-----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, S6UboM6PzBgrsmeorDyd05rBOjkTfDOeIsSMPYoBnGCFoWb0/qr2hupIJ1mV1chn 8y3PEiUCm7sAx5a+ewBUAQ== 0000950135-97-002355.txt : 19970514 0000950135-97-002355.hdr.sgml : 19970514 ACCESSION NUMBER: 0000950135-97-002355 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRESENIUS NATIONAL MEDICAL CARE HOLDINGS INC 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: 97602449 BUSINESS ADDRESS: STREET 1: TWO LEDGEMONT CENTER STREET 2: 95 HAYDEN AVE CITY: LEXINGTON STATE: MA ZIP: 02173 BUSINESS PHONE: 6174029000 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /NY/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 10-Q 1 FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended: March 31, 1997 ------------------------------- 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 NATIONAL 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.) Two Ledgemont Center, 95 Hayden Avenue, Lexington, MA 02173 - -------------------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code: 617-402-9000 ------------ - -------------------------------------------------------------------------------- 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 --- --- 2 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: 90,000,000, all of which are held by Fresenius Medical Care AG. 3 FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Consolidated Interim Statements of Earnings Consolidated Balance Sheets Consolidated Statements of Cash Flows Notes to Consolidated Interim Financial Statements ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION PART II: OTHER INFORMATION Item 1 Legal Proceedings Item 6 Exhibits 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED, CONSOLIDATED INTERIM STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUCCESSOR PREDECESSOR ------------ ------------ THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, MARCH 31, 1997 1996 ------------ ------------ NET REVENUES Health care services ...................... $512,241 $488,371 Medical supplies .......................... 112,153 39,920 -------- -------- 624,394 528,291 -------- -------- EXPENSES Cost of health care services .............. 304,712 287,531 Cost of medical supplies .................. 88,941 27,902 General and administrative expenses ....... 89,491 101,447 Provision for doubtful accounts ........... 22,498 21,486 Depreciation and amortization ............. 59,191 30,628 Research and development .................. 1,133 686 Allocation of Grace Chemicals expenses .... - 2,017 Interest expense, net, and related financing costs ......................... 41,214 7,004 -------- -------- 607,180 478,701 -------- -------- EARNINGS BEFORE INCOME TAXES ................ 17,214 49,590 PROVISION FOR INCOME TAXES .................. 10,577 23,145 -------- -------- NET EARNINGS ................................ $ 6,637 $ 26,445 ======== ======== Earnings per share .......................... $ 0.07 $ 0.27
See accompanying Notes to Unaudited, Consolidated Interim Financial Statements -1- 5 FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SUCCESSOR ----------------------------------- MARCH 31, 1997 DECEMBER 31, (UNAUDITED) 1996 ----------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 58,412 $ 50,422 Accounts receivable, less allowances of $148,505 and $153,939 500,664 516,083 Inventories 148,364 153,480 Deferred income taxes 135,702 146,751 Other current assets 89,972 86,907 ----------- ----------- Total Current Assets 933,114 953,643 ----------- ----------- Properties and equipment, net 535,030 525,988 ----------- ----------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $69,924 and $37,933 3,135,503 3,057,957 Other assets and deferred charges 53,142 58,491 ----------- ----------- Total Other Assets 3,188,645 3,116,448 ----------- ----------- Total Assets $ 4,656,789 $ 4,596,079 =========== =========== LIABILITIES AND EQUITY Current Liabilities: Current portion of long-term debt and capitalized lease obligations $ 19,638 $ 56,270 Short-term borrowings from affiliates - 12,193 Accounts payable 114,630 131,314 Accrued liabilities 378,481 421,240 Net payable to affiliates 34,263 32,590 Accrued income taxes 28,756 18,530 ----------- ----------- Total Current Liabilities 575,768 672,137 Long-term debt 1,606,514 1,420,959 Non-current borrowings from affiliates 483,458 504,693 Capitalized lease obligations 14,703 17,246 Deferred income taxes 168,539 179,290 Other liabilities 35,728 34,015 ----------- ----------- Total Liabilities 2,884,710 2,828,340 ----------- ----------- Equity: Equity 1,775,082 1,768,574 Cumulative translation adjustment (3,003) (835) ----------- ----------- Total Equity 1,772,079 1,767,739 ----------- ----------- Total Liabilities and Equity $ 4,656,789 $ 4,596,079 =========== ===========
See accompanying Notes to Unaudited, Consolidated Interim Financial Statements. -2- 6 FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR ------------ ------------ THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, MARCH 31, 1997 1996 ------------ ----------- Cash Flows Provided by Operating Activities: Net earnings $ 6,637 $ 26,445 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 59,191 30,628 Provision for doubtful accounts 22,498 21,486 Provision for (benefit of) deferred income taxes 298 (1,911) Loss on disposal of properties and equipment 1,556 1,136 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Decrease (increase) in accounts receivable 1,163 (43,070) Decrease in inventories 6,286 249 Increase in other current assets (2,901) (12,347) Decrease (increase) in other assets and deferred charges 3,855 (1,930) Decrease (increase) in accounts payable (19,537) 5,764 Increase in accrued income taxes 10,226 10,350 Decrease in accrued liabilities (44,686) (30,841) Increase in other long-term liabilities 1,713 4,261 Net changes due to/from affiliates 1,673 - Other, net 5,631 362 --------- --------- Net cash provided by operating activities 53,603 10,582 --------- --------- Cash Flows from Investing Activities: Capital expenditures (35,487) (24,584) Payments for acquisitions, net of cash acquired (129,049) (24,681) --------- --------- Net cash used in investing activities (164,536) (49,265) Cash Flows from Financing Activities: Increase in borrowings from affiliates (33,428) - Cash dividends paid (130) - Proceeds on issuance of debt 594,297 94,332 Payments on debt and capitalized leases (447,916) (126,746) Advances from Grace Chemicals, net - 69,367 --------- --------- Net cash provided by financing activities 112,823 36,953 --------- --------- Effects of changes in foreign exchange rates 6,100 2,055 --------- --------- (Decrease) increase in cash and cash equivalents 7,990 325 Cash and cash equivalents at beginning of period 50,422 33,530 --------- --------- Cash and cash equivalents at end of period $ 58,412 $ 33,855 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 40,676 $ 6,828 Income taxes 3,708 3,665
See accompanying Notes to Unaudited, Consolidated Interim Financial Statements -3- 7 FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY, REORGANIZATION AND BASIS OF PRESENTATION THE COMPANY Fresenius National Medical Care Holdings, Inc., ("FNMC"), formerly known as W. R. Grace & Co. ("Grace New York"), together with its wholly owned subsidiaries, National Medical Care, Inc. and its subsidiaries ("NMC") and Fresenius USA, Inc. and its subsidiaries ("FUSA") and together with FNMC, (the "Company"), was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization dated as of February 4, 1996 by and between Grace New York and Fresenius AG (the "Reorganization") which is more fully described hereunder. The Company is primarily engaged in (i) providing kidney dialysis services, (ii) manufacturing and distributing products and equipment for dialysis treatment and providing clinical laboratory testing and other medical services, and (iii) providing home infusion therapy and home respiratory services. THE REORGANIZATION The Reorganization, which was effective September 30, 1996, resulted from the culmination of the following transactions: (1) NMC, which was a subsidiary of W. R. Grace & Co. -- Conn. ("Grace Chemicals"), a wholly-owned subsidiary of Grace New York, borrowed $2.3 billion and paid a cash dividend of approximately $2.1 billion to Grace Chemicals; (2) the stock of NMC was transferred to Grace New York, so that NMC and Grace Chemicals became sibling subsidiaries of Grace New York; (3) the stock of Grace Chemicals was transferred to a newly formed Delaware subsidiary of Grace New York ("New Grace") and the shares of New Grace were spun-off to the Grace New York shareholders in a pro rata distribution; (4) Grace New York was recapitalized such that each Grace New York shareholder received one share of Class D Preferred Stock of Grace New York (the "Class D Preferred Stock") for each share of Grace New York common stock held; and (5) Grace New York, with NMC as its sole business, merged with a wholly-owned subsidiary of Fresenius Medical Care AG ("FMC"), and Fresenius AG's worldwide dialysis business ("FWD") was contributed as separate subsidiaries of FMC with the result that 44.8% of the ordinary shares of FMC were exchanged for the common stock held by Grace New York common shareholders in the merger transaction and the balance of the ordinary shares of FMC were received by Fresenius AG and the shareholders of FUSA, in consideration of the contribution of FWD to FMC. All of the Grace New York (now "FNMC") common stock is held by FMC, while the Class D Preferred Stock (which entitles its shareholders to a contingent dividend based on the consolidated performance of FMC in the years 1997-2001) and other previously issued classes of Grace New York preferred stock remain outstanding. Effective October 1, 1996, FMC contributed all of the assets and liabilities of FUSA to FNMC. The contribution of FUSA to FNMC by FMC was accounted for on the cost basis since FUSA was a subsidiary under control of a common parent. These consolidated interim financial statements -4- 8 include the results of FUSA's operations and cash flows for the period January 1, 1997 through March 31, 1997. BASIS OF PRESENTATION Basis of Consolidation - Predecessor Basis The consolidated interim financial statements have been prepared as if the Company had operated as an independent, stand alone entity for all periods presented. Such financial statements have been prepared using the historical basis of accounting prior to the Reorganization ("Predecessor") and include all of the assets, liabilities, revenues, expenses and related taxes on income of the Grace New York health care business operated by NMC (the "NMC Business") previously included in the consolidated interim financial statements of Grace New York and its subsidiaries prior to the Reorganization (the "Grace Consolidated Group"). Consequently, these consolidated interim financial statements include balances for goodwill and other assets and liabilities related to the NMC Business that were previously included in the financial statements of the Grace Consolidated Group, except that there is no allocation to the NMC Business of Grace Chemicals' borrowings and related interest expense. These consolidated interim financial statements reflect only the borrowings and interest expense of NMC prior to the Reorganization and interest expense of the Company after the Reorganization. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 55 ("SAB 55"), the financial statements have also been adjusted to include certain expenses incurred by Grace Chemicals on the NMC Business's behalf prior to the Reorganization. These consolidated interim financial statements do not necessarily indicate the financial position and results of operations that would have occurred if the NMC Business were a stand-alone entity on the dates, and for the periods, indicated. Accounting for the Reorganization - Successor Basis The issuance of FMC ordinary shares for all of the common stock of NMC has been recorded as an acquisition in accordance with the purchase method of accounting. Accordingly, purchase accounting adjustments recorded by FMC have been "pushed down" to NMC, thus establishing a new basis of accounting at NMC ("Successor"). The purchase price of the acquisition was determined as the average of the mid-points of the ranges of valuation of NMC and FMC, respectively, as assigned by independent financial advisors to Fresenius AG and was approximately $1,152,000. The valuation has been increased for direct costs incurred to consummate the transaction. The excess of the purchase price over the cost of the net identifiable assets acquired at September 30, 1996 of $1,696,698 has been allocated to the fair value of the assets acquired and liabilities assumed with the remaining portion recorded as goodwill. The Agreement and Plan for Reorganization also provides for the payment of additional purchase price to the holders of the FNMC Class D Preferred Stock in the form of a dividend, contingent upon the attainment of certain specific consolidated operating results by FMC. Such future dividends, if any, will be recorded as an increase in goodwill. -5- 9 In order to properly allocate purchase price to assets acquired, the Company obtained an independent appraisal to fair value all assets of NMC. Accordingly, the carrying values of specifically identified intangible assets and certain tangible assets were adjusted upward by $186,030 and $57,768, respectively, to approximate their fair values. The Company has also recorded adjustments to increase liabilities assumed by approximately $123,000 for preacquisition contingencies primarily related to legal settlements and the anticipated costs incurred in the defense of litigation. These adjustments resulted from discussions with the government in March 1997. The Company has provided an estimate of legal costs at the low end of an expected range, but the ultimate costs could be significantly higher. The Company is in discussions with the government regarding these matters. Any difference between the final settlement and the Company's estimate would be adjusted to goodwill, if determined within the allocation period, or charged to income if determined thereafter. In addition, the Company has accrued approximately $50,000 for certain costs related to the closing of certain renal products manufacturing and distribution operations as well as the closing of certain clinics of the Homecare Division. These restructuring costs primarily relate to severance payments and lease commitments. Through the period ended March 31, 1997 approximately $700 in payments have been applied against the preacquisition contingencies and $23,500 against the restructuring costs. All intercompany transactions and balances have been eliminated in consolidation. NOTE 2. INVENTORIES
SUCCESSOR ------------------------------ MARCH 31, DECEMBER 31, 1997 1996 --------- ------------ Inventories Raw materials $ 41,312 $ 41,659 Manufactured goods in process 11,755 11,837 Manufactured and purchased inventory available for sale 61,789 64,156 -------- -------- 114,856 117,652 Health care supplies 33,508 35,828 -------- -------- Total $148,364 $153,480 ======== ========
NOTE 3. DEBT Long-term debt to outside parties consists of:
SUCCESSOR ------------------------------- MARCH 31, DECEMBER 31, 1997 1996 ---------- ------------ Credit Agreement $1,605,000 $1,411,000 Third-party debt, primarily bank borrowings at variable interest rates (3% - 14%) with various maturities 11,942 57,101 ---------- ---------- 1,616,942 1,468,101 Less amounts classified as current 10,428 47,142 ---------- ---------- $1,606,514 $1,420,959 ========== ==========
-6- 10 NOTE 4. EQUITY At March 31, 1997, and December 31, 1996, respectively, the components of FNMC's Equity, excluding Cumulative Translation Adjustment, as presented in the Consolidated Balance Sheet are as follows:
Successor ------------------------------ March 31, December 31, 1997 1996 ---------- ----------- Preferred Stocks, $100 par value - 6% Cumulative (1); 40,000 shares authorized; 36,460 outstanding $ 3,646 $ 3,646 - 8% Cumulative Class A (2); 50,000 shares authorized; 16,176 outstanding 1,618 1,618 - 8% Noncumulative Class B (2); 40,000 shares authorized; 21,483 outstanding 2,148 2,148 ---------- ---------- 7,412 7,412 Preferred Stocks, $.10 par value - Noncumulative Class D (3), 100,000,000 shares authorized; 89,061,590 outstanding 8,906 8,906 ---------- ---------- Total Preferred 16,318 16,318 Common Stock, $1 par value: 300,000,000 shares authorized, 90,000,000 outstanding 90,000 90,000 Paid in Capital 1,723,345 1,723,345 Retained Earnings (54,581) (61,089) ---------- ---------- Total Equity $1,775,082 $1,768,574 ========== ==========
(1) 160 votes per share (2) 16 votes per share (3) 1/10 vote per share NOTE 5. COMMITMENTS AND CONTINGENCIES Contingent Non-NMC Liabilities of Grace New York (Now Known as Fresenius National Medical Care Holdings, Inc.) In connection with the Reorganization, Grace Chemicals has agreed to indemnify Grace New York and NMC against all liabilities of Grace New York, whether relating to events occurring before or after the Reorganization, other than liabilities arising from or relating to NMC operations. After the Reorganization, Grace New York will remain contingently liable for certain liabilities with respect to pre-Reorganization matters that are not related to NMC operations. Grace New York believes that in view of the nature of the non-NMC liabilities and the expected impact of the Reorganization on Grace Chemicals' financial position, the risk of significant loss from non-NMC liabilities is remote. Were events to violate the tax free nature of the Reorganization, the resulting tax liability would be the obligation of FNMC. Subject to representations by Grace Chemicals, FNMC and Fresenius AG, Grace Chemicals has agreed to indemnify FNMC for such a tax liability. Were FNMC not able to collect on the indemnity, the tax liability would have a material adverse effect on the financial position of FNMC and the results of its operations. -7- 11 OIG Investigative Subpoenas In October 1995, NMC received five investigative subpoenas from the Office of Inspector General of the U.S. Department of Health and Human Services (the "OIG"). The subpoenas were issued in connection with an investigation being conducted by the OIG, the U.S. Attorney for the District of Massachusetts and others concerning possible violations of federal laws, including the Anti-kickback Statute and the False Claims Act. The subpoenas call for extensive document production relating to various aspects of NMC's business. A sixth subpoena, clarifying the scope of one originally served, was received in May 1996. The five subpoenas cover the following areas: (a) NMC's corporate management, personnel and employees, organizational structure, financial information and internal communications; (b) NMC's dialysis services business, principally medical director contracts and compensation; (c) NMC's treatment of credit balances resulting from overpayments received under the Medicare end stage renal disease (ESRD) program, NMC's billing for home dialysis services and payment of supplemental medical insurance premiums on behalf of indigent patients; (d) NMC's LifeChem laboratory business ("LifeChem"), including documents relating to testing procedures, marketing, customers, competition and certain overpayments totaling approximately $4.9 million that were received by LifeChem from the Medicare program with respect to laboratory services rendered between 1989 and 1993; and (e) NMC's Homecare Division and, in particular, information concerning the intradialytic parenteral nutrition ("IDPN") business described below, including billing practices related to various services, equipment and supplies and payments made by third parties as compensation for administering IDPN therapy. The results of the investigation and its impact, if any, cannot be predicted at this time. In the event that a U.S. government agency believes that any wrongdoing has occurred, civil and/or criminal proceedings could be instituted, and if any such proceedings were to be instituted and the outcome were unfavorable, NMC could be subject to substantial fines, penalties and damages or could become excluded from government reimbursement programs. Any such result could have a material adverse effect on NMC's financial position or the results of operations of the Company. FMC and NMC have provided the United States government with a joint and several guarantee of payment of the obligations, if any, arising out of the investigation by the OIG. In support of this guarantee, NMC has delivered to the government an irrevocable standby letter of credit in the amount of $150 million. DIAGNOSTICS SUBPOENA On October 31, 1996, Biotrax International Inc. ("Biotrax") and NMC Diagnostic Services, Inc. ("DSI"), both of which are subsidiaries of FNMC, received an investigatory subpoena from the OIG. The subpoena calls for the production of extensive documents an was issued in connection with an investigation being conducted by the OIG in conjunction with the U.S. Attorney for the Eastern District of Pennsylvania concerning the possible submission of false or improper claims to, and their payment by, the Medicare program. The subpoena calls for the production of documents by December 30, 1996 on corporate organization, business plans, document retention, personnel files, sales and marketing and Medicare billing issues relating to certain procedures offered by the prior owner of the Biotrax business -8- 12 before its assets were acquired by NMC in March 1994 and by DSI following the acquisition. The Company has reviewed the subpoena with its legal counsel and has begun to make extensive document production in response to the subpoena. The outcome of this investigation, its duration, and its effect, if any, on NMC cannot be predicted at this time. If, however, the results of this investigation are adverse to the Company, the Company could face the same types of potential consequences of the OIG investigation. QUI TAM ACTIONS South Florida The Company and NMC have become aware that a qui tam action has been filed in the United States District Court for the Southern District of Florida, Southern Division (the "South Florida Action"). The original complaint in the South Florida Action was filed under seal in 1996. The Relator filed an Amended Complaint under seal on July 8, 1996. The seal with respect to the Amended Complaint was partially lifted pursuant to court order to permit the government to provide FNMC and NMC with a copy of the Amended Complaint. The Company and NMC received copies of the Amended Complaint on July 10, 1996. Pursuant to a court order dated July 26, 1996, the seal was further modified to permit the Company to provide copies of the Amended Complaint to Fresenius AG, lenders involved in the NMC credit facility and their respective counsel and to permit the Company and NMC to describe the allegations of the Amended Complaint in their securities filings with respect to the Reorganization. The Amended Complaint alleges, among other things, that the Company, Grace Chemicals and NMC violated the False Claims Act in connection with certain billing practices regarding IDPN and the administration of EPO. The Amended Complaint alleges that as a result of this allegedly wrongful conduct, the United States suffered actual damages in excess of $200 million and alleges that the defendants are liable to the United States for three times the amount of the alleged damages plus fines of up to $10,000 per false claim. The Amended Complaint also seeks the imposition of a constructive trust on the proceeds of the NMC dividend to Grace Chemicals for the benefit of the United States on the ground that the Reorganization constitutes a fraudulent conveyance that will render NMC unable to satisfy the claims asserted in the Amended Complaint. Tampa The Company and NMC have become aware that a qui tam action has been filed in the United States District Court for the Middle District of Florida, Tampa Division (the "Tampa Action"). The original complaint in the Tampa Action was filed under seal in 1995. The seal with respect to the complaint was partially lifted pursuant to court order to permit the government to provide the Company and NMC with a copy of the complaint. Pursuant to a court order dated November 7, 1996, the seal was further modified to permit the Company and NMC to disclose the complaint to the underwriters involved in two public securities offerings by FMC (the "Offerings") and their counsel, to Fresenius AG, and to lending institutions to whom NMC has contractual obligations, their successors and assigns and their respective counsel and to disclose allegations in the complaint in FMC's filings under the Securities Act of 1933, as amended, with respect to the Offerings and in FMC's and FNMC's periodic filings under the Securities Exchange Act of 1934, as amended. -9- 13 The complaint in the Tampa Action alleges, among other things, that the Company, NMC and certain NMC subsidiaries violated the False Claims Act in connection with the retention of overpayments made under the Medicare program, the alleged submission of claims in violation of applicable cost caps and the payment of supplemental Medicare insurance premiums as an inducement to patients to obtain dialysis products and services from NMC. The complaint alleges that as a result of this allegedly wrongful conduct, the United States suffered damages in excess of $10 million including applicable fines, and alleges that the defendants are liable to the United States for three times the amount of the alleged damages plus fines of up to $10,000 per false claim. Pennsylvania The Company, FNMC and NMC have become aware that a qui tam action has been filed in the United States District Court for the Eastern District of Pennsylvania (the "Pennsylvania Action"). The original complaint in the Pennsylvania Action was filed under seal in February of 1996. The seal with respect to the complaint was partially lifted pursuant to court order to permit the government to provide NMC with a copy of the complaint. Pursuant to a court order dated November 15, 1996, the seal was further modified to permit the Company and NMC to disclose the complaint to the underwriters involved in the Offerings and their counsel, to Fresenius AG, and to lending institutions to whom NMC has contractual obligations, their successors and assigns and their respective counsel and to disclose allegations in the complaint in the Company's filings under the Securities Act with respect to the Offerings and in the Company's and FNMCH's periodic filings under the Exchange Act. The complaint in the Pennsylvania Action alleges, among other things, that a pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for a non-sterile intravenous drug and for intravenous drugs which were allegedly billed in excess of permissible Medicare reimbursement rates. The complaint also claims that the defendants violated the Medicare and Medicaid anti-kickback statutes in connection with the receipt of discounts an other in kind payments as alleged inducements to purchase intravenous drugs. The complaint is focused on the business relationship between the pharmaceutical manufacturer and several providers, one of which is NMC. The complaint claims that as a result of the allegedly wrongful conduct, the United States suffered damages and that the defendants are liable to the United States for three times the amount of the alleged damages plus civil penalties of up to $10,000 per false claim. An adverse result in the Pennsylvania Action or an adverse result in any other qui tam action could have a material adverse affect on the Company's business, financial condition or results of operations. Omnibus Budget Reconciliation Act of 1993 The Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") affected the payment of benefits under Medicare and employer health plans for certain eligible ESRD patients. In July 1994, the Health Care Financing Administration ("HCFA") issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by OBRA 93 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, the patient's employer -10- 14 health plan was responsible for payment, which was generally at a rate higher than that provided under Medicare. In April 1995, HCFA 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. Under the new instruction, no 18-month coordination of benefits period would arise and Medicare would remain the primary payor for the patients affected by OBRA93. HCFA further proposed that its new instruction be effective retroactive to August 1993, the effective date of OBRA 93. Consequently, FNMC may be required to refund payments received from employer health plans for services provided after August 1993 under HCFA's original instruction and to re-bill Medicare for the same services, which would result in a cumulative reduction of net revenues to NMC totaling approximately $120,000 as of March 31, 1997. NMC believes that the April 1995 instruction letter issued by HCFA does not constitute a proper notice of final rulemaking and, accordingly, NMC continued to recognize revenues through the end of June 1995. If HCFA's instruction letter is adjudged by the courts to be the equivalent of a notice of proposed rulemaking, then NMC believes that a 60-day comment period would be required before the rule could become effective. Therefore, NMC believes that it would be allowed to recognize the higher reimbursement rate on dual eligible ESRD patients for 60 days subsequent to the HCFA instruction letter, or approximately through July 1, 1995. Effective July 1, 1995, NMC ceased to recognize the incremental revenue realized under the original instruction, which has resulted in a material reduction in NMC's operating earnings in comparison to prior periods in which NMC recognized such incremental revenue. However, NMC continued to bill the employer health plans as primary payors through December 31, 1995, at which time NMC commenced billing Medicare for the patients affected by OBRA 93. In May 1995, NMC filed suit in the U.S. District Court for the District of Columbia seeking a declaratory judgment with respect to HCFA's instructions relating to OBRA 93. In June 1995, the court granted NMC's motion for a preliminary injunction to preclude HCFA from retroactively enforcing its new instruction. The litigation is continuing with respect to NMC's request to permanently enjoin HCFA's new instruction, both retroactively and prospectively. While there can be no assurance that a permanent injunction will be issued, NMC believes that it will ultimately prevail in its claim that the retroactive reversal by HCFA of its original instruction relating to OBRA 93 was impermissible under applicable law. If HCFA's revised instruction is upheld and applied retroactively, NMC's business, financial position and results of operations would be materially adversely affected. Intradialytic Parenteral Nutrition NMC administers IDPN therapy to chronic dialysis patients who suffer from severe gastrointestinal malfunctions. Since late 1993, Medicare claims processors have sharply reduced the number of IDPN claims approved for payment as compared to prior periods. NMC believes that the reduction in IDPN claims currently being paid by Medicare represents an unauthorized policy coverage change. Accordingly, NMC and other IDPN providers are pursuing various administrative and legal remedies, including administrative appeals, to address this reduction. In November 1995, NMC filed a complaint in the U.S. District Court for the Middle District of Pennsylvania seeking a declaratory judgment and injunctive relief to prevent the implementation of this policy coverage change. -11- 15 NMC management believes that its IDPN claims were consistent with published Medicare coverage guidelines and ultimately will be approved for payment. Such claims represent substantial accounts receivable of NMC, amounting to approximately $149 million (net of a reserve of $47,000) and $140,000 (net of a reserve of $41,000) as of March 31, 1997 and December 31, 1996, respectively, and currently increasing at the rate of approximately $3,000 per month. If NMC is unable to collect its IDPN receivable, or if IDPN coverage is reduced or eliminated, depending on the amount of the receivable that is not collected and/or the nature of the coverage change, NMC's business, financial position and results of operations could be materially adversely affected. In May 1995 the Medicare claims processors circulated a draft coverage policy which, if implemented in the form proposed, would have limited or precluded continued coverage of parenteral and enteral nutrition ("PEN") therapies, including IDPN therapy. In April 1996, NMC received a copy of a revised final version of the new coverage policy, which became effective for services billed on and after July 1, 1996. While the new policy permits continued coverage of IDPN and other PEN therapies, and while the potential impact of the new policy is subject to further analysis, NMC believes that the new policy has made it substantially more difficult to qualify patients for future coverage by, among other things, requiring certain patients to undergo onerous and/or invasive tests in order to qualify for coverage. NMC, together with other interested parties, is seeking to effect certain changes in the new policy and NMC has made changes to its patient qualification procedures in order to comply with the policy. However, if NMC is unable to achieve changes in the new policy, if physicians and patients fail to accept the new qualification procedures and/or if patients fail to qualify under such procedures, the policy could significantly reduce the number of patients eligible for Medicare coverage of IDPN and other PEN therapies, which would have a material adverse effect on NMC's financial position and its results of operations. Other Legal Proceedings NMC has received multiple subpoenas from a federal grand jury in the District of New Jersey investigating, among other things, NMC's efforts to persuade the U.S. Food and Drug Administration to lift a January 1991 import hold issued with respect to NMC's Dublin, Ireland facility, whether NMC sold defective products, the manner in which NMC handled customer complaints and the development of a new dialyzer product line. Grace has also received two subpoenas relating to this investigation. In February 1996, the U.S. Attorney for the District of New Jersey notified NMC that it is a target of the New Jersey grand jury investigation, insofar as it relates to possible violations of federal criminal law in connection with efforts to affect the January 1991 import hold referred to above; the material element of the import hold was lifted in 1992. In June 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that the U.S. Attorney had declined to prosecute NMC with respect to a submission related to NMC's effort to lift the import ban. The letter added that NMC remains a subject of a federal grand jury's investigation into other matters. NMC also received a subpoena in June 1996 requesting certain documents in connection NMC's imports of the FoCus [Registered Trademark] dialyzer from January 1991 to November 1995. The outcome of these investigations and their impact, if any, on NMC's business, financial condition and results of operations cannot be predicted at this time. However, the Company believes that neither the Company nor any of its employees committed any violations of law. Accordingly, the Company does not believe that the results of these investigations will have a material adverse effect on the Company's financial position and results of operations. -12- 16 NOTE 6. SUBSEQUENT EVENTS Interest Rate Swap Agreements National Medical Care, Inc. has entered into interest rate swap agreements with various commercial banks for notational amounts totaling $1,500,000. These agreements effectively change NMC interest rate exposure on the majority of its revolving loans to fixed rates of interest between 5.85% and 6.44% plus the applicable margin under its Credit Agreement. The swap agreements all became effective April 3, 1997 and expire at various dates between December 15, 1997 and January 4, 2000. NMC had agreed under its Credit Agreement to have at least $500,000 of interest rate protection. -13- 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of the following discussion, Fresenius National Medical Care Holdings, Inc., ("FNMC") formerly known as W. R. Grace & Co. ("Grace New York"), together with the wholly owned subsidiaries, National Medical Care, Inc. and its subsidiaries ("NMC") and Fresenius USA, Inc. and its subsidiaries ("FUSA") and together with FNMC, (the "Company") was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization dated as of February 4, 1996 by and between Grace New York and Fresenius AG ("the Reorganization"). The following is a discussion of the financial condition and results of operations of FNMC. The discussion should be read in conjunction with the financial statements included elsewhere in this document. This section contains certain forward-looking statements. These forward-looking statements are made based on management's expectations and beliefs concerning future events impacting FNMC, but no assurance can be given that such events will occur or that the results will be as anticipated. Such statements include, without limitation, discussions concerning the outlook of FNMC, government reimbursement, future plans and management's expectations regarding future performance. OVERVIEW FNMC is primarily engaged in (a) providing kidney dialysis services, (b) manufacturing and distributing products and equipment for dialysis treatment and performing clinical laboratory testing and other medical services, and (c) providing home infusion therapy, home respiratory therapy and home health services. Throughout FNMC's history, a significant portion of FNMC's growth has resulted from the development of new dialysis centers and the acquisition of existing dialysis centers, as well as from the acquisition and development of complementary businesses in the health care field. FNMC derives a significant portion of its net revenues from Medicare, Medicaid and other government health care programs (approximately 62% in 1996). The reimbursement rates under these programs, including the Composite Rate, the reimbursement rate for EPO (which accounted for approximately 22% of DSD's domestic net revenues in 1996), and the reimbursement rate for other dialysis and non-dialysis related services and products, as well as other material aspects of these programs, have in the past and may in the future be changed as a result of deficit reduction and health care reform measures. -14- 18 FNMC's business, financial position and results of operations also could be materially adversely effected by an adverse outcome in the OIG investigations, any whistleblower action, the pending challenge by FNMC of changes effected by Medicare in approving reimbursement claims relating to the administration of IDPN or by the recent adoption of a new coverage policy that will change IDPN coverage prospectively. FNMC's business, financial position and results of operations would also be materially adversely affected by an adverse outcome in the pending litigation concerning the implementation of certain provisions of OBRA 93 relating to the coordination of benefits between Medicare and employer health plans in the case of certain dual eligible ESRD patients. FNMC also derives a significant portion of its net revenues from reimbursement by non-government payors. Historically, reimbursement rates paid by these payors generally have been higher than Medicare and other government program rates in all areas except for certain services provided by NMC Homecare. However, non-government payors are imposing cost containment measures that are creating significant downward pressure on reimbursement levels that FNMC receives for its services and products. DSD operated or managed dialysis centers in 14 foreign countries at March 31, 1997. In certain countries, FNMC experiences lower reimbursement rates per treatment for dialysis services than are generally realized in the U.S. FNMC's international dialysis services operations currently generate less operating profit per treatment than domestic dialysis operations due to both the lower reimbursement rates in some countries and the start-up nature of many of the centers in foreign countries. RESULTS OF OPERATIONS The following table summarizes certain operating results of FNMC by principal business unit for the periods indicated. Intercompany eliminations primarily reflect sales of medical supplies by Renal Products to DSD. -15- 19
THREE MONTHS ENDED ------------------ 1997 1996 ----- ----- (dollars in millions) Net Revenues: Dialysis Services $460 $419 Dialysis Products 159 80 NMC Homecare 64 78 Intercompany Eliminations (59) (49) ---- ---- Total Net Revenues $624 $528 ==== ==== Operating Earnings: Dialysis Services $ 61 $ 62 Dialysis Products 19 9 NMC Homecare 4 7 ---- ---- 84 78 ---- ---- Other Expenses: General Corporate, 24 21 Research and Development 1 1 Interest Expense, Net 41 7 ---- ---- Total Other Expenses 66 29 ---- ---- Earnings Before Income Taxes 18 49 Provision for Income Taxes 11 23 ---- ---- Net Earnings $ 7 $ 26 ==== ====
-16- 20 PROFORMA RESULTS OF OPERATIONS The following table represents the unaudited pro forma statements of operations of the Company for the three months ended 1996 and the actual statements of operations for the three months ended 1997, assuming the Reorganization occurred on January 1, 1996.
ACTUAL PROFORMA ------ -------- THREE MONTHS ENDED ------------------ 1997 1996 ---- ---- Net Revenues: DSD $460 $419 Renal Products 159 148 NMC Homecare 64 78 Intercompany Eliminations (59) (49) ---- ---- Total Net Revenues 624 596 ==== ==== Operating Earnings DSD 61 62 Renal Products 19 12 NMC Homecare 4 7 ---- ---- Total Operating Earnings 84 81 ---- ---- Other Expenses General Corporate 24 31 Research & Development 1 1 Interest Expense, Net 41 38 ---- ---- Total Other Expenses 66 70 ---- ---- Earnings before income taxes 18 11 Provision for Income Taxes 11 9 ---- ---- Net Earnings 7 2 ==== ====
EFFECT OF REORGANIZATION ON RESULTS OF OPERATIONS In accordance with U.S. GAAP relating to purchase accounting rules, the Company adjusted to fair value its assets and liabilities which, on a pro forma basis, would have resulted in increased amortization of approximately $15 million for the first three months of 1996, shown in the pro forma statement of operations as part of General Corporate expenses. In addition, as part of the Reorganization, the Company incurred additional debt, which resulted in a net increase in interest expense, including amortization of debt issuance costs and other fees, in the amount of $31 million for the first three months of 1996 on a pro forma basis. In connection with the Reorganization, the addition of FUSA for the first quarter of 1996 would have resulted in increased revenues for Renal Products of $68 million and increased operating earnings for Renal Products of $3 million in the first three months of 1996, on a pro forma basis. The Reorganization would have resulted in a decrease in the Company's provision for income taxes of $14 million in the first three months of 1996, on a pro forma basis. As a result of the above adjustments, on a pro forma basis, the Company would have reported net profit of $2 million in the first three months of 1996, as compared to its actual net profit of $26 million in the first three months of 1996. -17- 21 THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 Net revenues for the first three months of 1997 increased by 18% ($97 million) over the comparable period of 1996, with DSD and Renal Products accounting for most of the increase. Net earnings for the first three months of 1997 decreased 73% ($19 million) over the comparable period of 1996 as a result of higher general corporate and interest expenses. Dialysis Services. Dialysis Services net revenues for the first three months of 1997 increased by 10% ($41 million) over the comparable period of 1996, primarily as a result of a 12% increase in the number of treatments provided worldwide. This increase was partially offset by a $4 million decrease in diagnostic services revenues due to a decrease in the number of primary care treatments. LifeChem revenues for the first three months of 1997 decreased by $1 million compared to the similar period of 1996. This was a result of a slight decrease in external lab testing volume. Dialysis Services operating earnings for the first three months of 1997 decreased by 2% ($1 million) over the comparable period of 1996 primarily as a result of the aforementioned decreases in volume of diagnostic services treatments and LifeChem testing. In addition, DSD personnel costs increased by $3 million for the first three months of 1997 over the comparable 1996 period. These decreases to operating earnings were partially offset by increased treatment volume. Dialysis Products. Dialysis Products net revenues for the first three months of 1997 increased by 99% ($79 million) over the comparable period of 1996 primarily due to $81 million of first quarter revenues of FUSA, which was contributed to FNMC by Fresenius Medical Care AG effective October 1, 1996. During 1997, approximately $10 million of product sales were made between FUSA and the former Renal Products Division of NMC which have been eliminated for financial reporting. There were no such eliminations recorded in 1996 as the two companies were separate reporting entities. Dialysis Products operating earnings for the first three months of 1997 increased by 111% ($10 million) over the comparable period of 1996 entirely due to the first quarter operating earnings of FUSA. NMC's Renal Products Division's operating earnings increased by approximately $2 million during the quarter, however, this increase was entirely offset by intercompany profit eliminations now required between FUSA and the Renal Products Division. NMC Homecare. NMC Homecare's net revenues for the first three months of 1997 decreased by 18% ($14 million) as compared to the first three months of 1996. This is primarily due to changes in Medicare qualification procedures for IDPN patients ($10 million), and decreases in infusion therapy revenues mainly due to continued price compression from managed care ($7 million), partially offset by increases in respiratory therapy and other revenues ($3 million). -18- 22 NMC Homecare's operating earnings for the first three months of 1997 decreased by $3 million as compared to the first three months of 1996, primarily due to continued pressure resulting from managed care and the decline in the number of Medicare patients who receive IDPN treatments. Other Expenses. FNMC's other expenses for the first three months of 1997 increased by 128% ($37 million) over the comparable period of 1996. General corporate expense increased by 14% ($3 million) due to increased amortization expenses associated with the revaluation of intangible assets at the time of the Reorganization ($15 million), offset by reduced legal and other expense associated with the OIG investigation ($5 million), favorable savings in foreign exchange ($5 million) and reduced provisions for long term incentive compensation ($2 million). Research and development expenses for the first three months of 1997 were virtually the same as they were for the comparable period of 1996. Interest expense for the first three months of 1997 increased by 485% ($34 million) over the comparable period of 1996 mainly due to the large amount of bank debt incurred to finance the reorganization and the interest expense associated with FUSA in the first quarter of 1997 ($2 million). Income Tax Rate. The effective tax rate for the first three months of 1997 (61.4%) is significantly higher than the rate for the first three months of 1996 (46.7%) due primarily to the large amount of non-deductible goodwill incurred as a result of the reorganization. LIQUIDITY AND CAPITAL RESOURCES FNMC made acquisitions totaling $129 million and $25 million, during the first three months of 1997 and 1996, respectively. FNMC made capital expenditures for internal expansion, improvements, new furnishings and equipment of $35 million and $25 million during the first three months of 1997 and 1996, respectively. The Company intends to capitalize on the continuing shift in the U.S. from physician-owned and hospital-based dialysis clinics to multi-center providers by acquiring existing dialysis centers and the establishment of new or expanded centers and, accordingly, will require significant capital resources to pursue its growth strategy in the dialysis marketplace. FNMC may also make other strategic acquisitions in the future. FNMC also requires capital resources for working capital purposes. FNMC used cash to fund increases in accounts receivable of $16 million and $43 million during the first three months of 1997 and 1996, respectively. The increases in accounts receivable reflect growth in NMC's business operations and, beginning in 1994, the sharp reduction in IDPN claims approved for payment. -19- 23 FNMC historically funded its acquisitions and capital expenditures with cash advances from the Grace consolidated group and cash from operations supplemented by financing programs, including the accounts receivable securitization program. FNMC generated net cash from operations of $54 million and $11 million during the first three months of 1997 and 1996, respectively. FNMC received net cash advances from Grace of $69 million during the first three months of 1996. Effective July 1, 1995, FNMC ceased to recognize the incremental revenue provided under HCFA's initial instruction under OBRA 93, although it continued to bill private third-party payors for these amounts through December 31, 1995. If FNMC's position with respect to the retroactive application of OBRA 93 is not sustained, it may be required to refund amounts previously collected from private third-party payors (approximately $190 million through June 30, 1995) and rebill Medicare for these services, which would result in an estimated net cash and operating earnings loss of approximately $120 million as of March 31, 1997. FNMC began billing Medicare as the primary payor for the dual eligible ESRD patients affected by OBRA 93 effective January 1, 1996. If HCFA's revised instruction under OBRA 93 is permanently enjoined on a prospective basis, or if such revised instruction is sustained but given an effective date of later than June 30, 1995, FNMC may be able to rebill such services to third-party payors and, as a result, FNMC's future results of operations and financial position would be favorably affected by the incremental revenue that FNMC would recognize. NMC entered into a $2.5 billion Credit Agreement on September 27, 1996 with a group of financial institutions. The Credit Agreement was used to fund a cash dividend to Grace Chemicals of approximately $2.1 billion, finance existing letters of credit and for general corporate purposes. In November 1996, Fresenius Medical Care implemented two financings which raised a total of $731 million, the proceeds of which were invested in FNMC through a $249 million equity infusion and a total of $482 million of loans to FNMC. The funds were used to repay certain borrowings under the Credit Agreement. Also in November 1996, Fresenius Medical Care became a guarantor under the NMC Credit Agreement. The Credit Agreement will be utilized to fund future capital requirements and acquisitions and, to the extent necessary, General Corporate requirements, including future letters of credit, and any claims on the Company which may result from adverse settlements with the government on the OIG or other investigations. FNMC is party to a $200 million receivables financing arrangement. At March 31, 1997, $180 million was outstanding under this agreement, an increase of $32 million from December 31, 1996. National Medical Care, Inc. has entered into interest rate swap agreements with various commercial banks for notational amounts totaling $1,500,000. These agreements effectively change NMC interest rate exposure on the majority of its revolving loans to fixed rates of interest -20- 24 between 5.85% and 6.44% plus the applicable margin under its Credit Agreement. The swap agreements became effective April 3, 1997 and expire at various dates between December 15, 1997 and January 4, 2000. NMC had agreed under its Credit Agreement to have at least $500,000 of interest rate protection in place by March 25, 1997. The liquidity of FNMC is contingent upon a number of factors, principally FNMC's future operating results and the contingencies referred to below. FNMC believes that its current levels of liquidity, including availability under the NMC Credit Agreement, are sufficient to meet its foreseeable needs. If existing sources of funds are not sufficient to provide liquidity, FNMC may need to sell assets or obtain debt or equity financing from additional external sources. There can be no assurance that FNMC will be able to do so on satisfactory terms, if at all. IMPACT OF INFLATION A substantial portion of FNMC'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 FNMC's business and results of operations, possibly materially. CONTINGENCIES FNMC is the subject of investigations by several federal agencies and authorities, is a plaintiff in litigation against the federal government with respect to the implementation of OBRA 93 and coverage for IDPN therapy, and is seeking to change a proposed revision to IDPN coverage policies. An adverse outcome in any of these matters, beyond the reserves which have established, could have a material adverse effect on FNMC's business, financial condition and results of operations. -21- 25 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Intradialytic Parenteral Nutrition NMC administers IDPN therapy to chronic dialysis patients who suffer from severe gastrointestinal malfunctions. Since late 1993, Medicare claims processors have sharply reduced the number of IDPN claims approved for payment as compared to prior periods. NMC believes that the reduction in IDPN claims currently being paid by Medicare represents an unauthorized policy coverage change. Accordingly, NMC and other IDPN providers are pursuing various administrative and legal remedies, including administrative appeals, to address this reduction. In November 1995, NMC filed a complaint in the U.S. District Court for the Middle District of Pennsylvania seeking a declaratory judgment and injunctive relief to prevent the implementation of this policy coverage change. NMC management believes that its IDPN claims were consistent with published Medicare coverage guidelines and ultimately will be approved for payment. Such claims represent substantial accounts receivable of NMC, amounting to approximately $149 million (net of a reserve of $47,000) and $140,000 (net of a reserve of $41,000) as of March 31, 1997 and December 31, 1996, respectively and currently increasing at the rate of approximately $3,000 per month. If NMC is unable to collect its IDPN receivable, or if IDPN coverage is reduced or eliminated, depending on the amount of the receivable that is not collected and/or the nature of the coverage change, NMC's business, financial position and results of operations could be materially adversely affected. In May 1995 the Medicare claims processors circulated a draft coverage policy which, if implemented in the form proposed, would have limited or precluded continued coverage of parenteral and enteral nutrition ("PEN") therapies, including IDPN therapy. In April 1996, NMC received a copy of a revised final version of the new coverage policy, which became effective for services billed on and after July 1, 1996. While the new policy permits continued coverage of IDPN and other PEN therapies, and while the potential impact of the new policy is subject to further analysis, NMC believes that the new policy has made it substantially more difficult to qualify patients for future coverage by, among other things, requiring certain patients to undergo onerous and/or invasive tests in order to qualify for coverage. NMC, together with other interested parties, is seeking to effect certain changes in the new policy and NMC has made changes to its patient qualification procedures in order to comply with the policy. However, if NMC is unable to achieve changes in the new policy, if physicians and patients fail to accept the new qualification procedures and/or if patients fail to qualify under such procedures, the policy could significantly reduce the number of patients eligible for Medicare coverage of IDPN and other PEN therapies, which would have a material adverse effect on NMC's financial position and its results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Not applicable (b) Report on Form 8-K On March 27, 1997, FNMC filed a report on Form 8-K with respect to a change on FNMC's certifying accounting firm. -22- 26 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 National Medical Care Holdings, Inc. DATE: May 13, 1997 /s/ Ben J. Lipps ------------ ------------------------------------------- NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: May 13, 1997 /s/ Christian Fischer ------------ ------------------------------------------- NAME: Christian Fischer TITLE: Principal Accounting Officer -23- EX-11 2 SHARES AND EARNINGS PER SHARE COMPUTATION 1 EXHIBIT 11 FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION (DOLLARS AND SHARES IN THOUSANDS)
SUCCESSOR PREDECESSOR ------------ ----------- THREE MONTHS NINE MONTHS ENDED ENDED MARCH 31, MARCH 31, 1996 1996 ------------ ----------- The weighted average number of shares of Common Stock were as follows 90,000 97,888 ====== ======
Income used in the computation of earnings per share were as follows:
SUCCESSOR PREDECESSOR ------------ ----------- THREE MONTHS NINE MONTHS ENDED ENDED MARCH 31, MARCH 31, 1996 1996 ------------ ----------- Net Income $6,637 $26,445 Dividends paid on preferred stocks (130) (131) ------ ------- Income used in per share computation of earnings $6,507 $26,314 ====== ======= Earnings per share $ 0.07 $ 0.27 ====== =======
-24- EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 58,412 0 500,664 0 148,364 933,114 613,954 78,924 4,656,789 575,768 1,621,217 0 16,318 90,000 1,665,761 4,656,789 112,153 624,394 88,941 393,653 149,815 22,498 41,214 17,214 10,577 6,637 0 0 0 6,637 0.07 0.07
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