35 $ 0.31 $ 0.95 $ 0.84
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, ------------------ ------------------ 2001 2000 2001 2000 -------- ------- -------- ------- NET INCOME .................................... $ 31,946 $27,669 $ 85,866 $75,933 Other comprehensive income Foreign currency translation adjustments gain (loss)................................ 171 (115) 55 26 Derivative instruments, net................. (24,551) -- (48,446) -- -------- ------- -------- ------- Total other comprehensive loss ............. (24,380) (115) (48,391) 26 -------- ------- -------- ------- COMPREHENSIVE INCOME .......................... $ 7,566 $27,554 $ 37,475 $75,959 -------- ------- -------- -------
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, 2001 2000 ------------- ----------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents ............................. $ 42,439 $ 33,327 Accounts receivable, less allowances of $99,408 and $80,466 ............................................. 424,081 318,391 Inventories ........................................... 221,991 191,699 Deferred income taxes ................................. 80,126 123,190 Other current assets .................................. 163,184 139,082 IDPN accounts receivable .............................. -- 5,189 ----------- ----------- Total Current Assets ............................... 931,821 810,878 ----------- ----------- Properties and equipment, net ............................ 511,757 456,936 ----------- ----------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $683,154 and $564,880 .. 3,421,383 3,222,044 Other assets and deferred charges ..................... 85,671 63,500 ----------- ----------- Total Other Assets ....................................... 3,507,054 3,285,544 ----------- ----------- Total Assets ............................................. $ 4,950,632 $ 4,553,358 =========== =========== LIABILITIES AND EQUITY Current Liabilities: Note payable for settlement of investigation .......... -- 85,920 Current portion of long-term debt and capitalized lease obligations .................................. 152,976 151,268 Current portion of borrowing from affiliates .......... 311,892 341,643 Accounts payable ...................................... 158,624 139,754 Accrued liabilities ................................... 219,744 228,025 Accounts payable to affiliates ........................ 28,905 6,317 Accrued income taxes .................................. 44,192 11,525 ----------- ----------- Total Current Liabilities .......................... 916,333 964,452 Long-term debt ........................................... 343,100 588,526 Non-current borrowings from affiliates ................... 1,005,645 786,865 Capitalized lease obligations ............................ 1,972 911 Deferred income taxes .................................... 80,128 122,946 Other liabilities ........................................ 146,579 58,188 ----------- ----------- Total Liabilities ..................................... 2,493,757 2,521,888 ----------- ----------- Mandatorily Redeemable Preferred Securities .............. 691,193 305,500 ----------- ----------- 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 1,942,387 Retained deficit ......................................... (237,497) (322,973) Accumulated comprehensive income (loss) .................. (48,153) 238 ----------- ----------- Total Equity .......................................... 1,765,682 1,725,970 ----------- ----------- Total Liabilities and Equity ............................. $ 4,950,632 $ 4,553,358 =========== ===========
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, --------------------- 2001 2000 --------- --------- Cash Flows from Operating Activities: Net Income ................................................... $ 85,866 $ 75,933 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization ............................. 187,819 165,732 Provision for doubtful accounts ........................... 65,981 44,608 Deferred income taxes ..................................... 33,277 55,961 Loss on disposal of properties and equipment .............. 283 512 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable .............................. (118,484) (147,976) (Increase) decrease in inventories ........................... (25,073) 2,847 Increase in other current assets ............................. (6,487) (30,944) Decrease in IDPN accounts receivable ......................... 5,189 48,773 Decrease in other assets and deferred charges ................ 990 6,403 Decrease in accounts payable ................................. (15,765) (17,271) Increase in accrued income taxes ............................. 32,667 9,259 Decrease in accrued liabilities .............................. (20,956) (50,973) (Decrease) increase in other long-term liabilities ........... (2,712) 7,732 Net changes due to/from affiliates ........................... 27,184 5,628 Other, net ................................................... (11,416) 1,016 --------- --------- Net cash provided by operating activities ....................... 238,363 177,240 --------- --------- Cash Flows from Investing Activities: Capital expenditures ......................................... (84,439) (64,739) Payments for acquisitions, net of cash acquired .............. (376,273) (105,125) Increase in other investments ................................ (17,925) -- --------- --------- Net cash used in investing activities ........................... (478,637) (169,864) --------- --------- Cash flows from Financing Activities: Payments on settlement of investigation ...................... (85,920) (352,721) Net increase in borrowings from affiliates ................... 189,029 259,556 Cash dividends paid .......................................... (390) (390) Proceeds from receivable financing facility .................. 2,700 17,800 Proceeds from mandatorily redeemable preferred securities .... 383,882 -- Net increase (decrease) on debt and capitalized leases ....... (242,657) 65,262 Other net .................................................... 2,627 (647) --------- --------- Net cash provided by (used in) financing activities ............. 249,271 (11,140) --------- --------- Effects of changes in foreign exchange rates .................... 115 82 --------- --------- Change in cash and cash equivalents ............................. 9,112 (3,682) --------- --------- Cash and cash equivalents at beginning of period ................ 33,327 12,563 --------- --------- Cash and cash equivalents at end of period ...................... $ 42,439 $ 8,881 ========= =========
See accompanying Notes to Unaudited, Consolidated Financial Statements 7 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest............................................. $151,954 $159,968 Income taxes paid, net............................... 5,621 9,356 Details for Acquisitions: Assets acquired......................................... 423,583 105,745 Liabilities assumed..................................... 47,310 620 -------- -------- Net cash paid for acquisitions.......................... $376,273 $105,125 ======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements 8 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATD SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY Fresenius Medical Care Holdings, Inc., a New York corporation ("the Company") is a subsidiary of Fresenius Medical Care AG, a German corporation ("FMC" or "Fresenius Medical Care"). The Company conducts its operations through five principal subsidiaries, National Medical Care, Inc., ("NMC"); Fresenius USA Marketing, Inc., Fresenius USA Manufacturing, Inc., and SRC Holding Company, Inc., ("SRC"), all Delaware corporations and Fresenius USA, Inc., a Massachusetts corporation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and those financial statements where the Company controls professional corporations in accordance with Emerging Issues Task Force Issue 97-2. The Company is primarily engaged in (i) providing kidney dialysis services, and clinical laboratory testing, and (ii) manufacturing and distributing products and equipment for dialysis treatment. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at September 30, 2001 and 2000 and for the three and nine month periods then ended are unaudited and should be read in conjunction with the consolidated financial statements in the Company's 2000 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, 2001 are not necessarily indicative of the results of operations and cash flows for the fiscal year ending December 31, 2001. All intercompany transactions and balances have been eliminated in consolidation. EARNINGS PER SHARE Basic earnings per share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted earnings 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 earnings per share was 90,000 in all periods as there were no potential common shares and no adjustments to income to be considered for purposes of the diluted earnings per shares calculation.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ The weighted average number of shares of Common Stock were as follows ............. 90,000 90,000 90,000 90,000 ====== ====== ====== ======
9 Income used in the computation of earnings per share were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ----------------- 2001 2000 2001 2000 -------- ------- ------- ------- CONSOLIDATED Net income............................................. $ 31,946 $27,669 $85,866 $75,933 Dividends paid on preferred stock...................... (130) (130) (390) (390) -------- ------- ------- ------- Income used in per share computation of earnings....... $ 31,816 $27,539 $85,476 $75,543 ======== ======= ======= ======= Basic and fully dilutive earnings per share............ $ 0.35 $ 0.31 $ 0.95 $ 0.84 ======== ======= ======= =======
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and the related amendments of SFAS No. 138. The cumulative effect of adopting SFAS 133 as of January 1, 2001 was not material to the Company's consolidated financial statements. The Company is exposed to market risk due to changes in interest rates and foreign currencies. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations, forecasted raw material purchases and Euro denominated mandatorily redeemable preferred stock. The interest rate swaps are designated as cash flow hedges effectively converting certain variable interest rate payments into fixed interest rate payments. After tax losses of $25 million ($42 million pretax) for the three months ended September 30, 2001 and after tax losses of $49 million ($82 million pretax) for the nine months ended September 30, 2001, were deferred in other comprehensive income during the three and nine months period, respectively. Interest payable and interest receivable under the swap terms are accrued and recorded as an adjustment to interest expense at each reporting date. The Company enters into forward rate agreements that are designated and effective as hedges of forecasted raw material purchases. After tax losses of $0.1 million ($0.3 million pretax) for the nine months ended September 30, 2001 were deferred in other comprehensive income and will be reclassified into cost of sales in the period during which the hedged transactions affect earnings. There were no tax gains or losses for the three months ended September 30, 2001. 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. Ineffective amounts had no material impact on earnings for the three and nine months ended September 30, 2001. 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. 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 $354 million, which included assumed debt and the issuance of 2.25 million FMC preference share. Everest owns, operates or manages approximately 70 clinic facilities providing therapy to approximately 6,800 patients in the United States. Everest also operates 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 10 interests in Everest to the Company at its fair value which approximates its carrying 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 nine months ended September 30, 2001 include the consolidated operations and cash flows of Everest retroactive to January 1, 2001. Accordingly, the Company's previously reported revenues and results of operations for the six months ended June 30, 2001 have been restated to include Everest revenues and earnings of $134 million and $11 million, respectively. In addition Everest assets and liabilities of approximately $417 million and $306 million, including intercompany obligations of $79 million have been transferred to the Company. NEW PRONOUNCEMENTS In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, ("SFAS 140") which replaces SFAS No. 125 and rescinds SFAS No. 127. SFAS 140 provides the accounting and reporting standards for securitizations and other transfers of financial assets and collateral. These standards are based on consistent application of a financial-components approach that focuses on control. This Statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 140 is effective for transfers after March 31, 2001 and is effective for disclosures about securitizations and collateral for fiscal years ending after December 15, 2000. There is no impact to the Company for the adoption of SFAS 140. In July 2001, the FASB issued SFAS No.141, Business Combinations ("SFAS 141"), and SFAS No.142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 will require 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 will also require 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.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of SFAS 141 immediately, and SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS 142. SFAS 141 will require, upon adoption of SFAS 142, 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. Upon adoption of SFAS 142, the Company will be 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 will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, SFAS 142 will require 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 will then have 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 will be recognized as the cumulative effect of a change in accounting principle in its statement of operations. Because of the extensive effort needed to comply with adopting SFAS 141, it is currently not practicable to reasonably estimate 11 the impact of adopting this statement on the Company's financial statements at this time, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 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 of approximately $100 million. The favorable impact in 2002 should approximate $90 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 reviewing the impact of SFAS No. 143 on its results of operations. In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144") which replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less selling costs. SFAS 144 also broadens the reporting of discontinued operations and will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 31, 2001. The Company is currently reviewing the impact of SFAS No. 144 on its results of operations. NOTE 2. INVENTORIES
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------ ----------- Inventories: Raw materials ............................................ $ 42,473 $ 44,787 Manufactured goods in process ............................ 11,779 10,516 Manufactured and purchased inventory available for sale... 92,875 80,520 -------- -------- 147,127 135,823 Health care supplies .................................... 74,864 55,876 -------- -------- Total ............................................... $221,991 $191,699 ======== ========
NOTE 3. DEBT
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------ ----------- Notes payable and Long-term debt to outside parties consists of: NMC Credit Facility ................................. $489,100 $732,500 Note payable for settlement ......................... -- 85,920 Other ............................................... 4,044 7,120 -------- -------- 493,144 825,540 Less amounts classified as current .................. 150,044 237,014 -------- -------- $343,100 $588,526 ======== ========
12 Non current net borrowings from affiliates consists of:
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------ ----------- Fresenius Medical Care AG non-current borrowings primarily at interest rates approximating 4.54% ......... $ 182,504 $ 18,850 Fresenius AG non-current borrowing at interest rates approximating 4.48% .................................... 45,000 209,000 Fresenius Medical Care Trust Finance S.a.r.l. at interest rates from 8.25% to 9.25% ............................... 1,005,239 786,524 Franconia Acquisition, LLC at interest rates approximating 3.98% ..................................... 83,721 113,121 Other ....................................................... 1,073 1,013 ---------- ---------- Less amounts classified as current .......................... 1,317,537 1,128,508 Total ....................................................... 311,892 341,643 ---------- ---------- $1,005,645 $ 786,865 ========== ==========
NOTE 4. MANDATORILY REDEEMABLE PREFERRED SECURITIES During the fourth quarter of 2000 and the second and third quarters of 2001, a wholly-owned subsidiary of the Company issued to NMC shares of various series of Preferred Stock ("Redeemable Preferred Securities") which were then transferred to FMC for proceeds totaling $305,500 in 2000 and $392,037 for the nine months ended September 30, 2001. The table below provides information for Redeemable Preferred Securities for the periods indicated.
SEPTEMBER 30, DECEMBER 31, MANDATORILY REDEEMABLE PREFERRED SECURITIES 2001 2000 ------------ ----------- Series A Preferred Stock, 1,000 shares ............ $ 113,500 $ 113,500 Series B Preferred Stock, 300 shares .............. 34,000 -- Series C Preferred Stock, 1,700 shares ............ 192,000 192,000 Series D Preferred Stock, 870 shares .............. 97,500 -- Series E Preferred Stock, 1,300 shares ............ 147,500 -- Series F Preferred Stock, 980 shares .............. 113,037 -- --------- --------- 697,537 305,500 Mark to Market Adjustment ......................... (6,344) -- --------- --------- Total ............................................. $ 691,193 $ 305,500 ========= =========
These securities are similar in substance except for the order of preference both as to dividends and liquidation, dissolution or winding-up of the subsidiary. The order of preference is alphabetically Series A through Series F. In addition, the holders of the Redeemable Preferred Securities are entitled to receive dividends in amount of dollars per share that varies from approximately 5% to 8% depending on the Series. The dividends will be declared and paid in cash at least annually. All the Redeemable Preferred Securities have a par value of $.01 per share. Upon liquidation or dissolution or winding up of the issuer of the Redeemable Preferred Securities, the holders of the Redeemable Preferred Securities are entitled to an amount equal to the liquidation preference for each share of stock plus an amount equal to all accrued and unpaid dividends thereon through the date of distribution. The liquidation preference is the sum of the issuance price plus, for each year or portion thereof an amount equal to one-half of one percent of the issue price, not to exceed 5%. The Redeemable Preferred Securities will be sold to the Company in two years from the 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 F) plus any accrued and unpaid dividends. Accordingly, the Euro Redeemable Preferred Securities are deemed to be a Euro liability and the risk of foreign currency fluctuations are hedged through forward currency contracts. The holders of the Redeemable Preferred Securities have the same participation rights as the holders of all other classes of capital stock of the issuing subsidiary. 13 NOTE 6. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS COMMERCIAL LITIGATION In 1997, the Company, NMC, and certain named NMC subsidiaries, were served with a civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York. The lawsuit alleges inappropriate billing practices for nutritional therapy, diagnostic and clinical laboratory tests and misrepresentations. In April 1999, Aetna amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff, and to make certain other limited changes in its pleading. The amended complaint seeks unspecified damages and costs. Other insurance companies have filed similar claims seeking 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. Other private payors have contacted the Company and may assert that NMC received excess payment 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 result of operations. The Company intends to defend the claims vigorously. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. 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 (described in greater detail in "Indemnification by W. R. Grace & Co." below) 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 an additional class action were filed subsequently with substantially similar allegations; both cases have been subsequently stayed and transferred to the Delaware bankruptcy court in connection with Grace's Chapter 11 proceeding. The Company has requested indemnification from Grace Chemicals pursuant to the Merger agreements (see "Indemnification by W.R. Grace & Co."). 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. or its 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. OBRA 93 The Omnibus Budget Reconciliation Act of 1993 affected the payment of benefits under Medicare and employer health plans for dual-eligible ESRD patients. In July 1994, the Centers for Medicare and Medicaid Services (CMS) (formerly known as the Health Care Financing Administration, or HCFA) issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by that act would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than those provided under Medicare. In April 1995, CMS issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. CMS further proposed that its new instruction be effective retroactive to August 1993, the effective date of the Omnibus Budget Reconciliation Act of 1993. NMC ceased to recognize the incremental revenue realized under the original instruction as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by the Omnibus Budget Reconciliation Act of 1993 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by the act, and then began to re-bill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.95-0860 (WBB)) seeking to preclude CMS from retroactively enforcing its April 24, 1995 implementation of the Omnibus Budget Reconciliation Act of 1993 provision relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude CMS from enforcing its new policy retroactively, that is, to billing for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction and in December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that CMS' retroactive application of the April 1995 rule was legally invalid. CMS cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding CMS' retroactive 14 application of the April 1995 rule legally invalid. Based on its finding, the Court also permanently enjoined CMS from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on CMS' motion for summary judgment pending completion of the outstanding discovery. On October 5, 1998, NMC filed its own motion for summary judgment requesting that the Court declare CMS' prospective application of the April 1995 rule invalid and permanently enjoin CMS from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. CMS elected not to appeal the Court's June 1995 and January 1998 orders. CMS may, however, appeal all rulings at the conclusion of the litigation. If CMS should successfully appeal so that the revised interpretation would be applied retroactively, NMC may be required to refund the payment received from employer health plans for services provided after August 10, 1993 under the CMS' original implementation, and to re-bill Medicare for the same services, which would result in a loss to NMC of approximately $120 million attributable to all periods prior to December 31, 1995. Also, in this event, the Company's business, financial condition and results of operations would be materially adversely affected. In July, 2000, NMC filed a complaint in the U.S. District Court for the Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S. Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S. Healthcare and health plans administered by Aetna U.S. Healthcare for claims related to primary payor liability for dual eligible ESRD patients under the Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed the action pending resolution of the District of Columbia Court action. 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 ultimate outcome of these matters is not expected to materially affect the Company's financial position, results of operations or cash flows. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the U.S. anti-kickback statute, the False Claims Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. In the U.S., enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates a large number facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the 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 15 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. INDEMNIFICATION BY W. R. GRACE & CO. 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 "Legal Proceedings" above. In addition, the Merger was consummated as a tax-free reorganization. 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"); 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 years prior to 1993; that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation; and that, as a result of this ruling, Grace has recorded an accrual of $75.0 million for tax exposure and related interest. Subject to certain representations made by W.R. Grace & Co.-Conn., the Company and Fresenius AG, W.R. Grace & Co.-Conn. and certain of its affiliates agreed to indemnify the Company against this or other pre-merger or merger related tax liabilities. W.R. Grace & Co.-Conn. and certain of its subsidiaries have filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. If the Merger is determined to be a fraudulent transfer and if material damages are proved by the plaintiffs, or if W.R. Grace & Co. is unable to satisfy its Merger related or pre-merger tax obligations, and if the Company is not able to collect on the indemnities from W. R. Grace & Co. as a result of the bankruptcy proceedings or otherwise, and if the Company is not able to collect on the indemnities from any affiliates or former affiliates of W.R. Grace & Co. 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., judgments could have a material adverse effect on the Company's business, financial condition and results of operations. 16 NOTE 7. INDUSTRY SEGMENTS INFORMATION The Company's reportable segments are Dialysis Services and Dialysis Products. For purposes of segment reporting, the Dialysis Services Division and Spectra Renal Management are combined and reported as Dialysis Services. These divisions are aggregated because of their similar economic classifications. These include the fact that they are both health care service providers whose services are provided to a common patient population, and the fact that they 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, 2001 and 2000 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT SERVICES PRODUCTS SALES TOTAL ---------- -------- ------------ ----- NET REVENUES Three Months Ended 9/30/01 $ 799,484 $190,993 $ 73,969 $ 916,508 Three Months Ended 9/30/00 673,536 183,431 62,273 794,694 Nine Months Ended 9/30/01 $2,341,923 $559,463 $212,810 $2,688,576 Nine Months Ended 9/30/00 1,951,863 536,788 188,118 2,300,533 OPERATING EARNINGS Three Months Ended 9/30/01 $ 105,439 $ 38,235 -- $ 143,674 Three Months Ended 9/30/00 104,975 31,997 -- 136,972 Nine Months Ended 9/30/01 $ 323,722 $103,291 -- $ 427,013 Nine Months Ended 9/30/00 307,671 88,342 -- 396,013 TOTAL ASSETS 9/30/01 $2,692,852 $647,369 -- $3,340,221 12/31/00 2,176,055 644,853 -- 2,820,908
Total assets of $4,950,632 is comprised of total assets for reportable segments, $3,340,221; intangible assets not allocated to segments, $1,880,400; receivable financing facility ($448,000); and other corporate assets $178,011. 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, ---------------------- -------------------- ---------------------- 2001 2000 2001 2000 -------- -------- --------- --------- INCOME BEFORE INCOME TAXES: Total operating earnings for reportable segments ... $143,674 $136,972 $ 427,013 $ 396,013 Corporate G&A ...................................... (21,679) (26,232) (88,063) (77,686) Research and development expense ................... (1,373) (1,001) (3,620) (3,199) Net interest expense ............................... (59,457) (54,843) (170,085) (165,081) -------- -------- --------- --------- Income Before Income Taxes ......................... $ 61,165 $ 54,896 $ 165,245 $ 150,047 ======== ======== ========= =========
17 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, reimbursement, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, the realization of anticipated tax deductions, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this Item 2 and in the Company's reports filed from time to time with the Securities and Exchange Commission, could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. RESULTS OF OPERATIONS The following table summarizes certain operating results of the Company by principal business unit for the periods indicated. Intercompany eliminations primarily reflect sales of medical supplies by Dialysis Products to Dialysis Services.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2001 2000 2001 2000 ------- ------- ------- ------- NET REVENUES Dialysis Services ..................... $ 799 $ 674 $ 2,342 $ 1,952 Dialysis Products ..................... 191 183 559 537 Intercompany Eliminations ............. (74) (62) (213) (188) ------- ------- ------- ------- Total Net Revenues ....................... $ 916 $ 795 $ 2,688 $ 2,301 ======= ======= ======= ======= Operating Earnings: Dialysis Services ..................... $ 105 $ 105 $ 324 $ 308 Dialysis Products ..................... 38 32 103 88 ------- ------- ------- ------- Total Operating Earnings ................. 143 137 427 396 ------- ------- ------- ------- Other Expenses: General Corporate ..................... $ 22 $ 26 $ 88 $ 78 Research & Development ................ 1 1 4 3 Interest Expense, Net ................. 59 55 170 165 ------- ------- ------- ------- Total Other Expenses ..................... 82 82 262 246 ------- ------- ------- ------- Earnings Before Income Taxes ............. 61 55 165 150 Provision for Income Taxes ............... 29 27 79 74 ------- ------- ------- ------- Net Income ............................... $ 32 $ 28 $ 86 $ 76 ======= ======= ======= =======
18 THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Net revenues from operations for the third quarter of 2001 increased by 15% ($121 million) over the comparable period in 2000. Net income from operations for the third quarter of 2001 increased by 15% ($4 million) over the comparable period in 2000 as a result of increased operating earnings, and decreased general corporate expenses partially offset by increased interest expense. DIALYSIS SERVICES Dialysis Services net revenues for the third quarter of 2001 increased by 19% ($125 million) over the comparable period in 2000, primarily as a result of a 14% increase in the number of treatments provided, the impact of increased Medicare reimbursement rates, higher revenues in other ancillary services, and increased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 2000 and 2001 acquisitions. The laboratory testing revenues increased as a result of higher patient volume. Dialysis Services operating earnings for the third quarter of 2001 were the same as the comparable period of 2000 primarily due to increases in treatment volume, the impact of increased Medicare reimbursement rates, higher revenues in other ancillary services, and increased earnings from laboratory testing, offset by increases in provisions for doubtful accounts, higher personnel costs, and increases to other operating expenses. The Company's reserves for accounts receivable are based on historical collection experience by payor type and aging category. The increased provision for bad debt in the period is the result of an increased volume of accounts receivable coupled with changes in payor mix and aging distribution. DIALYSIS PRODUCTS Dialysis Products net revenues for the third quarter of 2001 increased by 4% ($8 million) over the comparable period of 2000. This is due to increased sales of dialyzers and other hemo disposable products, partially offset by decreased sales of machines. Dialysis Products operating earnings for the third quarter of 2001 increased by 19% ($6 million) over the comparable period of 2000. This is a result of an improvement in gross margin and decreased freight and distribution expenses. OTHER EXPENSES The Company's other expenses for the third quarter remained unchanged over the comparable period of 2000. General corporate expenses decreased by $4 million due to mark to market gains of approximately $9 million on foreign currency hedges for intercompany exposures partially offset by increases in legal fees, insurance costs and other general corporate expenses. INCOME TAX RATE The effective tax rate for the third quarter of 2001 (47.8%) is lower than the rate for the comparable period of 2000 (49.6%) due to higher earnings in relation to the constant amount of non-deductible merger goodwill. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Net revenues from operations for the first nine months of 2001 increased by 17% ($387 million) over the comparable period in 2000. Net income from operations for the first nine months of 2001 increased by 13% ($10 million) over the comparable period in 2000 as a result of increased operating earnings partially offset by increased general corporate expenses and increased interest expense. DIALYSIS SERVICES Dialysis Services net revenues for the first nine months of 2001 increased by 20% ($390 million) over the comparable period in 2000, primarily as a result of a 16% increase in the number of treatments provided, the impact of increased Medicare reimbursement rates, higher revenues in other ancillary services, and increased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 2000 and 2001 acquisitions. The laboratory testing revenues increased as a result efficiencies in testing procedures. 19 Dialysis Services operating earnings for the first nine months of 2001 increased by 5% ($16 million) over the comparable period of 2000 primarily due to the increase in treatment volume, the impact of increased Medicare reimbursement rates, higher earnings in other ancillary services, and increased earnings from laboratory testing partially offset by increases in the provision for doubtful accounts, higher personnel costs, and increases in other operating expenses. The Company's reserves for accounts receivable are based on historical collection experience by payor type and aging category. The increased provision for bad debt in the period is the result of an increased volume of accounts receivable coupled with changes in payor mix and aging distribution. DIALYSIS PRODUCTS Dialysis Products net revenues for the first nine months of 2001 increased by 4% ($22 million) over the comparable period of 2000. This is primarily due to increased sales of dialyzers, and other hemo disposable products partially offset by decreased sales of machines. Dialysis Products operating earnings for the first nine months of 2001 increased by 17% ($15 million) over the comparable period of 2000. This is a result of an improvement in gross margin and decreased freight and distribution expenses. OTHER EXPENSES The Company's other expenses for the first nine months of 2001 increased by 6% ($16 million) over the comparable period of 2000. General corporate expenses increased by $10 million primarily due to increased legal fees, insurance costs and other general corporate expenses. Interest expense was increased by $5 million primarily due to the change in the mix of debt instruments during the first nine months of 2001 versus the first nine months of 2000. INCOME TAX RATE The effective tax rate for the first nine months of 2001 (48.0%) is higher than the rate for the comparable period of 2000 (49.4%) due to higher earnings in relation to the constant amount of non-deductible merger goodwill. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements in 2001, and 2000, including acquisitions and capital expenditures have historically been funded by cash generated from operations, additional net intercompany borrowings, borrowings under the credit facility, and net increases in the receivable financing facility. Cash from operations increased by $61 million from $177 million for the nine months ended September 30, 2000 to $238 million for the nine months ended September 30, 2001. This increase is primarily due to cash inflows from operating assets and liabilities of $31 million, increases in net income of $10 million, and increases in net income adjustments of $20 million. The movement in operating assets and liabilities includes the collection of $5 million related to IDPN receivables. Increases in accounts receivable of $118 million in the nine month period ended September 30, 2001 are primarily due to the Company's revenue growth, the impact of acquisitions, and the growth in accounts receivable due from commercial payors that are in litigation with the Company. Decreases in accounts payable are primarily due to the timing of disbursements. Cash on hand was $42 and $33 million at September 30, 2001 and December 31, 2000, respectively. Net cash flows used in investing activities of operations totaled $479 million in 2001 compared to $170 million in 2000. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations and intercompany borrowings. Acquisitions totaled $376 million and $105 million in 2001 and 2000, respectively, net of cash acquired. Capital expenditures of $84 million and $65 million were made for internal expansion, improvements, new furnishings and equipment in 2001 and 2000, respectively. In addition, the Company made equity investments totaling $18 million in 2001. Net cash flows provided by financing activities of operations totaled $249 million in 2001 compared to net cash flows used of $11 million in 2000. During the first nine months of 2001, the Company made payments to the U.S. Government totaling $86 million pursuant to the January 2000 settlement agreement. In addition, debt and capital lease obligations decreased by $243 million, primarily due to the paydown of the Company's credit facility of $243 million. Proceeds from financing activities during the first nine months included $383,882 million (net of mark to market change of $6,344) for the issuance of mandatorily redeemable preferred stock to an affiliated company and increased borrowings under a receivable financing facility of $2.7 million. 20 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. Non-governmental payors also are exerting 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. Amgen Inc. announced a 3.9% increase in its wholesaler acquisition price for Epogen effective May 9, 2001. The Company's purchase contract with Amgen contains pricing protection such that its purchase price for Epogen will be unaffected by such increase through December 31, 2001. 21 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. Periodically, the Company enters into derivative instruments with related parties to form a natural hedge from currency exposures on intercompany obligations. These instruments are reflected in the balance sheet at fair value with changes in fair value recognized in earnings. 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 the Euro denominated mandatorily redeemable preferred stock and for forecasted purchases of raw materials. There are also foreign exchange contracts for intercompany sales of products to a Canadian subsidiary and for payment of expenses for the Company's manufacturing operations in Mexico. Since the Company carries a substantial amount of floating rate debt, the Company uses interest rate swaps to effectively 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 cash flow hedges are deferred in comprehensive income. The deferred gains and losses are recognized as adjustments to cost of sales when the future sales are recognized. Interest rate swap payments and receipts are recorded as part of interest expense. Gains and losses from interest rate swaps are deferred in other comprehensive income and will be reclassed into interest expense over the period during which the hedged variable interest rate payments are recognized. 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, 2001, the fair value of the Company's interest rate agreements, which consisted entirely of interest rate swaps, is approximately ($82.3 million) and the fair value of Company's foreign exchange contracts, which consisted entirely of forward agreements, is valued at approximately $(1.3) million. The Company had outstanding contracts covering the purchase of $604 million Euros ("EUR") at an average contract price of $0.9086 per EUR, for delivery between October 2001 and November 2003. 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS COMMERCIAL LITIGATION In 1997, the Company, NMC, and certain named NMC subsidiaries, were served with a civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York. The lawsuit alleges inappropriate billing practices for nutritional therapy, diagnostic and clinical laboratory tests and misrepresentations. In April 1999, Aetna amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff, and to make certain other limited changes in its pleading. The amended complaint seeks unspecified damages and costs. Other insurance companies have filed similar claims seeking 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. Other private payors have contacted the Company and may assert that NMC received excess payment 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 result of operations. The Company intends to defend the claims vigorously. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. 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 (described in greater detail in Note 5 to the financial statements included in Part I infra) 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 an additional class action were filed subsequently with substantially similar allegations; both cases have been subsequently stayed and transferred to the Delaware bankruptcy court in connection with Grace's Chapter 11 proceeding. The Company has requested indemnification from Grace Chemicals 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. or its affiliates or former affiliates or their insurers, and if the Company is not able to collect against any party that may have received proceeds 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. OBRA 93 The Omnibus Budget Reconciliation Act of 1993 affected the payment of benefits under Medicare and employer health plans for dual-eligible ESRD patients. In July 1994, the Centers for Medicare and Medicaid Services (CMS) (formerly known as the Health Care Financing Administration, or HCFA) issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by that act would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than those provided under Medicare. In April 1995, CMS issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. CMS further proposed that its new instruction be effective retroactive to August 1993, the effective date of the Omnibus Budget Reconciliation Act of 1993. NMC ceased to recognize the incremental revenue realized under the original instruction as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by the Omnibus Budget Reconciliation Act of 1993 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by the act, and then began to re-bill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio- 23 Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.95-0860 (WBB)) seeking to preclude CMS from retroactively enforcing its April 24, 1995 implementation of the Omnibus Budget Reconciliation Act of 1993 provision relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude CMS from enforcing its new policy retroactively, that is, to billing for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction and in December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that CMS' retroactive application of the April 1995 rule was legally invalid. CMS cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding CMS' retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also permanently enjoined CMS from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on CMS' motion for summary judgment pending completion of the outstanding discovery. On October 5, 1998, NMC filed its own motion for summary judgment requesting that the Court declare CMS' prospective application of the April 1995 rule invalid and permanently enjoin CMS from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. CMS elected not to appeal the Court's June 1995 and January 1998 orders. CMS may, however, appeal all rulings at the conclusion of the litigation. If CMS should successfully appeal so that the revised interpretation would be applied retroactively, NMC may be required to refund the payment received from employer health plans for services provided after August 10, 1993 under CMS' original implementation, and to re-bill Medicare for the same services, which would result in a loss to NMC of approximately $120 million attributable to all periods prior to December 31, 1995. Also, in this event, the Company's business, financial condition and results of operations would be materially adversely affected. In July, 2000, NMC filed a complaint in the U.S. District Court for the Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S. Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S. Healthcare and health plans administered by Aetna U.S. Healthcare for claims related to primary payor liability for dual eligible ESRD patients under the Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed the action pending resolution of the District of Columbia Court action. 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 ultimate outcome of these matters is not expected to materially affect the Company's financial position, results of operations or cash flows. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the U.S. anti-kickback statute, the False Claims Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. In the U.S., enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates a large number facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliate 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 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 24 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. 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBIT NO. DESCRIPTION - ----------- ----------- Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and Fresenius AG (incorporated herein by reference to Appendix A to the Joint Prox Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). 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). 26 Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 1997). Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). 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). 27 Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on November 11, 2000). Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A). as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558). Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558). Exhibit 4.15 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 4.16 Senior Subordinated Indenture dated November 27, 1996, among Fresenius Medical Care AG, State Street Bank and Trust Company, as successor to Fleet National Bank, as Trustee and the Subsidiary Guarantors named therein (incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.17 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 4.18 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 4.19 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 (Registration No. 333-66558)). Exhibit 4.20 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 28 reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 10.1 Employee Benefits and Compensation Agreement dated September 27, 1996 by and among W. R. Grace & Co., National Medical Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated herein by reference to the Registration Statement on Form F-1 of Fresenius Medical Care AG, as amended (Registration No. 333-05922), dated November 22, 1996 and the exhibits thereto). Exhibit 10.2 Purchase Agreement, effective January 1, 1995, between Baxter Health Care Corporation and National Medical Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.3* Product Purchase Agreement effective January 1, 2001 between Amgen, Inc. and National Medical Care, Inc. and Everest Healthcare Services Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on May 15, 2001). Exhibit 10.4 Primary Guarantee dated July 31, 1996 (incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-09497) dated August 2, 1996 and the exhibits thereto). Exhibit 10.5 Secondary Guarantee dated July 31, 1996 (incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-09497) dated August 2, 1996 and the exhibits thereto). Exhibit 10.6 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 10.7 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 10.8 Amended and Restated Transfer and Administration Agreement dated as October 26, 2000 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.9 Employment Agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992). Exhibit 10.10 Modification to FUSA Employment Agreement effective as of January 1, 1998 by and between Ben J. Lipps and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between Jerry A. Schneider and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between Ronald J. Kuerbitz and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.13 Employment Agreement dated March 15, 2000 by and between J. Michael Lazarus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.14 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). 29 Exhibit 10.15 Employment Agreement dated June 1, 2000 by and between John F. Markus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.16 Subordinated Loan Note dated as of May 18, 1999, among National Medical Care, Inc. and certain Subsidiaries with Fresenius AG as lender (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 22, 1999). Exhibit 11 Statement re: Computation of Per Share Earnings. (b) Reports on Form 8-K The Company filed no current reports on Form 8-K during the quarter for which this report is filed. * Confidential treatment has been requested as to certain portions of this Exhibit. 30 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, 2001 /s/ Ben J. Lipps ------------------------------------------ NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: November 14, 2001 /s/ Jerry A. Schneider ------------------------------------------ NAME: Jerry Schneider TITLE: Chief Financial Officer 31 EX-11 3 b40868fmex11.txt SUBSIDIARIES EXHIBIT 11 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION (DOLLARS AND SHARES IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- The weighted average number of shares of Common Stock were as follows........................... 90,000 90,000 90,000 90,000 ======== ======== ======== ========
Income used in the computation of earnings per share were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- CONSOLIDATED 2001 2000 2001 2000 -------- -------- -------- -------- Net earnings ............................................ $ 31,946 $ 27,669 85,866 $ 75,933 Dividends paid on preferred stocks ...................... (130) (130) (390) (390) -------- -------- -------- -------- Income used in per share computation of earnings........ $ 31,816 $ 27,539 85,476 $ 75,543 ======== ======== ======== ======== Basic and fully dilutive earnings per share ............. $ 0.35 $ 0.31 0.95 $ 0.84 ======== ======== ======== ========
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