SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2002
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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.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-3461988
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(State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.)
95 HAYDEN AVENUE, LEXINGTON, MA 02420
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(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 781-402-9000
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicated by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ------
1
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of the date hereof,
90,000,000 shares of common stock, par value $1.00 per share, are outstanding,
all of which are held by Fresenius Medical Care AG.
2
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS PAGE
Unaudited Consolidated Statements of Operations................ 4
Unaudited Consolidated Statements of Comprehensive Income...... 5
Unaudited Consolidated Balance Sheets.......................... 6
Unaudited Consolidated Statements of Cash Flows................ 7
Notes to Unaudited Consolidated Interim Financial Statements... 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................... 26
ITEM 4: CONTROLS AND PROCEDURES........................................ 26
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings.............................................. 27
ITEM 6: Exhibits and Reports on Form 8-K............................... 29
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET REVENUES
Health care services................................ $ 834,079 $ 794,908 $ 2,432,365 $ 2,328,721
Medical supplies.................................... 114,566 121,600 340,584 359,855
----------- ----------- ----------- -----------
948,645 916,508 2,772,949 2,688,576
----------- ----------- ----------- -----------
EXPENSES
Cost of health care services........................ 592,293 548,856 1,731,217 1,597,208
Cost of medical supplies............................ 79,660 84,674 234,278 258,174
General and administrative expenses................. 101,065 68,769 256,905 240,444
Provision for doubtful accounts..................... 24,482 28,859 71,820 65,981
Depreciation and amortization....................... 36,049 63,355 108,122 187,819
Research and development............................ 2,758 1,373 6,763 3,620
Interest expense, net and related financing costs
including $26,119 and $37,757 for the three
months and $93,485 and $99,861 for the nine
months ended, respectively, of interest with
affiliates........................................ 50,543 59,457 161,384 170,085
----------- ----------- ----------- -----------
886,850 855,343 2,570,489 2,523,331
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ..... 61,795 61,165 202,460 165,245
PROVISION FOR INCOME TAXES............................. 25,387 29,219 81,120 79,379
----------- ----------- ----------- -----------
NET INCOME BEFORE EXTRAORDINARY ITEM................... 36,408 31,946 121,340 85,866
Extraordinary loss on early redemption of borrowings
from affiliates, net of tax benefit of $6,520....... -- -- 9,780 --
----------- ----------- ----------- -----------
NET INCOME ............................................ $ 36,408 $ 31,946 $ 111,560 $ 85,866
=========== =========== =========== ===========
Basic and fully dilutive net income before
extraordinary item per share......................... $ 0.40 $ 0.35 $ 1.34 $ 0.95
Basic and fully dilutive net income per share.......... $ 0.40 $ 0.35 $ 1.24 $ 0.95
See accompanying Notes to Unaudited, Consolidated Financial Statements.
4
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
NET INCOME....................................... $ 36,408 $ 31,946 $ 111,560 $ 85,866
Other comprehensive income
Foreign currency translation adjustments...... (363) 171 750 55
Derivative instruments (net of deferred tax
benefit of $6,797 and $16,702 for the
three months and $7,955 and $33,031 for
the nine months ended, respectively)......... (7,802) (24,551) (13,724) (48,446)
-------- --------- --------- --------
Total other comprehensive income.......... (8,165) (24,380) (12,974) (48,391)
-------- --------- --------- --------
COMPREHENSIVE INCOME............................. $ 28,243 $ 7,566 $ 98,586 $ 37,475
======== ========= ========= ========
See accompanying Notes to Unaudited, Consolidated Financial Statements.
5
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 36,650 $ 26,786
Accounts receivable, less allowances of
$113,522 and $103,859........................ 370,611 423,912
Inventories.................................... 193,403 202,221
Deferred income taxes.......................... 173,912 196,831
Other current assets........................... 123,159 119,592
----------- -----------
Total Current Assets....................... 897,735 969,342
----------- -----------
Properties and equipment, net..................... 541,520 520,620
----------- -----------
Other Assets:
Excess of cost over the fair value of net
assets acquired and other intangible assets,
net of accumulated amortization of $753,909
and $718,939................................ 3,424,086 3,418,544
Other assets and deferred charges.............. 129,337 94,460
----------- -----------
Total Other Assets................................ 3,553,423 3,513,004
----------- -----------
Total Assets...................................... $ 4,992,678 $ 5,002,966
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and
capitalized lease obligations............... 688,217 152,046
Current portion of borrowing from affiliates... 268,819 291,360
Accounts payable............................... 100,204 125,530
Accrued liabilities............................ 252,401 229,153
Accrued special charge for legal matters....... 203,561 224,037
Net accounts payable to affiliates............. 44,283 39,934
Accrued income taxes........................... 84,365 83,654
----------- -----------
Total Current Liabilities................... 1,641,850 1,145,714
Long-term debt.................................... -- 300,600
Non-current borrowings from affiliates............ 651,268 1,005,669
Capitalized lease obligations..................... 1,812 1,675
Deferred income taxes............................. 120,071 113,046
Other liabilities................................. 141,971 146,170
----------- -----------
Total Liabilities.............................. 2,556,972 2,712,874
----------- -----------
Mandatorily Redeemable Preferred Securities....... 739,748 692,330
----------- -----------
Equity:
Preferred stock, $100 par value................ 7,412 7,412
Preferred stock, $.10 par value ............... 8,906 8,906
Common stock, $1 par value; 300,000,000 shares
authorized; outstanding 90,000,000............. 90,000 90,000
Paid in capital................................... 1,945,014 1,945,014
Retained deficit.................................. (291,579) (402,749)
Accumulated comprehensive loss.................... (63,795) (50,821)
----------- ------------
Total Equity................................... 1,695,958 1,597,762
----------- -----------
Total Liabilities and Equity...................... $ 4,992,678 $ 5,002,966
=========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements.
6
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2002 2001
----------- -----------
Cash Flows from Operating Activities:
Net Income................................................... $ 111,560 $ 85,866
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization............................. 108,122 187,819
Provision for doubtful accounts........................... 71,820 65,981
Deferred income taxes..................................... 37,898 33,277
Loss on disposal of properties and equipment.............. 1,707 283
Extraordinary loss on early redemption of borrowings from
affiliates, net........................................ 9,780 --
Changes in operating assets and liabilities, net of effects of
purchase acquisitions and foreign exchange:
Increase in accounts receivable.............................. (32,623) (118,484)
Decrease (increase) in inventories........................... 8,839 (25,073)
Increase in other current assets............................. (3,567) (6,487)
Decrease in IDPN accounts receivable......................... -- 5,189
(Increase) decrease in other assets and deferred charges...... (7,558) 990
Decrease in accounts payable................................. (25,325) (15,765)
Increase in accrued income taxes............................. 7,231 32,667
Increase (decrease) in accrued liabilities................... 20,963 (20,956)
Decrease in accrued special charge for legal matters......... (19,854) --
Decrease in other long-term liabilities...................... (14,076) (2,712)
Net changes due to/from affiliates........................... 4,349 27,184
Other, net................................................... (656) (11,416)
------------ -----------
Net cash provided by operating activities....................... 278,610 238,363
----------- -----------
Cash Flows from Investing Activities:
Capital expenditures......................................... (87,382) (84,439)
Payments for acquisitions, net of cash acquired.............. (35,747) (376,273)
Increase in other assets..................................... (1,000) (17,925)
------------ ------------
Net cash used in investing activities........................... (124,129) (478,637)
------------ ------------
Cash flows from Financing Activities:
Payments on settlement of investigation...................... -- (85,920)
Net (decrease) increase in borrowings from affiliates........ (376,942) 189,029
Premium on early redemption of debt.......................... (16,300) --
Cash dividends paid.......................................... (390) (390)
Proceeds from receivable financing facility.................. 14,000 2,700
Proceeds from mandatorily redeemable preferred securities.... -- 383,882
Net increase (decrease) on debt and capitalized leases....... 234,283 (242,657)
Other net.................................................... -- 2,627
----------- -----------
Net cash (used in) provided by financing activities............. (145,349) 249,271
----------- -----------
Effects of changes in foreign exchange rates.................... 732 115
----------- -----------
Change in cash and cash equivalents............................. 9,864 9,112
----------- -----------
Cash and cash equivalents at beginning of period................ 26,786 33,327
----------- -----------
Cash and cash equivalents at end of period...................... $ 36,650 $ 42,439
=========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements
7
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2002 2001
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest....................................... $ 174,613 $ 151,954
Income taxes paid, net......................... 36,000 5,621
Details for Acquisitions:
Assets acquired................................... 38,159 423,583
Liabilities assumed............................... (2,412) (47,310)
--------- ---------
Net cash paid for acquisitions.................... $ 35,747 $ 376,273
========= =========
See accompanying Notes to Unaudited Consolidated Financial Statements
8
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY
Fresenius Medical Care Holdings, Inc., a New York corporation ("the
Company") is a subsidiary of Fresenius Medical Care AG, a German corporation
("FMCAG" or "Fresenius Medical Care"). The Company conducts its operations
through five principal subsidiaries, National Medical Care, Inc. ("NMC");
Fresenius USA Marketing, Inc., Fresenius USA Manufacturing, Inc., and SRC
Holding Company, Inc. ("SRC"), all Delaware corporations and Fresenius USA,
Inc., a Massachusetts corporation.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries and those financial statements where the
Company controls professional corporations in accordance with Emerging Issues
Task Force Issue 97-2.
The Company is primarily engaged in (i) providing kidney dialysis
services, and clinical laboratory testing, and (ii) manufacturing and
distributing products and equipment for dialysis treatment.
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION
The consolidated financial statements in this report at September 30,
2002 and 2001 and for the three and nine month interim periods then ended are
unaudited and should be read in conjunction with the audited, consolidated
financial statements in the Company's 2001 report on Form 10-K. Such interim
financial statements reflect all adjustments that, in the opinion of management,
are necessary for a fair presentation of the results of the interim periods
presented. Certain amounts in the prior periods' consolidated financial
statements have been reclassified to conform to the current periods' basis of
presentation.
The results of operations and cash flows for the three and nine month
periods ended September 30, 2002 are not necessarily indicative of the results
of operations and cash flows for the fiscal year ending December 31, 2002.
All intercompany transactions and balances have been eliminated in
consolidation.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available
to common shareholders by the weighted-average number of common shares
outstanding during the year. Diluted net income per share includes the effect of
all dilutive potential common shares that were outstanding during the year. The
number of shares used to compute basic and diluted net income per share was
90,000 in all periods as there were no potential common shares and no
adjustments to income available to common shareholders to be considered for
purposes of the diluted net income per share calculation.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
------ ------ ------ ------
The weighted average number of shares of
Common Stock were as follows.............. 90,000 90,000 90,000 90,000
====== ====== ====== ======
9
Net income used in the computation of earnings per share were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2002 2001 2002 2001
------- ------- -------- -------
NET INCOME BEFORE EXTRAORDINARY ITEM
Net income before extraordinary item........ $36,408 $31,946 $121,340 $85,866
Dividends paid on preferred stock........... (130) (130) (390) (390)
------- ------- -------- -------
Income available to common shareholders..... $36,278 $31,816 $120,950 $85,476
======= ======= ======== =======
Basic and fully dilutive net income before
extraordinary item per share............... $ 0.40 $ 0.35 $ 1.34 $ 0.95
======= ======= ======== =======
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2002 2001 2002 2001
------- ------- -------- -------
NET INCOME
Net income.................................. $36,408 $31,946 $111,560 $85,866
Dividends paid on preferred stock........... (130) (130) (390) (390)
------- ------- -------- -------
Income available to common shareholders..... $36,278 $31,816 $111,170 $85,476
======= ======= ======== =======
Basic and fully dilutive net income per
share..................................... $ 0.40 $ 0.35 $ 1.24 $ 0.95
======= ======= ======== =======
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted the provisions of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities and the
related amendments of SFAS No. 138. The cumulative effect of adopting SFAS 133
as of January 1, 2001 was not material to the Company's consolidated financial
statements.
The Company is exposed to market risk due to changes in interest rates and
foreign currencies. The Company uses derivative financial instruments, including
interest rate swaps and foreign exchange contracts, as part of its risk
management strategy. These instruments are used as a means of hedging exposure
to interest rate and foreign currency fluctuations in connection with debt
obligations, forecasted raw material purchases and other obligations and Euro
denominated mandatorily redeemable preferred stock.
The interest rate swaps are designated as cash flow hedges effectively
converting certain variable interest rate payments into fixed interest rate
payments. After tax losses of $10.7 million ($17.8 million pretax) for the three
months ended September 30, 2002 and after tax losses of $14.5 million ($24.2
million pretax) for the nine months ended September 30, 2002 were deferred in
other comprehensive income. Interest payable and receivable under the swap terms
are accrued and recorded as adjustments to interest expense at each reporting
date.
The Company enters into forward rate agreements that are designated and
effective as hedges of forecasted raw material purchases and other obligations.
After tax gains of $0.7 million ($1.1 million pretax) for the three months ended
September 30, 2002 and after tax gains of $0.4 million ($0.6 million pretax) for
the nine months ended September 30, 2002 were deferred in other comprehensive
income and will be reclassified into cost of sales in the period during which
the hedged transactions affect earnings. All deferred amounts will be
reclassified into earnings within the next twelve months.
The Company enters into forward rate agreements that are designated and
effective as hedges of changes in the fair value of the Euro denominated
mandatorily redeemable preferred stock. Changes in fair value are recorded in
earnings and offset against gains and losses resulting from the underlying
exposures. After tax losses of $1.3 million ($2.2 million pretax) for the three
months ended September 30, 2002 and after tax gains of $0.4 million ($0.7
million pretax) for the nine months ended September 30, 2002 were
10
deferred in other comprehensive income. Ineffective amounts had no material
impact on earnings for the three and nine months ended September 30, 2002.
Periodically, the Company enters into derivative instruments with related
parties to form a natural hedge for currency exposures on intercompany
obligations. These instruments are reflected in the balance sheet at fair value
with changes in fair value recognized in earnings. Pre-tax charges (gains)
recorded in the consolidated statement of operations for the three and nine
months ended September 30, 2002 were $0.7 million and ($7.6 million),
respectively.
EVEREST ACQUISITION
On January 8, 2001, FMC acquired Everest Healthcare Services Corporation
(now known as Everest Healthcare Holdings, Inc., "Everest") through a merger of
Everest into a subsidiary of FMC at a purchase price of $365 million.
Approximately $99 million of the purchase price was funded by the issuance of
2.25 million FMCAG preference shares to the Everest shareholders. The remaining
purchase price was paid with cash of $266 million, including assumed debt.
Everest owned, operated or managed approximately 70 clinic facilities providing
therapy to approximately 6,800 patients in the United States. Everest also
operated extracorporeal blood services and acute dialysis businesses that
provide acute dialysis, apheresis and hemoperfusion services to approximately
100 hospitals. On August 22, 2001 FMC transferred its interests in Everest to
the Company at its book value. There was no gain or loss recorded on this sale
as it is a transfer between entities under common control. The consolidated
operations and cash flows of the Company for the comparable periods in 2001
include the consolidated operations and cash flows of Everest retroactive to
January 1, 2001.
NEW PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No.141, Business Combinations ("SFAS
141"), and SFAS No.142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after September 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
The Company adopted the provisions of SFAS 141 immediately, and adopted
SFAS 142 effective January 1, 2002. Accordingly, any goodwill or intangible
asset determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001 has not been amortized, but
has been evaluated for impairment in accordance with SFAS 142. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 were amortized through December 31, 2001.
SFAS 141 requires that the Company evaluate existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and that it
make any necessary reclassifications in order to conform with the new criteria
in SFAS 141 for recognition apart from goodwill. The Company is required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company is required to test the intangible asset for impairment in
accordance with the provisions of SFAS 142.
In connection with the transitional goodwill impairment evaluation, SFAS
142 requires that the Company perform an assessment of whether there is an
indication that goodwill (and equity-method goodwill) is impaired as of the date
of adoption. To accomplish this the Company must identify its reporting units
and determine the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company then has up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with SFAS 141, to its carrying amount, both of
which would be measured as of the date of adoption. This second step is required
to be completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss should be recognized as the
cumulative effect
11
of a change in accounting principle in its statement of operations.
The Company has completed the impairment tests for indefinite lived
specific intangibles and goodwill and has determined that there is no impairment
of these assets as of the transition date.
However, based on our current assessments and subject to continuing
analysis, had SFAS 142 been effective as of January 1, 2001 the Company
estimates that there would have been a favorable impact to pre-tax earnings for
fiscal year 2001 of approximately $107 million. The favorable impact in fiscal
year 2002 should approximate $97 million.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting
requirements for the retirement of tangible long-lived assets and asset
retirement costs. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period incurred and the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset. SFAS 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company is currently
estimating the impact of SFAS 143 on the Company's financial statements,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
Management does not believe that transitional impairment losses will be
incurred.
In October 2001, the FASB issued SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less selling costs. SFAS 144 also broadens the reporting of discontinued
operations and provides that discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have not
yet occurred. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 31, 2001.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections
("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under
Opinion 30 to determine if losses from extinguishment of debt should be
classified as extraordinary items. SFAS 145 amends Statement No. 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback arrangements be accounted for in a similar manner as
sale-leaseback transactions. The provisions of this Statement related to the
rescission of Statement 4 is effective for fiscal years beginning after May 15,
2002. The provisions of this Statement related to Statement 13 shall be
effective for transactions occurring after May 15, 2002. All other provisions of
this statement shall be effective for financial statements issued on or after
May 15, 2002. The Company will be required to reclassify the extraordinary loss
recorded in the nine months ended September 30, 2002 as a separate expense
within operations once this Statement is adopted in fiscal year 2003. There is
no material impact to the Company for those provisions effective for the periods
ended September 30, 2002.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies EITF
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The principal difference between this statement and EITF 94-3 relates to the
requirements for the recognition of a liability for a cost associated with an
exit or disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost was recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002.
12
NOTE 2. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -----------
Inventories:
Raw materials.......................................... $ 43,951 $ 40,834
Manufactured goods in process.......................... 13,212 11,053
Manufactured and purchased inventory available
for sale............................................. 80,014 84,789
-------- --------
137,177 136,676
Health care supplies.................................. 56,226 65,545
-------- --------
Total............................................. $193,403 $202,221
======== ========
NOTE 3. REPAYMENT OF INTERCOMPANY DEBT
On June 27, 2002 the Company repaid its intercompany debt to Fresenius
Medical Care Trust Finance S.a.r.l. in the amount of $350,995 originally due in
2006, utilizing funds borrowed under its senior credit facility. An
extraordinary loss of $9,780, net of a $6,520 tax benefit, was recorded for the
premium owed to Fresenius Medical Care Trust Finance S.a.r.l. in the event of
the early retirement of this obligation in accordance with the terms of the
intercompany debt agreement.
NOTE 4. DEBT
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
Long-term debt to outside parties consists of:
NMC Credit Facility ..................................... $ 685,800 $450,600
Other ................................................... 1,836 27
--------- --------
687,636 450,627
Less amounts classified as current ...................... 687,636 150,027
--------- --------
$ 0 $300,600
========= ========
All borrowings under the NMC Credit Facility are due and payable at
September 30, 2003. Accordingly, the Company has reclassified all outstanding
amounts at September 30, 2002 as current obligations. The Company has initiated
negotiations with its lenders and expects to enter into a replacement facility
during the first quarter 2003.
Borrowings from affiliates consists of:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
Fresenius Medical Care AG borrowings primarily at
interest rates approximating 2.64% and 2.85%,
respectively........................................... $ 150,000 $ 191,967
RTC Holdings, Inc. borrowings at interest rates
approximating 2.73%.................................... 11,000 --
Fresenius AG borrowing at interest rates approximating
2.64% and 2.73%, respectively.......................... 20,000 15,000
Fresenius Medical Care Trust Finance S.a.r.l.
borrowings at interest rates ranging between 8.25%
and 9.25%.............................................. 654,244 1,005,239
Franconia Acquisition, LLC at interest rates
approximating 2.10% and 2.40%, respectively............ 83,721 83,721
--------- ----------
Other.................................................... 1,122 1,102
--------- ----------
920,087 1,297,029
Less amounts classified as current 268,819 291,360
--------- ----------
Total................................................... $ 651,268 $1,005,669
========= ==========
NOTE 5. MANDATORILY REDEEMABLE PREFERRED SECURITIES
During 2001 and 2000, a wholly-owned subsidiary of the Company issued
shares of various series of Preferred Stock ("Redeemable Preferred Securities")
to NMC which were then transferred to FMCAG for proceeds totaling $392,037 in
2001 and $305,500 in 2000. No Redeemable Preferred Securities were issued during
the nine months ended September 30, 2002. The table below provides information
for Redeemable Preferred Securities for the periods indicated.
13
SEPTEMBER 30, DECEMBER 31,
MANDATORILY REDEEMABLE PREFERRED SECURITIES 2002 2001
------------ -----------
Series A Preferred Stock, 1,000 shares....... $113,500 $ 113,500
Series B Preferred Stock, 300 shares......... 34,000 34,000
Series C Preferred Stock, 1,700 shares....... 192,000 192,000
Series D Preferred Stock, 870 shares......... 97,500 97,500
Series E Preferred Stock, 1,300 shares....... 147,500 147,500
Series F Preferred Stock, 980 shares......... 113,037 113,037
-------- ---------
697,537 697,537
Mark to Market Adjustment.................... 42,211 (5,207)
-------- ---------
Total........................................ $739,748 $ 692,330
======== =========
These securities are similar in substance except for the order of
preference both as to dividends and liquidation, dissolution or winding-up of
the subsidiary. The order of preference among the various series corresponds to
the alphabetical order of Series A through Series F. In addition, the holders of
the Redeemable Preferred Securities are entitled to receive dividends in an
amount of dollars per share that varies from approximately 3% to 8% of the
purchase price depending on the Series. The dividends will be declared and
paid in cash at least annually. All the Redeemable Preferred Securities have a
par value of $.01 per share.
Upon liquidation or dissolution or winding up of the issuer of the
Redeemable Preferred Securities, the holders of the Redeemable Preferred
Securities are entitled to an amount equal to the liquidation preference for
each share of stock plus an amount equal to all accrued and unpaid dividends
thereon through the date of distribution. The liquidation preference is the sum
of the issuance price plus, for each year or portion thereof, an amount equal to
one-half of one percent of the issue price, not to exceed 5%.
The Redeemable Preferred Securities will be sold back to the Company two
years from their respective date of issuance for a total amount equal to Euros
501,773 (Series A, B, C, and F) and US dollars $245,000 (Series D and E) plus
any accrued and unpaid dividends. Dividends were recorded and classified as part
of interest expense in the consolidated statement of operations in the amounts
of $10,892 and $11,397 in the three month periods and $31,468 and $22,457 in the
nine month periods ended September 30, 2002 and 2001, respectively. In March
2002, a cash dividend payment was made totaling $29,850. No additional dividend
payments have been made during the nine months ended September 30, 2002. The
Euro Redeemable Preferred Securities are deemed to be a Euro liability and the
risk of foreign currency fluctuations are hedged through forward currency
contracts.
The Company records mark to market adjustments based on fluctuations in
currency rates and records the offset to accumulated comprehensive income.
The holders of the Redeemable Preferred Securities have the same
participation rights as the holders of all other classes of capital stock of the
issuing subsidiary.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
The table below shows net income as reported for the three and nine months
ended September 30, 2002 and net income as adjusted for the three and nine
months ended September 30, 2001 as if SFAS 142 has been adopted January 1, 2001.
The adjusted amounts have been tax effected.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
($000 EXCEPT FOR EARNINGS PER SHARE) 2002 2001 2002 2001
-------- -------- -------- --------
Net Income $ 36,408 $ 31,946 $111,560 $ 85,866
Net Income Adjusted $ 36,408 $ 54,092 $111,560 $152,242
14
Reconciliation of net income to adjusted net income and net income per
share to adjusted net income per share.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------------
($000 EXCEPT FOR NET INCOME PER SHARE) 2002 2001 2002 2001
-------- -------- --------- --------
Reported Net Income $ 36,408 $ 31,946 $ 111,560 $ 85,866
Addback: Amortization -- 23,034 -- 69,153
-------- -------- --------- --------
Adjusted Net Income $ 36,408 $ 54,980 $ 111,560 $155,019
======== ======== ========= ========
BASIC AND FULLY DILUTIVE NET INCOME PER
SHARE:
Reported $ 0.40 $ 0.35 $ 1.24 $ 0.95
Addback: Amortization -- 0.25 -- 0.77
-------- -------- --------- --------
Adjusted net income per share $ 0.40 $ 0.61 $ 1.24 $ 1.72
======== ======== ========= ========
The total pre-tax amortization expense associated with goodwill and
specific intangible assets recognized during the three months and nine months
ended September 30, 2001 totaled $27,633 and $82,981, respectively. The
effective tax rate for restatement of amortization was 16.7%. The effective tax
rate is less than the corporate statutory rate primarily due to permanent
differences related to non-deductible goodwill.
The gross carrying value and accumulated amortization of amortizable
intangible assets is as follows:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
----------------------- -------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
VALUE AMORTIZATION VALUE AMORTIZATION
-------- ------------ -------- ------------
Patient Relationships $242,091 $(184,489) $233,490 $(155,769)
Other Intangibles $108,862 $ (56,400) $109,545 $ (50,406)
Amortization expense for amortizable intangible assets at September 30,
2002 is estimated to be $7,800 for the remainder of 2002, $21,400 for 2003,
$17,400 for 2004, $13,800 for 2005, and $10,700 for 2006.
NOTE 7. SPECIAL CHARGE FOR LEGAL MATTERS
In the fourth quarter of 2001, the Company recorded a $258 million ($177
million after tax) special charge to address 1996 merger related legal matters,
estimated liabilities including legal expenses arising in connection with the
W.R. Grace Chapter 11 proceedings and the cost of resolving pending litigation
and other disputes with certain commercial insurers. The special charge is
primarily comprised of three major components relating to (i) the W.R. Grace
bankruptcy, (ii) litigation with commercial insurers and (iii) other legal
matters.
The Company has assessed the extent of potential liabilities as a result
of the W.R. Grace Chapter 11 proceedings. The Company accrued $172 million
principally representing a provision for income taxes payable for the years
prior to the 1996 merger for which the Company has been indemnified by W.R.
Grace, but may ultimately be obligated to pay as a result of W.R. Grace's
Chapter 11 filing. In addition, that amount included the costs of defending the
Company in litigation arising out of W.R. Grace's Chapter 11 filing.
The Company included in the special charge the amount of $55 million to
provide for settlement obligations, legal expenses and the resolution of
disputed accounts receivable for the commercial insurers in the ongoing billing
practice litigation. The Company believes that the accrual reasonably estimates
the costs and expenses associated with the continued defense and resolution of
this litigation.
15
The remaining amount of $31 million pre-tax was accrued for (i) assets and
receivables that are impaired in connection with other legal matters and (ii)
anticipated expenses associated with the continued defense and resolution of the
legal matters. See also Note 9- "Commitments and Contingencies- Legal
Proceedings."
At September 30, 2002, there is a remaining balance of approximately $204
million for the accrued special charge for legal matters. During the three and
nine months ended September 30, 2002, approximately $9 million and $20 million
of this accrual was utilized.
NOTE 8. PENSION PLANS
During the first quarter of 2002, the Company recorded a gain of
approximately $13.1 million resulting from the curtailment of the Company's
defined benefit and supplemental executive retirement plans. The Company has
retained all employee pension obligations as of the curtailment date for the
fully-vested and frozen benefits for all employees.
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
The Company was formed as a result of a series of transactions pursuant
to the Agreement and Plan of Reorganization (the "Merger") dated as of February
4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the
Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and
continues to have, significant potential liabilities arising out of
product-liability related litigation, pre-Merger tax claims and other claims
unrelated to NMC, which was Grace's dialysis business prior to the Merger. In
connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the
Company and NMC against all liabilities of W.R. Grace & Co., whether relating to
events occurring before or after the Merger, other than liabilities arising from
or relating to NMC's operations. Proceedings have been brought against W.R.
Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace
& Co.-Conn., principally alleging that the Merger was a fraudulent conveyance,
violated the uniform fraudulent transfer act, and constituted a conspiracy. See
discussion of "Mesquita v. W.R. Grace and Company" below.
Pre-Merger tax claims or tax claims that would arise if events were to
violate the tax-free nature of the Merger, could ultimately be the obligation
of the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its
filings with the Securities and Exchange Commission that: its tax returns for
the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the
"Service"); Grace has received the Service's examination report on tax periods
1993 to 1996; that during those years Grace deducted approximately $122.1
million in interest attributable to corporate owned life insurance ("COLI")
policy loans; that Grace has paid $21.2 million of tax and interest related to
COLI deductions taken in tax years prior to 1993; that a U.S. District Court
ruling has denied interest deductions of a taxpayer in a similar situation; and
that Grace is seeking a settlement of the Service's claims. Subject to certain
representations made by Grace, the Company and Fresenius AG, Grace and certain
of its affiliates agreed to indemnify the Company against this and other
pre-Merger and Merger related tax liabilities.
Subsequent to the Merger, Grace was involved in a multi-step transaction
involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The
Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to
confirm the Company's entitlement to indemnification from Sealed Air for all
losses and expenses incurred by the Company relating to pre-Merger tax
liabilities and Merger-related claims.
Subsequent to the Sealed Air transaction, Grace and certain of its
subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. The Company intends to continue to pursue vigorously its rights to
indemnification from Grace and its insurers and former and current affiliates,
including Sealed Air, for all costs incurred by the Company relating to
pre-Merger tax and Merger-related claims.
Since 1997, the Company, NMC, and certain NMC subsidiaries have been
engaged in litigation with various insurance companies concerning allegations of
inappropriate billing practices for nutritional therapy and diagnostic and
clinical laboratory tests and misrepresentations. These claims against the
Company seek unspecified damages and costs. The Company, NMC and its
subsidiaries believe that there are substantial defenses to the claims asserted,
and intend to vigorously defend all lawsuits. The Company has filed
counterclaims against the plaintiffs in these matters based on inappropriate
claim denials and delays in claim
16
payments. Other private payors have contacted the Company and may assert that
NMC received excess payments and, similarly, may join the lawsuits or file their
own lawsuit seeking reimbursement and other damages. Although the ultimate
outcome on the Company of these proceedings cannot be predicted at this time, an
adverse result could have a material adverse effect on the Company's business,
financial condition and results of operations.
On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et
al. (Sup. Court of Calif., S.F. County, #315465) was filed as a class action by
plaintiffs claiming to be creditors of W. R. Grace & Co.-Conn ("Grace
Chemicals") against Grace Chemicals, the Company and other defendants,
principally alleging that the Merger which resulted in the original formation of
the Company was a fraudulent transfer, violated the uniform fraudulent transfer
act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R.
Grace & Company, et al.) and additional class actions were filed subsequently
with substantially similar allegations; all cases have been stayed and
transferred to the U.S. District Court, have been dismissed without prejudice or
are pending before the U.S. Bankruptcy Court in Delaware in connection with
Grace's Chapter 11 proceeding. The Company has requested indemnification from
Grace Chemicals and Sealed Air Corporation pursuant to the Merger agreements. If
the Merger is determined to have been a fraudulent transfer, if material damages
are proved by the plaintiffs, and if the Company is not able to collect, in
whole or in part on the indemnity, from W.R. Grace & Co., Sealed Air
Corporation, or their affiliates or former affiliates or their insurers, and if
the Company is not able to collect against any party that may have received
distributions from W.R. Grace & Co., a judgment could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is confident that no fraudulent transfer or conspiracy occurred and
intends to defend the cases vigorously.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. Anti-Kickback Statute, the False Claims
Act, the Stark Statute, and other federal and state fraud and abuse laws.
Applicable laws or regulations may be amended, or enforcement agencies or
courts may make interpretations that differ from the Company's or the manner in
which the Company conduct its business. In the U.S., enforcement has become a
high priority for the federal government and some states. In addition, the
provisions of the False Claims Act authorizing payment of a portion of any
recovery to the party bringing the suit encourage private plaintiffs to
commence "whistle blower" actions. By virtue of this regulatory environment, as
well as our corporate integrity agreement with the government, the Company
expects that its business activities and practices will continue to be subject
to extensive review by regulatory authorities and private parties, and expects
continuing inquiries, claims and litigation relating to its compliance with
applicable laws and regulations. The Company may not always be aware that an
inquiry or action has begun, particularly in the case of "whistle blower"
actions, which are initially filed under court seal.
The Company operates a large number facilities throughout the U.S. In such
a decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliated companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the U.S.
Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws,
and the Company cannot predict whether law enforcement authorities may use such
information to initiate further investigations of the business practices
disclosed or any of its other business activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
17
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS
At December 31, 2001, the Company recorded a pre-tax special charge of
$258 million to reflect anticipated expenses associated with the continued
defense and resolution of pre-Merger tax claims, Merger-related claims, and
commercial insurer claims. While the Company believes that its accruals
reasonably estimate the Company's currently anticipated costs in connection
with the continued defense and resolution of these claims, no assurances can be
given that the actual costs incurred by the Company will not exceed the amount
of these accruals.
18
NOTE 10. INDUSTRY SEGMENTS INFORMATION
The Company's reportable segments are Dialysis Services and Dialysis
Products. For purposes of segment reporting, the Dialysis Services Division and
Spectra Renal Management are combined and reported as Dialysis Services. These
divisions are aggregated because of their similar economic characteristics.
These similarities include the fact that they are both health care service
providers whose services are provided to a common patient population, and both
receive a significant portion of their net revenue from Medicare and other
government and non-government third party payors. The Dialysis Products
segment reflects the activity of the Dialysis Products Division only.
The table below provides information for the three and nine months ended
September 30, 2002 and 2001 pertaining to the Company's two industry segments.
LESS
DIALYSIS DIALYSIS INTERSEGMENT
SERVICES PRODUCTS SALES TOTAL
----------- ---------- ------------ -----------
NET REVENUES
Three Months Ended 9/30/02 $ 838,241 $ 193,292 $ 82,888 $ 948,645
Three Months Ended 9/30/01 799,484 190,993 73,969 916,508
Nine Months Ended 9/30/02 $ 2,445,440 $ 568,007 $ 240,498 $ 2,772,949
Nine Months Ended 9/30/01 2,341,923 559,463 212,810 2,688,576
OPERATING EARNINGS
Three Months Ended 9/30/02 $ 101,246 $ 35,117 -- $ 136,363
Three Months Ended 9/30/01 106,235 38,233 -- 144,468
Nine Months Ended 9/30/02 $ 297,986 $ 105,648 -- $ 403,634
Nine Months Ended 9/30/01 323,724 103,291 -- 427,015
TOTAL ASSETS 9/30/02 $ 2,664,354 650,429 -- $ 3,314,783
12/31/01 2,650,561 645,956 -- 3,296,517
Total assets of $4,992,678 is comprised of total assets for
reportable segments, $3,314,783; intangible assets not allocated to segments,
$1,876,990; accounts receivable financing agreement ($456,000); and other
corporate assets, $256,905.
The table below provides the reconciliations of reportable segment operating
earnings to the Company's consolidated totals.
THREE MONTHS ENDED NINE MONTHS ENDED
SEGMENT RECONCILIATION SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------------- -------------------------------
2002 2001 2002 2001
------------ ----------- ------------ -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM:
Total operating earnings for reportable segments $ 136,363 $ 144,468 $ 403,634 $ 427,015
Corporate G&A .................................. (21,267) (22,473) (33,027) (88,065)
Research and development expense................ (2,758) (1,373) (6,763) (3,620)
Net interest expense............................ (50,543) (59,457) (161,384) (170,085)
----------- ---------- ----------- -----------
Income before income taxes and extraordinary
item.......................................... $ 61,795 $ 61,165 $ 202,460 $ 165,245
=========== ========== =========== ===========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company. The discussion should be read in conjunction with the
consolidated financial statements included elsewhere in this document.
This section contains certain forward-looking statements that are subject
to various risks and uncertainties. Such statements include, without limitation,
discussions concerning the outlook of the Company, government reimbursement,
future plans and management's expectations regarding future performance. Actual
results could differ materially from those contained in these forward-looking
statements due to certain factors including, without limitation, changes in
business, economic and competitive conditions, regulatory reforms, foreign
exchange rate fluctuations, uncertainties in litigation or investigative
proceedings, the realization of anticipated tax deductions, and the availability
of financing. These and other risks and uncertainties, which are more fully
described elsewhere in this Item 2 and in the Company's reports filed from time
to time with the Securities and Exchange Commission, could cause the Company's
results to differ materially from the results that have been or may be projected
by or on behalf of the Company.
RESULTS OF OPERATIONS (IN MILLIONS)
The following table summarizes certain operating results of the Company by
principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Dialysis Products to Dialysis
Services.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
NET REVENUES
Dialysis Services............................ $ 838 $ 799 $ 2,445 $ 2,342
Dialysis Products............................ 193 191 568 559
Intercompany Eliminations.................... (82) (74) (240) (212)
--------- --------- --------- ---------
Total Net Revenues.............................. $ 949 $ 916 $ 2,773 $ 2,689
========= ========= ========= =========
Operating Earnings:
Dialysis Services............................ $ 101 $ 106 $ 298 $ 324
Dialysis Products............................ 35 38 106 103
--------- --------- --------- ---------
Total Operating Earnings........................ 136 144 404 427
--------- --------- --------- ---------
Other Expenses:
General Corporate............................ $ 21 $ 23 $ 34 $ 88
Research & Development....................... 3 1 7 4
Interest Expense, Net........................ 50 59 161 170
--------- --------- --------- ---------
Total Other Expenses............................ 74 83 202 262
--------- --------- --------- ---------
Earnings Before Income Taxes and Extraordinary
Item........................................... 62 61 202 165
Provision for Income Taxes...................... 26 29 81 79
--------- --------- --------- ---------
Net Income Before Extraordinary Item............ $ 36 $ 32 $ 121 $ 86
Extraordinary Loss ............................. -- -- 9 --
--------- --------- --------- ---------
Net Income...................................... $ 36 $ 32 $ 112 $ 86
========= ========= ========= =========
20
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Net revenues for the third quarter of 2002 increased by 4% ($33 million)
over the comparable period in 2001. Net income for the third quarter of 2002
increased by 14% ($4 million) over the comparable period in 2001 primarily as a
result of decreased general corporate expenses ($2 million), decreased interest
expense ($9 million) and a more favorable effective tax rate ($3 million),
partially offset by decreased operating earnings ($8 million) and increased
research and development costs ($2 million).
Had the adoption of SFAS 142 been effective January 1, 2001, net income
would have decreased 34% ($19 million) over the comparable period in 2001.
DIALYSIS SERVICES
Dialysis Services net revenues for the third quarter of 2002 increased by
5% to $834 million (net of $4 million of intercompany sales). The increase in
dialysis services revenue resulted primarily from a 6% increase in treatment
volume, reflecting both base business growth and the impact of 2002 and 2001
acquisitions, the impact of one more dialysis day, increased ancillary services,
and increased laboratory testing revenues. The increase in revenue was partially
offset by a decrease in revenue per treatment from $287 in the third quarter
2001 versus $282 in the third quarter of 2002.
Dialysis Services operating earnings for the third quarter of 2002
decreased 5% ($5 million) over the comparable period in 2001, primarily due to
the lower treatment rate in 2002, Epogen(R) price increases, expenses associated
with the Company's conversion from re-use to single use dialyzers, and higher
facility leasing costs. These increases were partially offset by lower
amortization expenses as a result of the adoption of SFAS 142, which became
effective January 1, 2002, decreases in amortization of specific intangible
assets and lower provisions for doubtful accounts.
DIALYSIS PRODUCTS
Dialysis Products gross revenues increased 1% to $193 million in the third
quarter of 2002 as compared to $191 million in the comparable period of 2001.
Internal sales to Dialysis Services increased by 13% to $79 million and were
partially offset by a decrease in external sales of 6% to $114 million. Dialysis
Products external sales include both (i) sales of machines to a third party
leasing company which are leased back by Dialysis Services and (ii) Method II PD
revenues for Dialysis Services patients. Dialysis Products measures its external
sales performance based on sales to the "net available external market". The net
available external market excludes machines sales and Method II revenues
involving the Dialysis Services Division as well as sales to other vertically
integrated dialysis companies. Net available external market sales increased by
4% in the third quarter 2002 over the comparable period of 2001.
Dialysis Products operating earnings for the third quarter of 2002
decreased 8% to $35 million from $38 million in the comparable period of 2001.
Lower gross margins primarily due to higher manufacturing costs were partially
offset by lower amortization expense as a result of the adoption of SFAS 142,
which became effective January 1, 2002.
OTHER EXPENSES
The Company's other expenses for the third quarter of 2002 decreased by
11% ($9 million) over the comparable period of 2001. General corporate expenses
decreased by $2 million and interest expense decreased $9 million. The decrease
in general corporate expenses was primarily due to a reduction in amortization
expense primarily resulting from the adoption of SFAS 142 partially offset by
foreign exchange fluctuations, increases in worker's compensation and other
employee related costs and general increases in other general and administrative
costs.
INCOME TAX RATE
The effective tax rate from operations for the third quarter of 2002
(41.1%) is lower than the rate for the comparable period of 2001 (47.8%) due to
the expected higher earnings and the adoption of SFAS 142 which eliminates the
amortization on non-deductible goodwill.
21
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Net revenues for the first nine months of 2002 increased by 3% ($84
million) over the comparable period in 2001. Net income for the first nine
months of 2002 increased by 30% ($26 million) over the comparable period in 2001
primarily as a result of decreased general corporate expenses ($54 million).
These decreases were partially offset by decreased operating earnings ($23
million), an extraordinary loss, net of tax benefit, for a premium payment on
the early redemption of debt ($9 million) and increased income taxes ($2
million). Had the adoption of SFAS 142 been effective January 1, 2001, net
income would have decreased 28% ($43 million) over the comparable period in
2001.
DIALYSIS SERVICES
Dialysis Services net revenues for the first nine months of 2002 increased
by 4% to $2,432 million (net of $13 million of intercompany sales). The increase
in dialysis service revenue resulted primarily from a 4% increase in treatment
volume, reflecting both base business growth and the impact of 2002 and 2001
acquisitions. Revenue was also favorably impacted by increased ancillary
services in 2002 as compared to 2001.
Dialysis Services operating earnings for the first nine months of 2002
decreased 8% ($26 million) over the comparable period in 2001, primarily due to
decreased ancillary margins, Epogen(R) price increases, higher facility lease
costs, expenses associated with the Company's conversion from re-use to single
use dialyzers, severance and payroll costs associated with workforce reductions,
and higher provisions for doubtful accounts. These unfavorable variances in
earnings are partially offset by lower amortization expense as a result of the
adoption of SFAS 142 which became effective January 1, 2002, reduced personnel
costs associated with new staffing models, and lower amortization of specific
intangibles related to the 1996 NMC Merger.
DIALYSIS PRODUCTS
Dialysis Products gross revenues increased 2% to $568 million in the first
nine months of 2002 as compared to $559 million in the comparable period of
2001. Internal sales to Dialysis Services increased by 14% to $227 million and
were partially offset by a decrease in external sales of 5% to $340 million. Net
available external market sales increased by 5% in the first nine months of 2002
over the comparable period of 2001.
Dialysis Products operating earnings for the first nine months of 2002
increased 3% ($3 million) over the comparable period of 2001. This was primarily
due to lower amortization expenses as a result of the adoption of SFAS 142 which
became effective January 1, 2002 partially offset by slightly unfavorable gross
margins and increases in other operating costs.
OTHER EXPENSES
The Company's other expenses for the first nine months of 2002 decreased
by 23% ($60 million) over the comparable period of 2001. General corporate and
interest expenses decreased by $54 million and $9 million, respectively, while
research and development expense increased by $3 million. The decrease in
general corporate expenses was primarily due to decreased amortization expenses,
resulting from the adoption of SFAS 142, a gain on the curtailment of the
Company's defined benefit and supplement executive retirement plan and foreign
exchange fluctuations partially offset by increases in amortization of specific
intangible assets and other general and administrative expenses.
EXTRAORDINARY LOSS
On June 27, 2002 the Company repaid its intercompany debt to Fresenius
Medical Care Trust Finance S.a.r.l. in the amount of $351 million, originally
due in 2006, utilizing funds borrowed under its senior credit facility. An
extraordinary loss of $9 million, net of a tax benefit of $7 million, was
recorded for the premium owed to Fresenius Medical Care Trust Finance S.a.r.l.
in the event of the early retirement of this obligation in accordance with the
terms of the intercompany debt agreement.
22
INCOME TAX RATE
The effective tax rate from operations for the first nine months of 2002
(40.0%) is lower than the rate for the comparable period of 2001 (48.0%) due to
the expected higher earnings and the adoption of SFAS 142 which eliminates the
amortization on non-deductible goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Cash from operations increased by $40 million from $238 million for the
nine months ended September 30, 2001 to $278 million for the nine months ended
September 30, 2002. The increase is primarily related to favorable changes in
operating assets and liabilities ($72 million), and increased earnings of $26
million partially offset by decreases in non cash adjustments to net income ($58
million).
Increases in accounts receivable of $32 million for the nine months ended
September 30, 2002 are primarily due to the Company's revenue growth and impact
of acquisitions. Increases in accounts payable were primarily due to timing of
disbursements. Cash on hand was $37 million and $42 million at September 30,
2002 and 2001, respectively.
Net cash flows used in investing activities totaled $124 million in 2002
compared to $479 million in 2001. The Company funded its acquisitions and
capital expenditures primarily through cash flows from operations in 2002 and
cash flows from operations and intercompany borrowings in 2001. Cash
expenditures for acquisitions totaled $36 million and $376 million in 2002 and
2001, respectively, net of cash acquired. The decrease in acquisition spending
in 2002 over the comparable period in 2001 is primarily due to the Everest
acquisition completed in January 2001. Approximately $99 million of the purchase
price was funded by the issuance of 2.25 million FMC preference shares to the
Everest shareholders. The remaining purchase price was paid with cash of $260
million including assumed debt. Capital expenditures of $87 million and $84
million in 2002 and 2001, respectively, were made for new clinics, improvements
to existing clinics, the buyout of operating leases for dialysis machines, and
expansion and maintenance of production facilities.
The Company has financed the expansion of its dialyzer production capacity
by entering into sales-leaseback transactions with independent financing
companies. Under these financing arrangements the assets are sold to the
financing company at construction costs and then leased back under operating
leases. Under these arrangements, financing of $20 million and $28 million was
obtained in the nine month periods ended September 30, 2002 and 2001,
respectively. Accordingly, these amounts are not reported as capital
expenditures.
For the nine months ended September 30, 2002, net cash flows used by
financing activities totaled $145 million in 2002 compared to net cash flows
provided of $249 million for the comparable period of 2001. The Company
increased its borrowings under its accounts receivable facility (the "Accounts
Receivable Facility") by $14 million to $456 million at September 30, 2002. Debt
and capital lease obligations in 2002 increased by $234 million primarily due to
higher borrowings under the Company's credit facility in order to fund the early
repayment of intercompany borrowings and the premium on the early redemption of
this intercompany obligation.
All borrowings under the NMC Credit Facility are due and payable at
September 30, 2003. Accordingly, the Company has reclassified all outstanding
amounts at September 30, 2002 as current obligations. The Company has initiated
negotiations with its lenders and expects to enter into a replacement facility
during the first quarter 2003.
Accounts receivable balances as reflected in the consolidated balance
sheets are shown net of receivable sold under the Accounts Receivable Facility.
The Company's capacity to generate cash flow from the Accounts Receivable
Facility depends on the availability of sufficient accounts receivable that meet
certain criteria defined in the agreement with the third party funding
corporation. A lack of availability of such accounts receivable may have a
material impact on the Company's ability to utilize the facility for its
financial needs.
23
CRITICAL ACCOUNTING POLICIES
The Company has identified the following selected accounting policies and
issues that the Company believes are critical to understand the financial
reporting risks presented in the current economic environment. These matters and
judgments, and uncertainties affecting them, are also essential to understand
the Company's reported and future operating results. See Notes to Consolidated
Financial Statements - Note 2, "Summary of Significant Accounting Policies"
included in the Company's 2001 report on Form 10 K.
RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS
The growth of the Company's business through acquisitions has created a
significant amount of intangible assets, including goodwill, patient
relationships, tradenames and other intangibles. At September 30, 2002, the
carrying amount of net intangible assets amounted to $3,424 million representing
approximately 68% of the Company's total assets. In accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company reviews the carrying value of our
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. As discussed
in Note 2 to the Consolidated Financial Statements, any impairment is tested by
a comparison of the carrying amount of intangible assets to future net cash
flows expected to be generated. If such intangible assets are considered
impaired, the impairment recognized is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
A prolonged downturn in the healthcare industry with lower than expected
increases in reimbursement rates and/or higher than expected costs for providing
our healthcare services could adversely affect the Company's estimates of future
net cash flows in any segment. Consequently, it is possible that the Company's
future operating results could be materially and adversely affected by
impairment charges related to goodwill or other indefinite lived intangibles.
LEGAL CONTINGENCIES
The Company is a party to certain litigation including the commercial
insurer litigation, W.R. Grace & Co. bankruptcy and Sealed Air Corporation
indemnification litigation and other litigation arising in the ordinary course
of the Company's business as described in Note 9 "Commitments and Contingencies"
in the Company's Consolidated Financial Statements.
The Company regularly analyzes current information relating to these
litigation matters and provides accruals for probable contingent losses
including the estimated legal expenses to resolve the matter. In its decisions
regarding the recording of litigation accruals, the Company considers the
probability of an unfavorable outcome and its ability to make a reasonable
estimate of the amount of contingent loss.
If an unfavorable outcome is probable but the amount of loss cannot be
reasonably estimated by management, appropriate disclosure is provided, but no
contingent losses are accrued. The mere filing of a suit or formal assertion of
a claim or assessment does not necessarily require the recording of an accrual.
REVENUE RECOGNITION
Revenues are recognized on the date services and related products are
provided/shipped and are recorded at amounts estimated to be received under
reimbursement arrangements with third-party payors, including Medicare and
Medicaid. The Company records an allowance for estimated uncollectible accounts
receivable based upon an analysis of historical collection experience. The
analysis considers differences in collection experience by payor mix and aging
of the accounts receivable. From time to time, the Company reviews the accounts
receivable for changes in historical collection experience to ensure the
appropriateness of the allowances. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and adjusted in
future periods as final settlements are determined.
Net Revenues from machine sales to a third party leasing company where
there is a leaseback of the machines by the Dialysis Services Division were $7.4
million and $13.6 million for the three months ended September 30, 2002 and 2001
and $23.3 million and $37.1 million for the nine months ended September 30, 2002
and 2001, respectively. The profits on these sales are deferred and amortized to
earnings over the lease terms.
24
SELF INSURANCE PROGRAMS
The Company is self-insured for professional, product and general
liability, auto and worker's compensation claims up to predetermined amounts
above which third party insurance applies. Estimates include ultimate costs for
both reported and incurred but not reported claims.
IMPACT OF INFLATION
A substantial portion of the Company's net revenue is subject to
reimbursement rates which are regulated by the federal government and do not
automatically adjust for inflation. Moreover, non-governmental payors continue
to exert downward pressure on reimbursement levels. Increased operating costs
that are subject to inflation, such as labor and supply costs, without a
compensating increase in reimbursement rates, may adversely affect the Company's
business and results of operations.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due to changes in interest rates
and foreign currency rates. The Company uses derivative financial instruments,
including interest rate swaps and foreign exchange contracts, as part of its
market risk management strategy. These instruments are used as a means of
hedging exposure to interest rate and foreign currency fluctuations in
connection with debt obligations and purchase commitments. The Company does not
hold or issue derivative instruments for trading or speculative purposes.
Hedge accounting is applied if the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge. Additionally,
changes in the value of the derivative must result in payoffs that are highly
correlated to the changes in value of the hedged item. Derivatives are measured
for effectiveness both at inception and on an ongoing basis.
The Company enters into foreign exchange contracts that are designated as,
and effective as, hedges for forecasted purchase transactions. Also, since the
Company carries a substantial amount of floating rate debt, the Company uses
interest rate swaps to synthetically change certain variable-rate debt
obligations to fixed-rate obligations to mitigate the impact of interest rate
fluctuations.
Gains and losses on foreign exchange contracts accounted for as hedges are
deferred in other assets or liabilities. The deferred gains and losses are
recognized as adjustments to the underlying hedged transaction when the future
sales or purchases are recognized. Interest rate swap payments and receipts are
recorded as part of interest expense. The fair value of the swap contracts is
recognized in other liabilities in the financial statements. Cash flows from
derivatives are recognized in the consolidated statement of cash flows in the
same category as the item being hedged.
At September 30, 2002, the fair value of the Company's interest rate
agreements, which consisted entirely of interest rate swaps, is recorded as a
liability valued at approximately $90.8 million and the fair value of the
Company's foreign exchange contracts, which consisted entirely of forward
agreements, is recorded as an asset valued at approximately $45.6 million. The
Company had outstanding contracts covering the purchase of 666.2 million Euros
("EUR") at an average contract price of $.9099 per EUR, for delivery between
October 2002 and May 2004, contracts for the purchases of 28.5 million Mexican
Pesos at an average contract price of 10.3324 pesos per US dollar, and
contracts for the delivery of 7.1 million Canadian Dollars at an average
contract price of $.6444 per Canadian Dollar.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures within 90 days prior to the filing
of this report, pursuant to Securities Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation.
26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
The Company was formed as a result of a series of transactions pursuant
to the Agreement and Plan of Reorganization (the "Merger") dated as of February
4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the
Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and
continues to have, significant potential liabilities arising out of
product-liability related litigation, pre-Merger tax claims and other claims
unrelated to NMC, which was Grace's dialysis business prior to the Merger. In
connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the
Company and NMC against all liabilities of W.R. Grace & Co., whether relating to
events occurring before or after the Merger, other than liabilities arising from
or relating to NMC's operations. Proceedings have been brought against W.R.
Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace
& Co.-Conn., principally alleging that the Merger was a fraudulent conveyance,
violated the uniform fraudulent transfer act, and constituted a conspiracy. See
discussion of "Mesquita v. W.R. Grace and Company" below.
Pre-Merger tax claims or tax claims that would arise if events were to
violate the tax-free nature of the Merger, could ultimately be the obligation
of the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its
filings with the Securities and Exchange Commission that: its tax returns for
the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the
"Service"); Grace has received the Service's examination report on tax periods
1993 to 1996; that during those years Grace deducted approximately $122.1
million in interest attributable to corporate owned life insurance ("COLI")
policy loans; that Grace has paid $21.2 million of tax and interest related to
COLI deductions taken in tax years prior to 1993; that a U.S. District Court
ruling has denied interest deductions of a taxpayer in a similar situation; and
that Grace is seeking a settlement of the Service's claims. Subject to certain
representations made by Grace, the Company and Fresenius AG, Grace and certain
of its affiliates agreed to indemnify the Company against this and other
pre-Merger and Merger related tax liabilities.
Subsequent to the Merger, Grace was involved in a multi-step transaction
involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The
Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to
confirm the Company's entitlement to indemnification from Sealed Air for all
losses and expenses incurred by the Company relating to pre-Merger tax
liabilities and Merger-related claims.
Subsequent to the Sealed Air transaction, Grace and certain of its
subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. The Company intends to continue to pursue vigorously its rights to
indemnification from Grace and its insurers and former and current affiliates,
including Sealed Air, for all costs incurred by the Company relating to
pre-Merger tax and Merger-related claims.
Since 1997, the Company, NMC, and certain NMC subsidiaries have been
engaged in litigation with various insurance companies concerning allegations of
inappropriate billing practices for nutritional therapy and diagnostic and
clinical laboratory tests and misrepresentations. These claims against the
Company seek unspecified damages and costs. The Company, NMC and its
subsidiaries believe that there are substantial defenses to the claims asserted,
and intend to vigorously defend all lawsuits. The Company has filed
counterclaims against the plaintiffs in these matters based on inappropriate
claim denials and delays in claim payments. Other private payors have contacted
the Company and may assert that NMC received excess payments and, similarly, may
join the lawsuits or file their own lawsuit seeking reimbursement and other
damages. Although the ultimate outcome on the Company of these proceedings
cannot be predicted at this time, an adverse result could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et
al. (Sup. Court of Calif., S.F. County, #315465) was filed as a class action by
plaintiffs claiming to be creditors of W. R . Grace & Co.-Conn ("Grace
Chemicals") against Grace Chemicals, the Company and other defendants,
principally alleging that the Merger which resulted in the original formation of
the Company was a fraudulent transfer, violated the uniform fraudulent transfer
act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R.
Grace & Company, et al.) and additional class actions were filed subsequently
with substantially similar allegations; all cases have been stayed and
transferred to the U.S. District Court, have been dismissed without prejudice or
are pending before the U.S. Bankruptcy Court in Delaware in connection with
Grace's Chapter 11 proceeding. The Company has requested indemnification from
Grace Chemicals and Sealed Air Corporation pursuant to the Merger agreements. If
the Merger is determined to have been a fraudulent transfer, if material damages
are proved by the plaintiffs, and if the Company is not able to collect, in
whole or in part on the indemnity, from W.R. Grace & Co., Sealed Air
Corporation, or their affiliates or former affiliates or their insurers, and if
the Company
27
is not able to collect against any party that may have received distributions
from W.R. Grace & Co., a judgment could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is confident that no fraudulent transfer or conspiracy occurred and intends to
defend the cases vigorously.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other litigation arising in the ordinary course of its business. Management
regularly analyzes current information including, as applicable, the Company's
defenses and insurance coverage and, as necessary, provides accruals for
probable liabilities for the eventual disposition of these matters.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. Anti-Kickback Statute, the False Claims
Act, the Stark Statute, and other federal and state fraud and abuse laws.
Applicable laws or regulations may be amended, or enforcement agencies or
courts may make interpretations that differ from the Company's or the manner in
which the Company conduct its business. In the U.S., enforcement has become a
high priority for the federal government and some states. In addition, the
provisions of the False Claims Act authorizing payment of a portion of any
recovery to the party bringing the suit encourage private plaintiffs to
commence "whistle blower" actions. By virtue of this regulatory environment, as
well as our corporate integrity agreement with the government, the Company
expects that its business activities and practices will continue to be subject
to extensive review by regulatory authorities and private parties, and expects
continuing inquiries, claims and litigation relating to its compliance with
applicable laws and regulations. The Company may not always be aware that an
inquiry or action has begun, particularly in the case of "whistle blower"
actions, which are initially filed under court seal.
The Company operates large number facilities throughout the U.S. In such a
decentralized system, it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliated companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the U.S.
Anti-Kickback Statute, the Stark Statute and False Claims Act, among other laws,
and the Company cannot predict whether law enforcement authorities may use such
information to initiate further investigations of the business practices
disclosed or any of its other business activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that insurance will cover all
asserted claims. A successful claim against the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and the results of its operations. Any claims,
regardless of their merit or eventual outcome, also may have a material adverse
effect on the Company's reputation and business.
The Company has also had claims asserted against it and has had lawsuits
filed against it relating to businesses that it has acquired or divested. These
claims and suits relate both to operation of the businesses and to the
acquisition and divestiture transactions. The Company has asserted its own
claims, and claims for indemnification. Although the ultimate outcome on the
Company cannot be predicted at this time, an adverse result could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.
ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS
At December 31, 2001, the Company recorded a pre-tax special charge of
$258 million to reflect anticipated expenses associated with the continued
defense and resolution of pre-Merger tax claims, Merger-related claims, and
commercial insurer claims. While the Company believes that its accruals
reasonably estimate the Company's currently anticipated costs in connection
with the continued defense and resolution of these claims, no assurances can be
given that the actual costs incurred by the Company will not exceed the amount
of these accruals.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care
Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of
the New York Business Corporation Law dated March 23, 1988
(incorporated herein by reference to the Form 8-K of the
Company filed on May 9, 1988).
Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace &
Co.) under Section 805 of the New York Business Corporation
Law dated May 25, 1988 (changing the name to W. R. Grace &
Co., incorporated herein by reference to the Form 8-K of the
Company filed on May 9, 1988).
Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace &
Co.) under Section 805 of the New York Business Corporation
Law dated September 27, 1996 (incorporated herein by reference
to the Form 8-K of the Company filed with the Commission on
October 15, 1996).
Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace &
Co.) under Section 805 of the New York Business Corporation
Law dated September 27, 1996 (changing the name to Fresenius
National Medical Care Holdings, Inc., incorporated herein by
reference to the Form 8-K of the Company filed with the
Commission on October 15, 1996).
Exhibit 3.5 Certificate of Amendment of the Certificate of
Incorporation of Fresenius Medical Care Holdings, Inc. under
Section 805 of the New York Business Corporation Law dated
June 12, 1997 (changing name to Fresenius Medical Care
Holdings, Inc., incorporated herein by reference to the Form
10-Q of the Company filed with the Commission on August 14,
1997).
Exhibit 3.6 Certificate of Amendment of the Certificate of
Incorporation of Fresenius Medical Care Holdings, Inc. dated
July 6, 2001 (authorizing action by majority written consent
of the shareholders) (incorporated herein by reference to the
Form 10-Q of the Company filed with the Commission on August
14, 2001).
Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care
Holdings, Inc. (incorporated herein by reference to the Form
10-Q of the Company filed with the Commission on August 14,
1997).
Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among
National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and Affiliates,
as Guarantors, the Lenders named therein, NationsBank, N.A.,
as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank AG and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agents
(incorporated herein by reference to the Form 6-K of Fresenius
Medical Care AG filed with the Commission on October 15,
1996).
Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the
Credit Agreement dated as of September 27, 1996, incorporated
herein by reference to the Form 8-K of Registrant filed with
the Commission on December 16, 1996).
Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment
to the Credit Agreement dated as of September 27, 1996,
incorporated herein by reference to the Form 10-K of
Registrant filed with the Commission on March 31, 1997).
Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agents, as previously amended (incorporated herein by
reference to the Form 10-Q of the Registrant filed with the
Commission on November 14, 1997).
29
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement
dated as of September 27, 1996, among National Medical Care,
Inc. and Certain Subsidiaries and Affiliates, as Borrowers,
Certain Subsidiaries and Affiliates, as Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of
America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agents, as previously amended (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on November 14, 1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit
Agreement dated as of September 27, 1996, among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, Bank of America, N.A. (formerly
known as NationsBank, N.A.), as paying agent and The Bank of
Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and
Bank of America, N.A. (formerly known as NationsBank, N.A.),
as Managing Agents, as previously amended (incorporated herein
by reference to the Form 10-K of Registrant filed with
Commission on March 23, 1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated
December 12, 1997 to the Credit Agreement dated as of
September 27, 1996 among National Medical Care, Inc. and
Certain Subsidiaries and Affiliates, as Borrowers, Certain
Subsidiaries and Affiliates, as Guarantors, the Lenders named
therein, Bank of America, N.A. (formerly known as NationsBank,
N.A.), as paying agent and The Bank of Nova Scotia, The Chase
Manhattan Bank, Dresdner Bank AG and Bank of America, N.A.
(formerly known as NationsBank, N.A.), as Managing Agents
(incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on March 23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the
Credit Agreement dated as of September 27, 1996, among
National Medical Care, Inc. and Certain Subsidiaries and
Affiliates, as Borrowers, Certain Subsidiaries and Affiliates,
as Guarantors, the Lenders named therein, Bank of America,
N.A. (formerly known as NationsBank, N.A.), as paying agent
and The Bank of Nova Scotia, The Chase Manhattan Bank, N.A.,
Dresdner Bank AG and Bank of America, N.A. (formerly known as
NationsBank, N.A.), as Managing Agents, as previously amended
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on November 12, 1998).
Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors ,
the Lenders named therein, Bank of America, N.A. (formerly
known as NationsBank, N.A.), paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A. G. and Bank
of America, N.A. (formerly known as NationsBank, N.A.). as
Managing Agents, (incorporated herein by reference to the Form
10-K of registrant filed with Commission on March 9, 1999).
Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agent (incorporated herein by reference to the Form
10-K of registrant filed with Commission on March 30, 2000).
Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agent (incorporated herein by reference to the Form
10-K of registrant filed with Commission on March 30, 2000).
Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agent (incorporated herein by reference to the Form
10-K of registrant filed with Commission on November 11,
2000).
30
Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A). as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agent (incorporated by reference to the Registration
Statement on Form F-4 of Fresenius Medical Care AG
(Registration No. 333-66558)).
Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agent (incorporated by reference to the Registration
Statement on Form F-4 of Fresenius Medical Care AG
(Registration No. 333-66558)).
Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N.A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank
of America, N.A. (formerly known as NationsBank, N.A.), as
Managing Agent (incorporated herein by reference to the Form
10-K of Registrant filed with Commission on April 1, 2001).
Exhibit 4.16 Amendment No. 14 dated as of February 22, 2002 to the Credit
Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates Guarantors, the
Lenders named therein, Bank of America, N.A. (formerly known
as NationsBank, N. A.), as paying agent and The Bank of Nova
Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank
of America, N. A. (formerly known as NationsBank, N. A. ), as
Managing Agent (filed herewith).
Exhibit 4.17 Fresenius Medical Care AG 1998 Stock Incentive Plan as
amended effective as of August 3, 1998 (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on May 14, 1998).
Exhibit 4.18 Fresenius Medical Care AG 2001 International Stock
Incentive Plan (incorporated by reference to the Registration
Statement on Form F-4 of Fresenius Medical Care AG filed
August 2, 2001 (Registration No. 333-66558)).
Exhibit 4.19 Senior Subordinated Indenture dated as of February 19,
1998, among Fresenius Medical Care AG, State Street Bank and
Trust Company as Trustee and Fresenius Medical Care Holdings,
Inc., and Fresenius Medical Care AG, as Guarantors with
respect to the issuance of 7 7/8% Senior Subordinated Notes
due 2008 (incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on March 23, 1998).
Exhibit 4.20 Senior Subordinated Indenture dated as of February 19,
1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer,
State Street Bank and Trust Company as Trustee and Fresenius
Medical Care Holdings, Inc., and Fresenius Medical Care AG, as
Guarantors with respect to the issuance of 7 3/8% Senior
Subordinated Notes due 2008 (incorporated herein by reference
to the Form 10-K of Registrant filed with Commission on March
23, 1998).
Exhibit 4.21 Senior Subordinated Indenture dated as of June 6, 2001
among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l.
Luxemborg - III, Fresenius Medical Care Holdings, Inc.,
Fresenius Medical Care Deutschland GmbH and State Street Bank
and Trust Company with respect to 7 7/8% Senior Subordinated
Notes due 2011 (incorporated herein by reference to the
Registration Statement on Form F-4 of Fresenius Medical Care
AG dated August 2, 2001 (Registration No. 333-66558)).
Exhibit 4.22 Senior Subordinated Indenture dated as of June 15, 2001
among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l.
Luxemborg - III, Fresenius Medical Care Holdings, Inc.,
Fresenius Medical Care Deutschland GmbH and State Street Bank
and Trust Company with respect to 7 7/8% Senior Subordinated
Notes due 2011 (incorporated herein by reference to the
Registration Statement on Form F-4 of Fresenius Medical Care
AG dated August 2, 2001 (Registration No. 333-66558)).
31
Exhibit 10.1 Purchase Agreement, effective January 1, 1995, between
Baxter Health Care Corporation and National Medical Care,
Inc., including the addendum thereto (incorporated by
reference to the Form SE of Fresenius Medical Care dated July
29, 1996 and the exhibits thereto).
Exhibit 10.2* Product Purchase Agreement effective January 1, 2002 between
Amgen USA, Inc. and National Medical Care, Inc. (incorporated
by reference to the Form 10-Q of the Registrant filed with the
Commission on May 15, 2002).
Exhibit 10.3 Receivables Purchase Agreement dated August 28, 1997
between National Medical Care, Inc. and NMC Funding
Corporation (incorporated herein by reference to the Form 10-Q
of the Registrant filed with the Commission on November 14,
1997).
Exhibit 10.4 Amendment dated as of September 28, 1998 to the
Receivables Purchase Agreement dated as of August 28, 1997, by
and between NMC Funding Corporation, as Purchaser and National
Medical Care, Inc., as Seller (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on November 12, 1998).
Exhibit 10.5 Second Amended and Restated Transfer and Administrative
agreement dated as of September 24, 2002 among NMC Funding
Corporation, National Medical Care, Inc., Enterprise Funding
Corporation, Compass US Acquisition, LLC, Giro Multifunding
Corporation, the Bank Investors listed therein, WestLB AG, New
York Branch (formerly known as Westdeutsche Landesbank
Girozentrale, New York Branch), as an administrative agent and
Bank of America, N.A., as an administrative agent (filed
herewith).
Exhibit 10.6 Amendment No.1 dated as of October 22, 2002 to the Second
Amended and Restated Transfer and Administrative agreement
dated as of September 24, 2002 among NMC Funding Corporation,
National Medical Care, Inc., Enterprise Funding Corporation,
Compass US Acquisition, LLC, Giro Multifunding Corporation,
the Bank Investors listed therein, WestLB AG, New York Branch
(formerly known as Westdeutsche Landesbank Girozentrale, New
York Branch), as an administrative agent and Bank of America,
N.A., as an administrative agent (filed herewith).
Exhibit 10.7 Employment Agreement dated January 1, 1992 by and between Ben
J. Lipps and Fresenius USA, Inc. (incorporated herein by
reference to the Annual Report on Form 10-K of Fresenius USA,
Inc., for the year ended December 31, 1992).
Exhibit 10.8 Modification to FUSA Employment Agreement effective as of
January 1, 1998 by and between Ben J. Lipps and Fresenius
Medical Care AG (incorporated herein by reference to the Form
10-Q of Registrant filed with Commission on May 14, 1998).
Exhibit 10.9 Employment Agreement dated March 15, 2000 by and between
Jerry A. Schneider and National Medical Care, Inc
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.10 Employment Agreement dated March 15, 2000 by and between
Ronald J. Kuerbitz and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 12, 2000).
Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between J.
Michael Lazarus and National Medical Care, Inc. (incorporated
herein by reference to the Form 10-Q of Registrant filed with
Commission on May 12, 2000).
Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between
Robert "Rice" M. Powell, Jr. and National Medical Care, Inc.
(incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on April 2, 2001).
Exhibit 10.13 Employment Agreement dated July 1, 2002 by and between John
F. Markus and National Medical Care, Inc. (incorporated herein
by reference to the Form 10-Q of Registrant filed with
Commission on August 14, 2002).
32
Exhibit 10.15 Subordinated Loan Note dated as of May 18, 1999, among
National Medical Care, Inc. and certain Subsidiaries with
Fresenius AG as lender (incorporated herein by reference to
the Form 10-Q of Registrant filed with Commission on November
22, 1999).
Exhibit 10.16 Corporate Integrity Agreement between the Offices of
Inspector General of the Department of Health and Human
Services and Fresenius Medical Care Holdings, Inc. dated as of
January 18, 2000 (incorporated herein by reference to the Form
8-K of the Registrant filed with the Commission on January 21,
2000).
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Confidential treatment has been requested as to certain portions of this
Exhibit
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the period covered by this
report.
33
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fresenius Medical Care Holdings, Inc.
DATE: NOVEMBER 14, 2002 /s/ Ben J. Lipps
----------------- -----------------------------------------
NAME: Ben J. Lipps
TITLE: President (Chief Executive Officer)
DATE: NOVEMBER 14, 2002 /s/ Jerry A. Schneider
----------------- ------------------------------------------
NAME: Jerry Schneider
TITLE: Chief Financial Officer
CERTIFICATIONS
Chief Executive Officer
I, Ben J. Lipps, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Fresenius Medical
Care Holdings, Inc.
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Quarterly Report.
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
34
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ BEN J. LIPPS
-------------------------------------
Ben J. Lipps
President and Chief Executive Officer
Chief Financial Officer
I, Jerry A. Schneider, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Fresenius Medical
Care Holdings, Inc.
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Quarterly Report.
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ JERRY A. SCHNEIDER
---------------------------------
Jerry A. Schneider
Chief Financial Officer