1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (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, 1995 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 1-8350 --------------------------------------------------------- FRESENIUS USA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2550576 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION) 2637 SHADELANDS DRIVE WALNUT CREEK, CALIFORNIA 94598 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (510) 295-0200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the most recent practicable date: 21,738,117 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE ISSUED AND OUTSTANDING AT NOVEMBER 6, 1995. 2 FRESENIUS USA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 (UNAUDITED) (DOLLARS IN THOUSANDS) Assets September 30, December 31, 1995 1994 ------------- ------------ Current assets: Cash $ 3,161 2,315 Trade accounts receivable, net 50,462 42,671 Inventories 52,721 52,704 Other current assets 5,653 1,893 -------- ------- Total current assets 111,997 99,583 Property, plant, and equipment, net 50,688 45,956 Intangible assets 37,530 39,498 Other assets 4,602 311 Total assets -------- ------- $204,817 185,348 ======== ======= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 11,576 13,128 Accounts payable to affiliates,net 32,384 33,361 Accrued expenses 8,815 12,214 Short term borrowings 36,819 22,330 Short term borrowings-Fresenius AG 4,450 4,380 Current portion long-term debt 8,369 8,356 Current portion of capital lease obligations 1,068 1,140 Income taxes payable 440 95 -------- ------- Total current liabilities 103,921 95,004 Long-term payable, less current portion 1,830 1,861 Note payable to Fresenius North America 274 274 Long-term debt, less current portion 17,593 25,963 Capital lease obligations 8,873 1,674 ------- ------- Total liabilities 132,491 124,776 Stockholders' equity: Series F preferred stock, $1.00 par value 200 200 Common stock, $.01 par value 214 212 Capital in excess of par value 140,699 139,510 Currency translation adjustment (69) (94) Accumulated deficit (68,718) (79,256) -------- ------- Total stockholders' equity 72,326 60,572 -------- ------- $204,817 185,348 ======== ======= See accompanying notes to consolidated financial statements. 2 3 FRESENIUS USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Three Months Ended ------------------------------ September 30, September 30, 1995 1994 ------------- ------------- Net sales $78,933 65,370 Cost of sales 55,602 45,662 ------- ------ Gross profit 23,331 19,708 Operating expenses: Selling, general, administrative, and research and development 18,709 16,417 ------- ------ Operating income 4,622 3,291 Other income (expense): Interest income 66 76 Interest expense (1,396) (1,194) Other income (expense) (29) 101 -------- ------ Income before income taxes 3,263 2,274 Income tax benefit (expense) 484 (296) -------- ------ Net income $ 3,747 1,978 ======= ====== Net income per common and common equivalent share: Primary $ .14 .08 ======= ====== Fully diluted $ .14 .08 ======= ====== Weighted average number of shares of common stock and common stock equivalents used to compute net income per common and common equivalent share: Primary 26,930 24,243 ======= ====== Fully diluted 27,215 24,745 ======= ====== See accompanying notes to consolidated financial statements. 3 4 FRESENIUS USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Nine Months Ended ------------------------------ September 30, September 30, 1995 1994 ------------- ------------- Net sales $223,853 186,198 Cost of sales 156,430 128,716 -------- ------- Gross profit 67,423 57,482 Operating expenses: Selling, general, administrative, and research and development 54,533 48,108 -------- ------- Operating income 12,890 9,374 Other income (expense): Interest income 130 141 Interest expense (3,889) (3,856) Other income (expense) (101) 128 -------- ------- Income before income taxes 9,030 5,787 Income tax benefit (expense) 1,508 ( 753) -------- ------- Net income $ 10,538 5,034 ======== ======= Net income per common and common equivalent share: Primary $ .40 .23 ======== ======= Fully diluted $ .39 .22 ======== ======= Weighted average number of shares of common stock and common stock equivalents used to compute net income per common and common equivalent share: Primary 26,271 21,937 ======== ======= Fully diluted 27,148 22,678 ======== ======= See accompanying notes to consolidated financial statements. 4 5 FRESENIUS USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) (IN THOUSANDS) Nine Months Ended ------------------------------ September 30, September 30, 1995 1994 ------------- ------------- Net cash used in operating activities $ (3,154) (3,262) Cash flows from investing activities: Purchases of property, plant and equipment (28,537) (13,753) -------- ------- Net cash provided by (used in) investing activities (28,537) (13,753) Cash flows from financing activities: Principal payments under debt and capital lease obligations (10,042) (9,065) Proceeds from sale/leaseback of property,plant and equipment 19,000 -- Proceeds from capital lease financing arrangement 8,782 -- Change in accounts payable to affiliates, net (977) 3,013 Proceeds from short-term borrowings 44,369 12,895 Proceeds from short-term borrowings-Fresenius AG 70 221 Repayment of short-term borrowings (29,880) (9,680) Proceeds from issuance of common stock, net 1,191 16,720 -------- ------- Net cash provided by financing activities 32,513 14,104 Effect of exchange rates on cash 24 10 -------- ------- Net increase (decrease) in cash and cash equivalents 846 (2,901) Cash and cash equivalents at beginning of period 2,315 5,552 -------- ------- Cash and cash equivalents at end of period $ 3,161 2,651 ======== ======= See accompanying notes to consolidated financial statements. 5 6 FRESENIUS USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) (1) Description of Business Fresenius USA, Inc. manufactures and distributes equipment and disposable products for the treatment of kidney failure by hemodialysis and by peritoneal dialysis. The Company is one of only two companies in the United States offering a full line of both hemodialysis and peritoneal dialysis machines and disposable products. These machines and products are used to cleanse a patient's blood of waste products and fluids normally eliminated by properly functioning kidneys. (2) Net Income Per Common Share Net income per common share was computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents (when dilutive) outstanding during each year. Stock options, common stock warrants, and the Series F preferred stock are considered to be common stock equivalents. The computation of fully diluted net income per common share would also include the effect of converting other outstanding securities when the effect is dilutive, and the additional dilution related to stock options when the market price at the end of the period is higher than the average market price for the period. For the period presented, the effect of these items has been included in the determination of fully diluted net income per common share as they have resulted in dilution of more than three percent. (3) Income Taxes At December 31, 1994, the Company had net operating loss carryforwards of approximately $50.0 million for federal income tax reporting purposes. The net operating losses expire in varying amounts beginning in 1998 through 2006. The ability of the Company to use carryforwards to offset taxes on its future income is also subject to certain annual cumulative limitations. The Company believes that it has sufficient net loss carryforwards to offset any 1995 net income for federal income tax reporting purposes. 6 7 FRESENIUS USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) (4) Inventories Inventories are stated at the lower of cost (determined by using first-in, first-out method) or market value, and consist of the following as of September 30, 1995 and December 31, 1994:(in thousands) September 30, December 31, 1995 1994 ------------- ------------ Raw Materials $24,038 23,071 Work in process 7,919 4,237 Finished goods 22,401 27,464 ------- ------ 54,358 54,772 Reserves (1,637) (2,068) ------- ------ Inventories, net $52,721 52,704 ======= ====== (5) Commitments and Contingencies In March 1994, the Company began construction of a 104,000 square foot addition to its manufacturing facility in Ogden, Utah for the manufacture of polysulfone dialyzers. In June, 1995, the Company completed the construction of the addition to its manufacturing facility and commenced validation and production of polysulfone dialyzers at its Ogden, Utah plant. During the period from March 1994 through September 30, 1995, the Company has expended approximately $40.9 million for this construction and the expansion of its solution and device manufacturing capability in Ogden, Utah. On March 31, 1995, the Company entered into a sale leaseback arrangement with a bank which covers the sale by the Company of approximately $19.0 million of certain new equipment to the bank and the leaseback of the equipment under a four year renewable lease. As of September 30, 1995, approximately $19.0 million of equipment had been funded under this arrangement and leased back by the Company. The Company and the same bank are currently in discussions to provide for additional funding for equipment of approximately $8.0 million under similar sale leaseback arrangments. In March 1995, the Company replaced a $15.0 million line of credit supported by Fresenius AG with a $20.0 million line of credit from a commercial bank independent of support from Fresenius AG. This line of credit is secured by the Company's accounts receivable. 7 8 FRESENIUS USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) (6) Management Representation The accompanying unaudited consolidated condensed financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. Operating results for the three and nine month periods ended September 30, 1995 are not necessarily indicative of the results to be expected for the year. Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and regulations. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto contained in the Company's Form 10-K for the year ended December 31, 1994. 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) RESULTS OF OPERATIONS Three Months and Nine Months Ended September 30, 1995 Compared to Three Months and Nine Months Ended September 30, 1994 Net Sales. Net sales were $78.9 million for the third quarter 1995, an increase of $13.5 million or 20.7% compared with net sales of $65.4 million for the third quarter 1994. Net sales for the first nine months of 1995 were $223.9 million, an increase of $37.7 million or 20.2% compared with $186.2 million for the first nine months of 1994. The increase in sales for the first nine months of 1995 is the result of continued higher unit sales volumes for both hemodialysis and peritoneal dialysis products. Gross Profit. Gross profit was $23.3 million for the third quarter 1995, an increase of $3.6 million or 18.4% compared with gross profit of $19.7 million for the third quarter 1994. Gross profit margin decreased from 30.1% for the third quarter 1994 to 29.6% for the third quarter 1995. The decrease in gross profit margin was primarily due to decreased production efficiencies as a result of commencing the Ogden, Utah manufacture of polysulfone dialyzers. Selling, General and Administrative Expense and Research and Development Expense. Selling, general and administrative expense and research and development expense were $18.7 million for the third quarter 1995, an increase of $2.3 million or 14.0% compared with the third quarter 1994, and $54.5 million for the first nine months in 1995, an increase of $6.4 million or 13.4% compared to the first nine months in 1994. These expenses as a percentage of net sales were 23.7% for the third quarter 1995 compared to 25.1% for the third quarter of 1994, and 24.4% for the first nine months of 1995 compared with 25.8% for the first nine months of 1994. 9 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) Interest Expense (Net). Interest expense (net) was $1.3 million for the third quarter 1995 and $3.8 million for the nine months ended September 30, 1995 compared to $1.1 million and $3.7 million for the same periods of 1994. Income Tax Benefit (Expense). Income tax benefit in the third quarter of 1995 was $484,000 compared to income tax expense of $296,000 for the same period in 1994. Income tax benefit for the nine months ended September 30, 1995 was $1.5 million compared to income tax expense of $753,000 for the same period in 1994. During the third quarter of 1995, and for the nine months ended September 30, 1995, the Company recognized a tax benefit of $875,000, and $2.6 million, respectively, related to the Company's net operating loss carryforward from previous years. Net Income. Net income was $3.7 million for the third quarter 1995, an increase of $1.7 million or 85.0% compared to net income of $2.0 million for the third quarter 1994. Net income for the first nine months was $10.5 million, an increase of $5.5 million or 109.3% compared to net income of $5.0 million for the first nine months of 1994. Net income for the third quarter 1995 and for the first nine months of 1995 included the above tax benefit which resulted from recognition of a portion of the Company's deferred tax asset. 10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its operations, working capital and capital expenditures through bank borrowings obtained with credit support from Fresenius AG, private placements of preferred stock and common stock to Fresenius AG and internally generated funds. Since 1990, the Company has realized $19.5 million in net proceeds from private placements of preferred and common stock to Fresenius AG, all of which was utilized to reduce outstanding obligations to Fresenius AG and affiliated companies. During June 1994, the Company completed an underwritten public offering of 3,450,000 shares of the Company's Common Stock, including 450,000 shares issued upon the exercise of the underwriter's over-allotment option. The net proceeds of approximately $16.3 million were used to repay indebtedness and short-term credit facilities. In March 1994, the Company began construction of a 104,000 square foot addition to its manufacturing facility in Ogden, Utah for the manufacture of polysulfone dialyzers. In June, 1995, the Company completed the construction of the addition to its manufacturing facility and commenced validation and production of polysulfone dialyzers at its Ogden, Utah plant. During the period from March 1994 through September 30, 1995, the Company has expended approximately $40.9 million for this construction and the expansion of its solution and device manufacturing capability in Ogden, Utah. During March 1995, the Company replaced an existing $15.0 million line of credit with a commercial bank supported by Fresenius AG with a $20.0 million line of credit from a commercial bank independent of support from Fresenius AG, but secured by the Company's accounts receivable. On March 31, the Company also entered into an arrangement with a commercial bank, whereby the bank has committed to purchase $19.0 million of the Company's manufacturing equipment in Ogden, Utah, and lease the equipment back to the Company under a four year renewable lease. As of September 30, 1995, approximately $19.0 million of equipment had been acquired by the bank and leased back by the Company. The Company and the same bank are currently in discussions to provide for additional funding for equipment of approximately $8.0 million under similar sale leaseback arrangements 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The present source of liquidity for the Company is its cash balances, which totalled $3.2 million as of September 30, 1995, and amounts available under various lines of credit. As of September 30, 1995, the Company had outstanding short term borrowings under lines of credit of $36.8 million with six commercial banks. These lines of credit provide for total credit availability of $47.0 million. Fresenius AG provided credit support for $27.0 million to enable the Company to obtain these lines of credit. In addition, at September 30, 1995, the Company had fully drawn the amount available under a $4.5 million short-term line of credit with Fresenius AG, the terms of which are similar to those of the lines of credit with the six commercial banks described above. The Company believes that its committed, and possible future commercial financing, combined with internally generated funds, will be sufficient to fund the Ogden, Utah plant expansion, the Company's other capital expenditures, working capital requirements and other obligations. 12 13 PART II Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11 Statement of Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K No current reports on Form 8-K were filed by the registrant during the period covered by this report. 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fresenius USA, Inc. November 13, 1995 /s/ Heinz Schmidt ----------------------- Vice President Finance (Principal Financial Officer) /s/ Robert E. Farrell ----------------------- Vice President Administration and General Counsel 14 15 EXHIBIT EXHIBIT DESCRIPTION NO. Ex-11 Statement of Computation of Per Share Earnings Ex-27 Financial Data Schedule