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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of (I.R.S. Employer Identification Number)
incorporation or organization)
2637 SHADELANDS DRIVE, WALNUT CREEK, CALIFORNIA 94598
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 510-295-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock of the registrant held by
nonaffiliates of the registrant was approximately $158 million at March 25,
1996. For purposes of the foregoing sentence, the term "affiliate" includes each
director and executive officer of the registrant.
21,536,172 shares of Common Stock were outstanding at March 25, 1996
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS.
INTRODUCTORY NOTE
Unless the context requires otherwise, all references in this Annual
Report to Fresenius USA, Inc. or the "Company" are to the combined operations of
Fresenius USA, Inc. and its subsidiaries. On December 31, 1991, the Company
acquired substantially all of the assets of a subsidiary of Fresenius
Aktiengesellschaft, a German corporation ("Fresenius AG"). Because of the
accounting treatment accorded this acquisition, the historical financial
statements of the Company presented in this Report reflect the results of the
Company as if the acquisition had occurred in 1987. See "Overview."
Optum(R), Delflex(R), Inpersol(R) and PD-Plus(R) are registered
trademarks of the Company. Safe-Lock(R) is a registered trademark of Fresenius
AG. Calcijex(R) is a registered trademark of Abbott Laboratories ("Abbott").
Critikon(R) is a registered trademark of Johnson & Johnson.
RECENT DEVELOPMENT
On February 4, 1996, W.R. Grace & Co. ("Grace") and Fresenius AG
entered into a definitive agreement to combine Grace's National Medical Care,
Inc. ("NMC") with Fresenius AG's worldwide dialysis business, including the
Company, to create a fully integrated dialysis company. Such combination is
referred to in this Report as the "Reorganization." Pursuant to this
agreement, Fresenius AG has agreed with Grace that the Company would become a
wholly-owned subsidiary of the new company, to be called Fresenius Medical Care
and organized as an aktiengesellschaft under the laws of Germany, and that, when
the economic terms on which the Company's shareholders, other than Fresenius AG
and its affiliates, will participate in this transaction, have been established,
Fresenius AG will vote its shares in the Company in favor of the transaction. An
Independent Committee of the Board of Directors of the Company has been
established, consisting of Messrs. Ehrlich (Chairman) and Baker and Dr. Marten,
to negotiate these terms with Fresenius AG. This Committee has retained Salomon
Brothers and Ropes & Gray to advise the Committee as investment bankers and
counsel, respectively.
OVERVIEW
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.
The Company comprises the combined operations of two businesses which,
since October 1987, have been owned or effectively controlled by Fresenius AG
and the assets of which were formally combined on December 31, 1991. One was the
Company itself which, immediately prior to this combination, operated under the
name Delmed, Inc. ("Delmed") and manufactured peritoneal dialysis systems for
sale to a single, exclusive distributor. The other was Fresenius U.S.A., Inc., a
California corporation ("Old FUSA") and a wholly-owned subsidiary of Fresenius
AG, which engaged in the manufacture and sale of hemodialysis machines and
related equipment and supplies.
In October 1987, Fresenius AG acquired effective control of Delmed by
purchasing Delmed's Series F Series Preferred Stock (the "Series F Preferred
Stock") and certain other securities of Delmed, such that Fresenius AG then
beneficially owned approximately 49% of Delmed's outstanding Common Stock.
Following this acquisition, Delmed continued to operate independently of Old
FUSA, with NMC as its exclusive distributor. The exclusive distribution
arrangement between Delmed and NMC expired in March 1990 and, in April 1990, Old
FUSA began to act as the
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exclusive distributor of Delmed's peritoneal dialysis products. During 1990 and
1991, Old FUSA made significant expenditures to establish a sales and
distribution network for Delmed's peritoneal dialysis products.
On December 30, 1991, Delmed changed its name to "Fresenius USA, Inc."
and effected a one-for-ten reverse split of its common stock. Effective December
31, 1991, Delmed acquired substantially all of Old FUSA's assets, which included
the exclusive North American distribution rights for certain Fresenius AG
products and the distribution network for Delmed's peritoneal dialysis products
established by Old FUSA, subject to substantially all of Old FUSA's liabilities.
These transactions increased Fresenius AG's beneficial ownership of the common
stock of the Company to approximately 80%. This combination of Delmed and Old
FUSA was accounted for as a transaction between entities under common control
using historical amounts in a manner similar to a pooling of interests.
On February 24, 1993, the Company acquired the renal dialysis business
(other than the Calcijex product line and certain other excluded assets) of
Abbott in the United States, Australia and New Zealand (the "Abbott
Acquisition"). The Abbott Acquisition was treated as a purchase for accounting
purposes. Among other things, this acquisition gave the Company rights in and
access to Abbott's patents, trademarks, know-how, manufacturing technology and
other intangible rights and property used by Abbott in this business. Abbott
also agreed to manufacture certain peritoneal dialysis products for the Company
for five years, after which time the Company intends to manufacture these
products itself. With this acquisition, the Company obtained rights to
peritoneal dialysis products which are interchangeable with those of its primary
competitor, thereby enhancing the breadth and marketability of the Company's
peritoneal dialysis product line and giving the Company a larger base of
potential peritoneal dialysis patients. See Note 23 of Notes to Consolidated
Financial Statements.
During the second quarter of 1995, the Company began producing
polysulfone dialyzers at its expanded Ogden, Utah manufacturing facility.
Although the Company continued to purchase dialyzers from Fresenius AG during
1995, it is currently producing most of the polysulfone dialyzers that it had,
in the past, purchased from Fresenius AG.
The products supplied by the Company to the hemodialysis and peritoneal
dialysis market include: hemodialysis and peritoneal dialysis machines and
related equipment, dialyzers, peritoneal dialysis solutions in flexible plastic
bags, hemodialysis concentrate solutions, granulate mixes and disposable tubing
assemblies. The Company's large installed base of hemodialysis machines, as well
as the significant number of patients using the Company's peritoneal dialysis
products, provides the Company with the opportunity to generate additional,
recurring revenues through the sale of its disposable products, including
dialyzers, solutions and disposable tubing assemblies.
ESRD AND THE DIALYSIS MARKET
Overview
The human kidney normally removes waste products and excess water from
the blood, preventing toxin build up, eventual poisoning of the body and water
overload. End-stage renal disease ("ESRD"), or chronic renal (kidney) failure,
is a slow, progressive loss of kidney function resulting from inherited
disorders or prolonged medical conditions. Unlike acute renal failure, which
stems from bleeding, injury, burns, poisoning, acute infection, blockage or
other causes which are generally temporary and permit the kidneys to return to
normal after the failure has been treated, ESRD cannot be reversed, and all
those affected eventually require artificial dialysis or kidney transplantation.
There are presently only three methods for the treatment of ESRD:
hemodialysis, peritoneal dialysis and kidney transplants. Transplants, while a
viable form of treatment for some patients, are limited by the scarcity of
compatible kidneys. Therefore most patients suffering from ESRD must rely on
artificial renal therapy in the form of either hemodialysis or peritoneal
dialysis.
The Company believes that, between 1984 and 1994 the total number of
persons in the United States suffering from ESRD grew at a compound annual rate
of approximately 9.1%, and that the number of patients on hemodialysis and
peritoneal dialysis grew, during this same period, at approximately 8.8% and
10.7% annually, respectively. The Company believes that, at December 31, 1994,
approximately 155,518 and 31,304 persons in the United States were receiving
hemodialysis and peritoneal dialysis treatments, respectively. The Company
believes that, over the next
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five to ten years, the number of patients suffering from ESRD will continue to
grow at approximately the same rate, and that the number of patients treated
using peritoneal dialysis will continue to grow more quickly than the number of
patients using hemodialysis because of cost and quality of life considerations.
Hemodialysis
Hemodialysis is the process by which waste products and excess fluid
are removed from the blood extracorporeally, or outside of the body.
In hemodialysis, the blood flows outside the body by means of plastic
tubes known as bloodlines through a specially designed filter -- a dialyzer --
which separates waste products from the blood by diffusion and osmosis or
ultrafiltration. In the dialyzer, which functions as an artificial kidney, the
patient's blood flows past a semipermeable membrane, which is in turn surrounded
by dialysate solution, the cleansing liquid. By diffusion, toxic substances pass
through the semi-permeable membrane. Through ultrafiltration, excess water and
dissolved electrolytes also pass from the blood through the membrane into the
dialysis solution. The dialysis solution carries away the waste products and
excess water and the cleansed blood is returned to the patient. The movement of
the blood and dialysis fluid is controlled by a hemodialysis machine, which
pumps blood, adds anti-coagulants, regulates the purification process and
controls the mixing of dialysis solution and the rate of its flow through the
system. This machine also monitors and records patient vital signs.
Hemodialysis treatments are generally administered to a patient three
times per week and can last from two and one-half to four hours. A hemodialysis
patient must follow a restricted diet and take a variety of medications and
vitamin supplements. Complications suffered by patients being treated by
hemodialysis include anemia, malnutrition, fluid imbalance and calcium
deficiency. In addition, because of the buildup of toxins in the blood and fluid
on days when no treatment occurs, a patient tends to feel worse on these days.
However, hemodialysis is the only form of treatment (other than transplantation)
currently available to patients who have very low residual or nonexistent renal
function and are inadequately dialyzed using peritoneal dialysis, as well as for
those who have difficulty making the connections and disconnections of tubes and
catheters required with self-administered peritoneal dialysis.
Peritoneal Dialysis
Peritoneal dialysis removes waste products from the blood by use of the
peritoneum, the membrane lining covering the internal organs located in the
abdominal area. Most peritoneal dialysis treatments are self-administered by
patients in their own homes and workplaces by a technique known as continuous
ambulatory peritoneal dialysis ("CAPD") or by a treatment introduced by the
Company in 1980 known as continuous cycling peritoneal dialysis ("CCPD").
In peritoneal dialysis, the patient has a catheter surgically implanted
to provide access to the peritoneal cavity. Using this catheter, a sterile
dialyzing solution is introduced into the peritoneal cavity and the peritoneum
operates as the dialyzing membrane.
A typical CAPD peritoneal dialysis program involves the daily
introduction and disposal of approximately eight liters of solution, two liters
at a time. A patient using CAPD drains, by use of gravity, the dialyzing
solution then contained in his or her peritoneum into a disposable drainage set
at several points during a day. A new solution bag is connected to the drainage
set and the new solution is filled into the peritoneum by gravity. The patient
then manually disconnects from the drainage tubing, caps the catheter and
discards the waste solution and drainage set.
With CCPD the patient connects the implanted catheter to a disposable
"cycler" tubing set that is attached to a prescribed amount of sterile dialysate
solution. A machine is used to "cycle" solution to and from the patient's
peritoneum during sleep.
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In both CAPD and CCPD, the patient undergoes dialysis daily, and
typically does not experience the build-up of toxins and fluids experienced by
hemodialysis patients on the days they are not treated. In addition, because the
patient is not required to make frequent visits to a hemodialysis clinic, and
because the solution exchanges can be accomplished at more convenient times, a
patient on peritoneal dialysis suffers much less disruption to his or her life
than does a patient on hemodialysis. Peritoneal dialysis patients also face less
severe dietary and fluid intake restrictions than hemodialysis patients.
Historically, two aspects of peritoneal dialysis have limited its use
as a long-term therapy. First, certain patients could not effect sterile
connections of the peritoneal dialysis tubing to the catheter, leading to
excessive episodes of peritonitis, a bacterial infection which can result in
serious adverse health consequences. Second, earlier forms of treatment by
peritoneal dialysis were not as effective as hemodialysis so that patients using
peritoneal dialysis needed some residual renal function (which deteriorates over
time) or the amount of therapy had to be increased. Recently, the Company has
introduced products which, the Company believes, may increase the use of
peritoneal dialysis as a long term treatment of ESRD. The Company believes that
its Safe-Lock connector, the Optum device, the Freedom Cycler PD+, and PD Plus
therapy all have the potential to increase the amount of time that a patient
will be able to benefit from peritoneal dialysis treatment. It is likely,
however, that the patients will require hemodialysis treatments at some period
during the term of their disease.
BUSINESS STRATEGY
The Company's business strategy is to continue to strengthen its market
position by: (i) offering the most complete hemodialysis and peritoneal dialysis
product line in the ESRD market; (ii) capitalizing on the expected gradual shift
in the United States of the preferred treatment modality from hemodialysis to
peritoneal dialysis, which provides the Company with a greater source of
recurring revenues per patient; (iii) expanding the Company's manufacturing
capability for its major product lines; (iv) continuing innovation in its
dialysis product line; and (v) introducing new products, particularly in the
blood processing and purification field, which build on technologies used by the
Company.
The Company is one of only two companies in the United States offering
a full line of both hemodialysis and peritoneal dialysis products, including
hemodialysis and peritoneal dialysis machines and related equipment, dialyzers,
peritoneal dialysis solutions in flexible plastic bags, hemodialysis concentrate
solutions and granulate mixes and disposable tubing assemblies. The Company
believes that the breadth of its product line is a competitive advantage. The
Company has used contacts it developed in the hemodialysis products field to
introduce physicians and clinics to the Company's peritoneal dialysis products,
thereby expanding the growth opportunities for its peritoneal dialysis products.
Beginning in 1990, the Company established a national sales and distribution
network for all of its peritoneal dialysis products, and in 1993 the Company
consummated the Abbott Acquisition. During 1994, the Company introduced PD-Plus,
a new form of CCPD treatment which the Company believes offers significantly
improved peritoneal dialysis therapy at a competitive cost. The Company intends
to expand sales of its Safe-Lock peritoneal dialysis products in Mexico and
Canada.
During 1995, the Company completed the expansion of its manufacturing
capacity at its plant in Ogden, Utah and began producing polysulfone dialyzers.
Although the Company continued to purchase polysulfone dialyzers from Fresenius
AG during 1995, and expects to continue to purchase certain types of dialyzers
from Fresenius AG in the future, the Company believes that polysulfone
dialyzer production at the Ogden facility is now fully operational. The Company
intends to further expand manufacturing capacity in Ogden to include the
production of certain additional peritoneal dialysis products (currently
manufactured for the Company by Abbott) and the plastic film used in the
manufacture of the Company's peritoneal dialysis solution plastic bags
(currently imported from the Netherlands). This expansion will enable the
Company to integrate its manufacturing processes vertically and thereby become
less dependent on other manufacturers, and, in the case of the polysulfone
dialyzers and the plastic film, significantly reduce the pricing, allocation
and currency risks to which the Company is currently subject.
The Company is seeking to expand into medical product markets other
than dialysis that will use the Company's expertise and manufacturing
capabilities. The Company plans to focus this expansion on markets relating to
blood processing and purification equipment and supplies. Such expansion is most
likely to be accomplished by distributing or licensing products developed by
Fresenius AG, although the Company may, in the future, consider the
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acquisition or licensing of product lines or businesses from unaffiliated third
parties. In 1994, the Company signed a distribution agreement with Fresenius AG
to distribute blood cell separators and related products for blood processing.
THE COMPANY'S PRODUCTS
Overview
The Company's products include machines and related disposables for
hemodialysis and peritoneal dialysis treatment of ESRD. The Company's product
catalogs contain over 2,500 different items, and the Company believes that it
offers the most complete ESRD product line in the United States. The following
table shows, for each of the past three years, total revenues related to
hemodialysis products and peritoneal dialysis products, as well as all other
products:
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
TOTAL PERCENT TOTAL PERCENT TOTAL PERCENT
REVENUES OF TOTAL REVENUES OF TOTAL REVENUES OF TOTAL
-------- -------- -------- -------- -------- --------
Hemodialysis $134,117 65% $170,579 67% $206,875 68%
Peritoneal Dialysis (1) 65,073 32 77,331 30 89,561 29
Other Products 6,770 3 6,434 3 8,528 3
-------- --- -------- --- -------- ---
Total $205,960 100% $254,344 100% $304,964 100%
======== === ======== === ======== ===
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(1) On February 24, 1993, the Company consummated the Abbott Acquisition
and this business is included in the above figures only on and after
this date. If the Abbott Acquisition had occurred on January 1, 1993,
the Company's pro forma total revenues from peritoneal dialysis in 1993
would have been $69.8 million.
Hemodialysis Products
The Company offers a complete package of products for hemodialysis,
consisting of: four different hemodialysis machines; 12 different dialyzers,
including high, medium and low flux dialyzers; bloodlines; dialysate solutions
and concentrates; needles, connectors and other similar supplies; and machines
and supplies for the reuse of dialyzers.
The Company assembles, tests and calibrates hemodialysis machines and
sells these machines in the United States, Canada and Mexico. Components for
these machines are purchased from Fresenius AG and other vendors. The
hemodialysis machines sold by the Company have a modular design, and may include
a blood pressure module, single-needle module, a special arterial and venous
level control module and a heparin pump module. The Company also offers a
computer interface module, which performs on-line data collection during
dialysis, entry of nursing records at the bedside and prescribed therapy
monitoring. This modular design allows the Company's machines to be upgraded by
substituting modules instead of replacing an entire machine. This modular design
also permits the Company to offer dialysis clinics a broad range of options when
machines are acquired. The Company's hemodialysis machines are capable of
operating with dialyzers manufactured by all manufacturers, and are compatible
with a wide variety of bloodlines and dialysate solutions.
All dialyzers produced by the Company use hollow fiber polysulfone
membranes (a synthetic material), which the Company believes have superior
performance characteristics compared to other materials used in dialyzers
because polysulfone dialyzers are highly biocompatible and have excellent
clearing capacities for uremic toxins. The
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Company's polysulfone dialyzer line consists of a complete range of permeability
(high, medium and low flux) to allow tailoring of the dialysis therapy to the
individual patient. While most of the Company's polysulfone dialyzers are
manufactured at its facility in Ogden, Utah pursuant to a license granted by
Fresenius AG, the Company plans to continue to purchase certain dialyzers from
Fresenius AG. See "Certain Relationships and Related Transactions."
The Company distributes disposable bloodlines which carry a
hemodialysis patient's blood to the hemodialysis machine and dialyzer and then
back to the patient. These bloodlines are manufactured abroad for the Company by
a third party.
The Company produces both liquid and dry dialysate concentrate. Liquid
dialysate concentrate is mixed with purified water by the hemodialysis machine
to produce dialysate solution, which is used in hemodialysis treatment to remove
the waste products and excess water from the patient's blood. Dry concentrate is
less labor intensive to use, requires less storage space and is less prone to
bacterial growth than liquid bicarbonate solutions.
The Company also sells dialyzer reuse and rinse machines manufactured
by the Company for Seratronics, Inc. ("Seratronics"). These machines cleanse
dialyzers after dialysis, permitting multiple usage for the same patient before
disposal of the dialyzer. The Seratronics machines facilitate the reuse of
disposable dialyzers and, therefore, permit hemodialysis providers to reduce
operating costs. The reuse business of Seratronics is managed by the Company.
See "Certain Relationships and Related Transactions."
Peritoneal Dialysis Products
The Company offers a full product line for peritoneal dialysis
patients. The Company's peritoneal dialysis products include peritoneal dialysis
cycling machines for CCPD and disposable products for both CAPD and CCPD, such
as tubing, sterile solutions and sterile kits to prepare patients for dialysis.
The Company offers four different CCPD machines and over 90 disposable products
for CCPD and CAPD.
The Company believes that its Delflex solution products with Safe-Lock
connectors offer significant advantages for CAPD and CCPD home patients
including ease of use and greater protection against touch contamination than
other peritoneal dialysis systems.
To use Safe-Lock products, the surgically-implanted catheter is fitted
with one part of the Safe-Lock connector and the peritoneal dialysis solution
bag and tubing are fitted with the other part of the Safe-Lock connector.
Patients using the Safe-Lock connector may not easily use products produced by
the Company's competitors, and to market its Safe-Lock peritoneal dialysis
products to patients fitted with other connectors the Company supplies an
adapter. The Inpersol line of peritoneal dialysis products acquired from Abbott
is interchangeable and competitive with the peritoneal dialysis products offered
by the Company's major competitor in this field. The addition of the Inpersol
product line to the Company's other products therefore enables the Company to
expand the potential customer base for which it competes, because the Company
now supplies peritoneal dialysis products usable by all peritoneal dialysis
patients in the United States.
Although CAPD is the predominant form of peritoneal dialysis therapy in
the United States, the Company believes that CCPD therapy offers patients
psychological benefits over CAPD therapy. In a typical CAPD program, a patient
undergoes four two-liter exchanges of peritoneal dialysis solution over a
twenty-four hour period, with treatment occurring seven days per week. While
CAPD must be performed by the patient when he or she is awake, the Company's
CCPD system cycles the solution throughout the night while the patient is
sleeping. The patient thus has complete daytime freedom, wearing only the
surgically-implanted catheter and capping device. In addition, the Company
believes that due to less frequent handling of the catheter, CCPD reduces the
risk of peritonitis.
The Company has been an innovator in peritoneal dialysis therapy since
1980 when it introduced the first CCPD machine. The Company's peritoneal
dialysis cycling equipment incorporates microprocessor technology that
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can be easily programmed by the patient or hospital or clinic staff to perform
specific, prescribed therapy for a given patient. These machines allow the
physician to prescribe any of a number of current therapy procedures including
CCPD, Intermittent Peritoneal Dialysis and Tidal Peritoneal Dialysis, since all
components are monitored and programmable.
During 1994, the Company introduced a new variant on CCPD therapy
called PD-Plus. Normally, a CCPD patient undergoes five or six two-liter
solution exchanges at night, and carries no solution during the day. PD-Plus
therapy provides a more tailored therapy using a simpler night-time cycler, and
where necessary, one exchange during the day (typically in the late afternoon or
early evening, after the patient has returned home). Compared with typical CCPD
therapy, the Company believes that PD-Plus therapy will be less costly and
easier to administer. Compared with CAPD therapy, the Company believes that
PD-Plus therapy will improve toxin removal by 43%, with a small percentage
increase in cost, and will therefore be attractive to patients and physicians
alike. By increasing the effectiveness of peritoneal dialysis treatments at an
acceptable increase in cost, PD-Plus therapy may also effectively prolong the
time period during which a patient will be able to remain on peritoneal
dialysis.
Other Products
The Company sells blood cell separation products designed for the
therapeutic removal of diseased blood components as well as collection of donor
blood components for transfusion. The key product in this line is the Fresenius
AS 104 Cell Separator, which is purchased from Fresenius AG pursuant to a
distribution and manufacturing agreement entered into in December 1994. See
"Certain Relationships and Related Transactions - Products from Fresenius AG."
The Company believes this product offers significant benefits over competing
products with respect to ease and speed of setup, automated operation,
protective systems and reduced extracorporeal volumes. The Company also sells
the associated disposable sets required for each use of the cell separator.
In 1992, the Company acquired from a subsidiary of Johnson & Johnson
the Critikon infusion pump business. The acquired products include the pump,
disposable tubing and related supplies for infusion of intravenous solutions.
Sales of these products were not material in 1995.
MARKETING, DISTRIBUTION AND SERVICE
The Company maintains a national direct sales force of trained
salespersons, organized on a regional basis and engaged in the sale of both
hemodialysis and peritoneal dialysis products. Each member of the Company's
sales force has extensive sales experience. This sales force engages in direct
promotional efforts, including visits to physicians, clinical specialists,
hospitals, clinics and dialysis centers, and represents the Company at industry
trade shows. The Company also maintains a clinical support group composed
primarily of registered nurses to train and assist its customers and facilitate
the introduction of new products. Technical support is also available to
customers on a 24-hour basis through a toll-free telephone number. The Company's
service department provides technical support, spare parts and field service on
a nationwide basis.
All of the Company's machines are shipped from its facilities in Walnut
Creek, California. The Company's hemodialysis disposable products are shipped
from the Company's facilities in Ogden, Utah and Maumee, Ohio to regional
distribution centers. The Company relocated its Maumee operations to
Lewisberry, Pennsylvania, and will close the Maumee facility at the end of the
first quarter of 1996. The Company's disposable peritoneal dialysis products
are shipped from its facility in Ogden, Utah or from Abbott facilities to
regional
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distribution centers, and from there the products are delivered directly to the
customer, in most cases the patient, by the Company's drivers. The Company's
drivers store deliveries in the location desired by the patient, rotate
disposable products so that the oldest products are used first, and generally
provide continuity of contact between the Company and patients using the
Company's peritoneal dialysis products. See "Properties."
At the time of the Abbott Acquisition, Abbott had agreements with
numerous hospitals pursuant to which these hospitals could order the full line
of Abbott products, including renal dialysis products, from Abbott. Abbott has
agreed to act as the Company's distributor for the continued sale of Inpersol
products to hospitals until 1998. Following the Abbott Acquisition, the Company
consolidated the distribution outlets used by Abbott with the Company's
distribution outlets, eliminating or consolidating certain locations and
introducing the Company's products into many of the public warehouses previously
used by Abbott.
The Company's products are distributed in Canada by a wholly-owned
Canadian subsidiary. The Company acquired the remaining interest in this
subsidiary held by an unaffiliated third party during 1993 for consideration of
a convertible note which was subsequently converted to 434,000 shares of the
Company's common stock. The Company currently distributes its products in Mexico
via independent distributors. Inpersol products are not distributed by the
Company in Canada or Mexico, where a subsidiary of Abbott retains exclusive
rights to these products.
MANUFACTURING OPERATIONS AND SOURCES OF SUPPLY
The Company assembles equipment, including hemodialysis machines,
dialyzer reuse devices and peritoneal dialysis cyclers, at its facility in
Walnut Creek, California. Components of the Company's hemodialysis machines are
supplied by Fresenius AG as well as other suppliers, and the Company has
experienced no difficulties in obtaining sufficient quantities of such
components. In connection with the sale and installation of the machines, the
Company's technicians and engineers calibrate the machines and add computer
software for record keeping and monitoring.
The Company owns a 344,000 square foot facility in Ogden, Utah for the
manufacture of disposable products, including polysulfone dialyzers, peritoneal
dialysis solutions, other sterile solutions, plastic tubing and medical devices.
This facility uses automated equipment for the production of sterile solutions
in flexible plastic containers. While the Company obtains the film used in the
manufacture of its plastic bags from one supplier located in the Netherlands,
the Company believes that there are readily-available alternative sources of
supply for which the Food and Drug Administration (the "FDA") could grant
expedited approval. The Company also intends to manufacture its own plastic film
for peritoneal dialysis solution bags.
Prior to 1995, all polysulfone dialyzers sold by the Company were
manufactured by Fresenius AG in Germany. During 1995, the Company completed the
expansion and equipping of its Ogden facility in order to produce these
polysulfone dialyzers. In April 1994, Fresenius AG granted the Company an
exclusive license in the United States, Canada, Mexico and Puerto Rico for the
proprietary technology for the manufacture of polysulfone dialyzers and agreed
to provide required technical support and assistance in return for a 4.5%
royalty on sales of Company- manufactured dialyzers for ten years beginning
January 1, 1996, at the conclusion of which the Company will have a paid-up
exclusive license in North America. While the Company began manufacturing
polysulfone dialyzers during the second quarter of 1995, the Company continued
to purchase dialyzers and bundles of polysulfone which were assembled into
dialyzers from Fresenius AG. The Company expects to continue to purchase
certain dialyzers from Fresenius AG in the future. The Company believes that
it is the principal manufacturer of polysulfone dialyzers in the United States.
Over the next two years, the Company intends to transfer the production
of the products acquired from Abbott to the Company's facility in Ogden. During
this period, the Company has agreed to purchase at contractually-established
prices, and Abbott has agreed to manufacture and sell to the Company, stated
quantities of Inpersol dialysis products. The Company's license agreement with
Abbott also provides the Company with access to Abbott's manufacturing
technology used in connection with Abbott's production of peritoneal dialysis
solution in plastic bags, related tubing assemblies and other products used in
the dialysis field (other than Abbott's Calcijex product line). Abbott will
assist the Company in establishing the Company's manufacturing capability for
these
- 8 -
10
products. The Company intends to use this technology to develop the ability to
manufacture several components that it now purchases from third parties. See
Notes 4 and 12 of Notes to Consolidated Financial Statements.
Each step in the manufacture of the Company's products, from the
initial processing of raw materials through the final packaging of the completed
product, is carried out under controlled quality assurance procedures and under
Good Manufacturing Practices ("GMP") mandated by the FDA. Incoming raw materials
for solutions are subjected to infrared, ultraviolet and physical and chemical
analysis to assure quality and consistency. During the production cycle,
sampling and testing are done in accordance with established quality assurance
procedures. Pressure, temperatures and times for various processes are monitored
to assure consistency of semifinished goods. Environmental conditions are
monitored to assure that particulate and bacteriological levels do not exceed
specified maximums. Sampling and testing are done in accordance with physical
and chemical procedures required to insure sterility, safety and potency of
finished products. The Company maintains continuing quality control and GMP
education and training programs for its employees. See "Regulation -- FDA and
Other Regulatory Matters."
In 1992, the Company began producing liquid dialysate concentrate at a
facility in Maumee, Ohio. The Company moved this operation to a facility in
Lewisberry, Pennsylvania and will close the Maumee facility at the end of the
first quarter of 1996. On March 26, 1996, the Company entered into a
non-binding letter of intent with an unaffiliated third party to sell the
assets comprising the concentrate production facility in Lewisberry. The letter
of intent provides that any obligations of the Company to sell the assets are
contingent upon consummation of the Reorganization.
The Company obtains its bloodlines under an agreement with a supplier
whose principal source of bloodlines is a single FDA-approved plant located in
Thailand.
PATENTS, TRADEMARKS AND LICENSES
As a subsidiary of Fresenius AG, the Company uses the trade-name
Fresenius, which is material to its business, and additionally has obtained
rights to certain patents, trademarks, know-how and other intellectual property
owned by Fresenius AG. Fresenius AG has obtained patent protection in the
countries in which its dialysis products are sold, including the United States,
for the proprietary technology incorporated into its dialysis products. The
Company negotiates access to Fresenius AG's technology, proprietary processes
and know-how on a case by case basis. See "Certain Relationships and Related
Transactions."
In addition to the Fresenius AG intellectual property, the Company's
intellectual property includes the Inpersol trademark and rights to certain
manufacturing know-how the Company obtained from Abbott and a paid-up
non-exclusive worldwide sublicense from Baxter International, Inc. to certain
CAPD and connector technology.
RESEARCH AND DEVELOPMENT
The Company relies primarily on the research and development efforts of
Fresenius AG, negotiating distribution arrangements for new products from
Fresenius AG when Fresenius AG and the Company believe that there is market
potential for these products in the United States and when the products fit the
Company's business strategy. See "Certain Relationships and Related
Transactions."
During 1993, 1994 and 1995, the Company spent approximately $1.5
million, $1.8 million and $2.3 million, respectively, on research and
development activities. The Company believes that, in the absence of its access
to the research and development efforts of Fresenius AG, the Company would have
had to spend significantly more on research and development. The Company and
Fresenius AG from time to time negotiate the basis on which the Company will
have access to these efforts on an arms-length basis including, in some cases,
payment of royalties by the Company to Fresenius AG.
The Company maintains a product development group, composed of
engineers and other technical personnel. This group has created the operational
software for much of the equipment marketed by the Company, and currently
- 9 -
11
has under development a variety of new products and improvements to existing
products including: new monitoring devices for hemodialysis machines, methods to
prevent recirculation during hemodialysis, software programs to monitor therapy
delivery, further development of both the Safe-Lock and the Inpersol product
lines in peritoneal dialysis, new peritoneal dialysis solution formulations, and
more environmentally compatible disposables and production procedures. It is
also conducting research on improved treatment delivery and treatment
modalities. The Company's product development staff works closely with Fresenius
AG's research and development group to coordinate the development of new
products and product modifications for the United States market. In addition,
the Company's research and development staff coordinates its efforts with the
sales force on an ongoing basis.
COMPETITION
The markets in which the Company sells its products are highly
competitive. Among the Company's competitors in the sale of hemodialysis
products are Baxter International, Inc., CGH Medical, NMC and Althin CD
Medical, Inc. The major competitor in the peritoneal dialysis field is Baxter
International, Inc. Many of the Company's competitors possess greater
financial, marketing and research and development resources than the Company.
See "Recent Developments."
The Company believes that competition in the ESRD market is based
primarily on product performance, cost-effectiveness, reliability, assurance of
supply and service and continued technological innovation. The Company believes
its products are competitive in all of these areas. Certain of the Company's
competitors own and operate dialysis centers and other medical facilities, and,
therefore, it is difficult for the Company to compete for the business of these
potential customers.
REGULATION
Health Care Reform
Demand for the Company's products is affected by governmental and other
third-party reimbursement programs. Until 1983, hospitals were reimbursed for
the reasonable cost of services. Under current legislation, hospitals are
reimbursed at a fixed rate based on the patient's diagnosis, regardless of
actual costs incurred. Many private health care payors are adopting similar
policies and are otherwise providing incentives for health care consumers to
seek lower cost health care. These developments have also encouraged the
concentration of ownership of dialysis centers and other medical facilities and
increased the number and importance of customers representing national accounts.
Such customers have a strong bargaining position and frequently award purchase
orders on the basis of competitive bidding.
Presently, Medicare reimbursement is available for dialysis equipment
and/or treatment for most ESRD patients, at approximately the same nominal
dollars-per-treatment level that prevailed in 1983 (representing a significant
decrease in real dollars-per-treatment). Because the demand for the Company's
products is affected by Medicare reimbursement, any significant changes or
spending decreases in the Medicare program could have a material adverse effect
on the Company. However, the Company believes that, because an increasing number
of its products are manufactured or assembled by the Company and not by third
parties, the Company will be able to control its production costs and compete
effectively in a more competitive and cost conscious health care environment.
- 10 -
12
FDA and Other Regulatory Matters
The manufacturing and marketing of the Company's products are subject
to rigorous regulation by the FDA, pursuant to the United States Food Drug and
Cosmetic Act (the "FDC Act"), and by numerous other federal, state and foreign
governmental authorities. The Company believes it has filed all necessary
premarket submissions for the manufacture and sale of the products that the
Company currently produces and sells in the jurisdictions where these products
are currently sold. Products developed in the future are likely to require
approval by the FDA and other authorities before they may be sold in the
United States or elsewhere.
Many of the Company's products, including its hemodialysis and
peritoneal dialysis equipment, dialyzers, bloodlines and cell separators, are
regulated as medical devices by the FDA and classified on the basis of the
controls necessary to ensure reasonably their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, premarket notification
and adherence to GMP) and class II devices are subject to special controls
(e.g., performance standards, postmarket surveillance, patient registries and
FDA guidelines). Generally, class III devices (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to devices in interstate commerce prior to
1976) are those which must receive premarket approval by the FDA to ensure their
safety and effectiveness.
Before a new medical device can be introduced into the United States
market, the manufacturer generally must file either a 510(k) premarket
notification or a premarket approval application ("PMA"). The FDA will grant
510(k) clearance if the submitted data establish that the proposed device is
"substantially equivalent" to a legally marketed class I or II medical device,
or to a class III medical device for which the FDA does not require PMAs. A
determination that a device is not substantially equivalent, or a request for
additional data, could delay the market introduction of new products and could
have a materially adverse effect on the Company's business, financial condition
and results of operation. There also can be no assurance that the Company will
obtain necessary regulatory approvals or clearances, including 510(k) premarket
clearances, within reasonable time frames, if at all.
The Company's peritoneal dialysis solutions have been designated as
drugs by the FDA and are thus subject to FDA regulation under the FDC Act. In
order for a new drug to receive marketing approval in the United States, the
Company must follow a series of steps which may include: (i) preclinical
laboratory and animal tests in accordance with Good Laboratory Practices, (ii)
an Investigational New Drug application which must become effective before human
clinical trials may begin, (iii) well-controlled human clinical trials to
establish the safety and efficacy of the new drug product, (iv) a New Drug
Application ("NDA") or an Abbreviated New Drug Application ("ANDA") and (v)
approval of the NDA or ANDA prior to any commercial sale or shipment of the
drug. FDA approval must be obtained for each product. Generally, approval of an
NDA takes one and a half or more years and may take longer should the FDA raise
questions or have concerns about a new drug.
Any products manufactured or distributed by the Company pursuant to
510(k) premarket clearance or an approved PMA, NDA or ANDA are subject to
pervasive and continuing regulation by the FDA. The FDC Act requires the Company
to manufacture its products in compliance with GMP. These regulations impose
certain procedural and documentation requirements upon the Company with respect
to manufacturing and quality assurance activities. Additionally, the Company
must comply with various FDA requirements regarding the design, safety,
advertising, labeling, record keeping and reporting of adverse events related to
the use of the Company's products.
The Company has completed a voluntary action with respect to the Optum
exchange device acquired from Abbott, which has been classified by the FDA as a
recall. The FDA reviewed the actions taken by the Company and determined that
they are adequate.
In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing
facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each
location, violations of certain GMPs were found. At the Walnut Creek facility,
violations of pre-market notification filing requirements were also found,
although these devices were subsequently determined to be covered by
appropriate filings. The FDA
- 11 -
13
issued warning letters with respect to each facility, as a result of which the
issuance of new 510(k) notices and new export clearances was placed on
administrative hold. The Company has responded to the inspection findings at
Maumee in a manner it believes addresses the FDA's findings, and is awaiting a
subsequent inspection of that facility. The Company undertook an exhaustive
review of the FDA's findings relating to Walnut Creek and submitted a detailed
response to those findings. The Walnut Creek facility was inspected again in
January and February of 1996 and the Company was advised that all GMP issues
raised by the FDA have been resolved. The Ogden plant was reinspected in 1995
and the administrative holds have been lifted from both the Ogden and Walnut
Creek facilities. The Company believes that the facilities in Walnut
Creek, California, Maumee, Ohio and Ogden, Utah are currently in compliance in
all material respects with the applicable local, state and federal
requirements. The Company is in the process of closing its Maumee facility and
moving the related manufacturing to a site in Lewisberry, Pennsylvania. The
Company believes that all FDA filings have been made in connection with this
move. See "Properties."
EMPLOYEES
At December 31, 1995, the Company employed approximately 1,600 people.
Management believes that the Company's relations with its employees are
generally good. During the third quarter of 1995, certain of the Company's
employees at the Maumee, Ohio facility voted in favor being represented by the
International Longshoremen's Association. Subsequent to that election, for
business reasons unrelated to the election, the Company decided to close the
Maumee facility and transfer its production of dialysate concentrate to a
facility under construction in Harrisburg, Pennsylvania. The Company entered
into a settlement agreement with union representatives with respect to the
effect of the closing on the 35 employees (of approximately 50 employees at the
facility) represented by the union. The amount of the settlement was not
material.
ITEM 2. PROPERTIES.
The following table describes the Company's principal facilities:
FLOOR AREA
(APPROXIMATE OWNED OR
LOCATION SQUARE FEET) LEASED USE
-------- ------------ -------- ---
Walnut Creek, California 85,000 Leased Corporate headquarters;
warehousing; machine manufacture
and assembly; and customer service.
Ogden, Utah 344,000 Owned Production of disposable products,
including solutions and dialyzers.
Maumee, Ohio 26,000 Leased Production and warehousing of
dialysate concentrate. This facility
was closed by the Company during the
first quarter of 1996.
Lewisberry, Pennsylvania 64,000 Leased To replace Maumee facility for
production and warehousing of
dialysate concentrate.
The lease on the Company's Walnut Creek facility is scheduled to expire
in June 1996. During 1995, the Company exercised its option to extend this lease
for an additional six years with a rent adjustment. During 1995, the Company
renegotiated the lease for its manufacturing space in Maumee, Ohio which will
expire on March 31, 1996, at which time the facility will be closed. The
Company's lease for the Lewisberry facility expires in November, 2000. On March
26, 1996, the Company entered into a non-binding letter of intent with an
unaffiliated third party to sell the assets comprising the concentrate
production facility in Lewisberry. The letter of intent provides that any
obligations of the Company to sell the assets are contingent upon consummation
of the Reorganization. The Company owns one warehouse and also leases fourteen
warehouses in various locations throughout the United States. These warehouses
are used as regional distribution centers for the Company's peritoneal dialysis
products. All such warehouses are subject to leases with remaining terms not
exceeding four years. As a result of the Abbott Acquisition, the Company has
added distribution capacity at an additional twenty-two public warehouses,
substantially all of which were formerly used by Abbott.
- 12 -
14
The Company's Ogden, Utah facility was subject to a mortgage securing
the Company's obligation under an industrial revenue bond which financed the
development of this facility. The Company prepaid this obligation in full during
1994 with a portion of the proceeds of a public offering of the Company's Common
Stock.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company normally both asserts
claims and defends claims asserted by others against it. The Company believes
that its obligations, if any, with respect to all of such claims would have no
material adverse effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
- 13 -
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock was listed on the American Stock Exchange
("ASE") under the name Delmed, Inc. on June 25, 1982. Effective December 30,
1991, the Company effected a one-for-ten reverse stock split and changed its
name to Fresenius USA, Inc. In connection with this change of name, the
Company's ticker symbol was changed to FRN.
The following table sets forth the high and low sales prices on the ASE
during the indicated periods.
HIGH LOW
---- ---
1994
First Quarter $ 8 1/4 $ 6 5/8
Second Quarter 7 1/2 5 3/8
Third Quarter 9 5 7/8
Fourth Quarter 8 7/8 7
1995
First Quarter $ 11 $ 8 5/8
Second Quarter 13 1/8 9 1/2
Third Quarter 16 1/2 12
Fourth Quarter 19 7/8 15 1/8
As of March 25, 1996, there were approximately 4,000 holders of record
of the Company's Common Stock.
The Company's capital stock consists of 40,000,000 authorized shares of
common stock, par value $.01 per share, of which, as of March 25, 1996,
21,536,172 shares were issued and outstanding; and 600,000 authorized shares of
series preferred stock, par value $1.00 per share, of which, as of March 25,
1996, 200,000 shares of Series F Preferred Stock were issued and outstanding.
The Company has never declared a cash dividend on its common stock. The
Series F Preferred Stock is not entitled to receive any dividends, but instead
receives an adjustment in its conversion price to compensate for any dividends
paid on common stock. The Board of Directors of the Company has no present
intention to pay dividends on common stock and does not anticipate doing so
within the next several years. It is the present policy of the Company to retain
earnings, if any, to provide for growth and working capital needs.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain financial data with respect to
the Company and is qualified in its entirety by the Consolidated Financial
Statements of the Company contained elsewhere in this Report.
The Abbott Acquisition has been accounted for as a purchase. Because
this occurred on February 24, 1993, the statements below include the results of
operations, assets and liabilities of this acquired business only for periods
and dates occurring on or after February 24, 1993.
- 14 -
16
YEAR ENDED DECEMBER 31,
-----------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(dollars and shares in thousands, except per share data)
Statement of Operations Data:
Net sales $101,436 $128,607 $205,960 $254,344 $304,964
Cost of sales 71,812 92,575 140,960 175,766 212,102
-------- -------- -------- -------- --------
Gross profit 29,624 36,032 65,000 78,578 92,862
Selling, general and administrative
and research and development 28,865 32,964 55,713 66,489 74,836
Litigation settlements 1,300 (400) -- -- --
-------- -------- -------- -------- --------
Operating income (loss) (541) 3,468 9,287 12,089 18,026
Interest expense (net) (2,167) (2,447) (4,631) (4,195) (4,924)
Equity in earnings (loss) of Fresenius
Brent 84 70 86 -- --
Other income (expense), net (191) (341) (149) (17) 149
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items (2,815) 750 4,593 7,877 12,953
Income tax expense (benefit) 15 111 900 723 (3,434)
-------- -------- -------- -------- --------
Income (loss) before extraordinary items (2,830) 639 3,693 7,154 16,387
Extraordinary items 255 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (2,575) $ 639 $ 3,693 $ 7,154 $ 16,387
======== ======== ======== ======== ========
Net Income (Loss) Per Common and Common Equivalent Share:
Income (loss) before extraordinary items $ (.18) $ .03 $ .18 $ .32 $ .61
Extraordinary items .02 -- -- -- $ --
-------- -------- -------- -------- --------
Net income (loss) per common and
common equivalent share:
Primary $ (.16) $ .03 $ .18 $ 32 $ .61
======== ======== ======== ======== ========
Fully diluted $ (.16) $ .03 $ .18 $ 31 $ .59
======== ======== ======== ======== ========
Weighted average number of shares of common stock and common stock
equivalents:
Primary 15,543 18,692 20,660 23,926 26,647
Fully diluted 15,543 18,692 20,660 23,926 27,844
Pro Forma(1):
Net sales $154,694 $210,642
Gross profit 49,024 67,424
Operating income 6,838 10,162
Net income 1,617 4,160
Net income per common share $ .09 $ .20
Weighted average number of shares of
common stock and common stock
equivalents 18,692 20,660
DECEMBER 31,
------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital $ 22,604 $ 18,739 $ 15,525 4,579 12,991
Total assets 78,144 88,961 159,216 185,348 224,921
Total debt and capital lease obligations 29,039 21,905 65,421 64,117 73,597
Stockholders' equity 22,792 31,037 37,006 60,572 78,602
- --------------
(1) Pro forma operating data give effect to the Abbot Acquisition as if
this acquisition were consummated on January 1, 1992. See Note 23 of
Notes to Consolidated Financial Statements.
- 15 -
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Certain sections of this Report contain forward-looking statements.
These forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting the Company, but no assurance can be
given that such events will occur or that the results will be as anticipated.
Such sections include, without limitation, discussions concerning the outlook of
the Company, future plans and management's expectations regarding future
performance.
There are certain important factors that could cause results to differ
materially from those anticipated. These factors include:
RECENT DEVELOPMENT: On February 4, 1996, Grace and Fresenius AG entered into a
definitive agreement to combine NMC with Fresenius AG's worldwide dialysis
business, including the Company. Pursuant to this agreement, Fresenius AG has
agreed with Grace that the Company would become a wholly-owned subsidiary of
the new company, and that, when the economic terms on which the Company's
shareholders, other than Fresenius AG and its affiliates, will participate in
this transaction, have been established, will vote its shares in the Company in
favor of the transaction. While the Independent Committee established by the
Company's Board of Directors is currently negotiating with Fresenius AG, there
can be no assurance that an agreement will be reached, or what the terms of any
such agreement will be. Fresenius AG, through the composition of the Company's
Board of Directors and Fresenius AG's ownership of all of the outstanding
shares of the Series F Preferred Stock and its direct and indirect ownership of
Common Stock, has the ability to consummate the Reorganization without the
agreement of the Independent Committee.
RELIANCE ON FRESENIUS AG: The Company is dependent on Fresenius AG in a variety
of ways for technology, products and, to some degree, financial support. The
provisions relating to the Series F Preferred Stock owned by Fresenius AG,
coupled with Fresenius AG's direct and indirect ownership of Common Stock, have
the practical effect of giving Fresenius AG an absolute majority of the voting
power attributable to each class of the Company's voting securities with respect
to all matters.
COMPETITION AND TECHNOLOGICAL CHANGE: The markets in which the Company sells its
products are highly competitive. The Company's principal competitor in the
hemodialysis and peritoneal dialysis fields possesses greater financial,
marketing and research and development resources than the Company. There can be
no assurance that competition, innovation or introduction of new products from
these or other sources will not materially adversely affect sales of the
Company's products or render one or more of the Company's present or proposed
products obsolete.
RELIANCE ON SUPPLIERS; PURCHASE COMMITMENTS: The supplies for certain of the
Company's products are purchased from single suppliers, including Fresenius AG,
located outside of the United States. If a particular source of supply becomes
unavailable, there can be no assurance that the Company would be able to find a
substitute supplier acceptable to the FDA in a timely fashion. The loss of such
a source of supply could have a material adverse effect on the Company's
revenues and profits, as well as its ability to supply its products to its
customers and retain its customer base.
FDA AND OTHER GOVERNMENT REGULATION: The manufacturing and marketing of the
Company's products are subject to rigorous regulation by the FDA, pursuant to
the FDC Act, and numerous other federal, state and foreign governmental
authorities. The Company believes it has obtained all necessary clearances for
the manufacture and sale of the products that the Company currently produces
and sells in the jurisdictions where these products are currently sold.
Products developed in the future are likely to require approval by the FDA and
other authorities before they may be sold in the United States or elsewhere.
While the Company believes that it is generally in compliance with applicable
FDA and other requirements, there can be no assurance that the Company will be
able to continue such compliance, that one or more of the Company's products
will not be the subject of a recall, or that changes in regulations or
interpretations made by the FDA or other regulatory bodies will not adversely
affect the Company.
POTENTIAL PRODUCT LIABILITY; LITIGATION: The Company faces an inherent business
risk of exposure to product liability claims. Although the Company maintains
product liability insurance at a level which it believes to be prudent, there
can be no assurance that such coverage will be adequate to cover claims, or that
adequate insurance coverage will continue to be available at acceptable costs.
Although the Company has not been subject to significant product liability
claims in the past, there can be no assurance that the Company can avoid a
significant product liability claim or recall in the future which could have a
material adverse affect on the business, financial condition or prospects of the
Company.
- 16 -
18
HEALTH CARE REFORM: Presently, Medicare reimbursement is available for dialysis
equipment and/or treatment for most ESRD patients at approximately the same
nominal dollars-per-treatment level that prevailed in 1983 (representing a
significant decrease in real dollars-per-treatment). Because the demand for the
Company's products is affected by the availability and level of Medicare
reimbursement, any significant changes or spending decreases in the Medicare
program could have a material adverse effect on the Company.
CURRENCY RISK: Products and supplies purchased from Fresenius AG must be paid
for by the Company in German currency and, therefore, a decrease in the value of
the United States dollar relative to the German mark will increase the Company's
costs for these products and supplies. The Company attempts to protect itself
from short-term currency fluctuations using various hedging techniques, but
there can be no assurance that such techniques will continue to be available to
the Company or that, even if available, they will successfully protect the
Company from these currency fluctuations. The Company is unable to protect
itself from long-term changes in exchange rates. If there are long-term changes
in exchange rates, or if the Company is not successful in protecting itself
against short-term currency fluctuations, the Company's cost of sales could
increase substantially which could have a material adverse effect on the
Company's financial results.
The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof.
The Company's net sales have continued to grow over the last three
years, from $206.0 million in 1993 to $305.0 million in 1995. The Company's net
sales are derived from sales of machines, which accounted for approximately 29%
of 1995 net sales, and disposable products, which accounted for approximately
71% of 1995 net sales. The Company attributes the growth in net sales during
this period principally to increased penetration in both the hemodialysis and
peritoneal dialysis markets, growth in the number of people with ESRD and the
introduction of new products. Improved market penetration was partly
attributable to enhanced sales and marketing programs and, in the case of
peritoneal dialysis products, primarily to the Abbott Acquisition.
A significant portion of the Company's products and components used in
its products are manufactured outside of the United States by Fresenius AG and
other suppliers. As a result, fluctuations in exchange rates of the United
States dollar against foreign currencies, particularly the German mark, may
affect the Company's cost of sales. The Company engages in foreign currency
hedging arrangements as an effort to minimize the effect of short-term currency
fluctuations on its results of operations. In order to minimize the effect of
longer-term currency fluctuations, the Company is increasingly producing
components for the products it sells, or the products themselves, in the United
States. In 1995, the Company began producing polysulfone dialyzers at its
expanded facility in Ogden, Utah.
The following table sets forth certain items from the Consolidated
Statements of Operations as a percent of net sales and the percentage increase
(decrease) in the dollar amount of those items as compared to the prior period.
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19
PERCENTAGE
PERCENTAGE OF NET SALES INCREASE (DECREASE)
----------------------- -------------------
1994 1995
VS. VS.
1993 1994 1995 1993 1994
---- ---- ---- ---- ----
Net Sales 100 100 100 23 20
Cost of Sales 68 69 70 25 21
Gross Profit 32 31 30 21 18
Selling, general and admini-
strative expense 26 25 24 19 12
Research and development
expense 1 1 1 23 24
Operating income 5 5 6 30 49
Interest expense, net 2 2 2 (9) 17
Income before income taxes 2 3 4 72 64
Net income 2 3 5 94 129
RESULTS OF OPERATIONS
1995 Compared to 1994
Net Sales. Net sales were $305.0 million in 1995, an increase of $50.7
million or 19.9% compared with net sales of $254.3 million in 1994. The increase
in 1995 net sales primarily reflects higher unit sales volumes in all major
product categories from 1994 levels. Average net sales price per unit in each
major product category did not change significantly during 1995 as compared with
1994.
Net sales of hemodialysis products were $206.9 million, an increase of
$36.3 million or 21.3% compared to 1994 net sales. The sales increase in
hemodialysis products was due to the continued acceptance of the Company's
products and the continuing trend of hemodialysis customers to utilize primary
suppliers which offer a full line of products. The sales increase is also
attributable to growth in the number of hemodialysis patients in the United
States.
Net sales of peritoneal products was $89.6 million, an increase of
$12.2 million or 15.8% compared to 1994 net sales. The increase in net sales of
peritoneal dialysis products was primarily attributable to growth in the number
of peritoneal dialysis patients in the United States, as well as market
acceptance of new peritoneal dialysis therapies introduced by the Company.
Gross Profit. Gross profit was $92.9 million in 1995, an increase of
$14.3 million or 18.2% compared with gross profit of $78.6 million in 1994.
Gross profit margin decreased from 30.9% in 1994 to 30.5% in 1995 primarily due
to a loss of efficiency at the Ogden manufacturing facility due to the start-up
of dialyzer production, and due to increased costs of products purchased from
Germany as a result of the continued weakness of the United States dollar.
Selling, General and Administrative Expense and Research and
Development Expense. Selling, general and administrative expense and research
and development expense were $74.8 million in 1995, an increase of $8.3 million
or 12.6% compared with 1994. Selling, general and administrative expense and
research and development expense as a percentage of sales decreased to 24.5% in
1995 from 26.1% in 1994. Research and development expense was $2.3 million in
1995 compared to $1.8 million in 1994, virtually unchanged as a percentage of
sales.
- 18 -
20
Interest Expense (Net). Interest expense (net) was $4.9 million in
1995, an increase of $0.7 million or 17.4% over 1994. This increase is primarily
the result of the Company's increased short-term borrowings during 1995.
Income Tax Expense (Benefit). During 1995, the Company recognized a
portion of the Company's deferred tax asset related to the utilization of net
operating loss carry-forward from previous years and reduced the valuation
allowance on its deferred tax asset based on the Company's belief that it is
more likely than not to be realized through the results of future operations.
The net amount of this tax benefit recognized during 1995 was $3.4 million
compared to tax expense of $0.7 million in 1994. The Company's income tax
provisions for 1995 and 1994 were substantially lower than statutory rates.
See Note 17 of Notes to Consolidated Financial Statements.
Net Income. Net income was $16.4 million in 1995, an increase of $9.2
million or 129.1% from 1994. Net income in 1995 included a tax benefit of $4.6
million, which the Company recognized during 1995. Excluding the tax benefit,
net income was $11.8 million in 1995, an increase of $4.6 million or 64.8% from
1994.
1994 Compared to 1993
Net Sales. Net sales were $254.3 million in 1994, and increase of $48.3
million or 23.4% compared with net sales of $206.0 million in 1993. The
increase in 1994 net sales primarily reflects higher unit sales volumes in all
major product categories from 1993 levels. Average net sales price per unit in
each major product category did not change significantly during 1994 as compared
with 1993.
Net sales of hemodialysis products were $170.6 million, an increase of
$36.5 million or 27.2% compared to 1993 net sales. The sales increase in
hemodialysis products was due to the continued acceptance of the Company's
products and the continuing trend of hemodialysis customers to utilize primary
suppliers which offer a full line of products. The sales increase is also
attributable to growth in the number of hemodialysis patients in the United
States.
Net sales of peritoneal products was $77.3 million, an increase of
$12.3 million or 18.8% compared to 1993 net sales. The increase in net sales of
peritoneal dialysis products was primarily attributable to growth in the number
of peritoneal dialysis patients in the United States, as well as market
acceptance of new peritoneal dialysis therapies introduced by the Company.
Gross Profit. Gross profit was $78.6 million in 1994, an increase of
$13.6 million or 20.9% compared with gross profit of $65.0 million in 1993.
Gross profit margin decreased from 31.6% in 1993 to 30.9% in 1994. However,
gross margin in 1993 included a $3.9 million refund related to United States
import duties on dialyzers and hemodialysis machine components. Excluding this
refund, gross margin in 1993 was 29.7%, compared to 30.9% in 1994.
Selling, General and Administrative Expense and Research and
Development Expense. Selling, general and administrative expense and research
and development expense were $66.5 million in 1994, an increase of $10.8 million
or 19.3% compared with 1993. Selling, general and administrative expense and
research and development expense as a percentage of sales decreased to 26.1% in
1994 from 27.1% in 1993. Research and development expense was $1.8 million in
1994 compared to $1.5 million in 1993, virtually unchanged as a percentage of
sales.
Interest Expense (Net). Interest expense (net) was $4.2 million in
1994, a decrease of $0.4 million or 9.4% over 1993, primarily as a result of the
Company's full redemption of all of its 10 1/2% convertible debentures and the
payment of the outstanding principal balance of its industrial revenue bonds
issued in connection with its Ogden, Utah facility, all in June 1994.
Income Tax Expense. Income tax expense was $0.7 million, a decrease of
$0.2 million over 1993, primarily as a result of tax credits from the Company's
Canadian wholly-owned subsidiary. As a result of utilization of net operating
loss carryforwards for which no tax benefit had previously been recognized, the
Company's income tax provisions for 1994 and 1993 were substantially lower than
statutory rates. See Note 17 of Notes to Consolidated Financial Statements.
Net Income. Net income was $7.2 million in 1994, an increase of $3.5
million or 93.7% from 1993.
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21
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically 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. During 1995, the Company obtained a
$20.0 million line of credit from a commercial bank independent of support by
Fresenius AG and entered into a sale leaseback arrangement with a bank without
support from Fresenius AG. In addition, during 1994, the Company successfully
completed a public offering of 3,450,000 shares of its Common Stock, realizing
proceeds, after payment of expenses, of approximately $16.2 million. 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 1995, the Company had a negative cash flow from operations of
$1.9 million compared to a positive cash flow of $4.1 million in 1994 and $4.4
million in 1993. This change from prior years is primarily due to the increase
of current assets from operations over current liabilities from operations. As
of December 31, 1995, the Company had cash balances of $2.3 million, and working
capital of $13.0 million.
The consideration for the acquired assets in the Abbott Acquisition was
(i) $31.0 million cash paid at the closing, (ii) $12.5 million payable in
installments of $2.5 million each in the years 1994 through 1998 inclusive,
discounted to $10.6 million using an imputed interest rate of 5.68%, the first
of which was paid in the first quarter of 1994 and (iii) a ten-year warrant to
purchase 1,750,000 shares of the Company's Common stock at an exercise price of
$8.00 per share (the "Abbott Warrant") which was valued at $228,000. In
addition, the Company agreed to purchase from Abbott, and Abbott agreed to
supply, a stated amount of certain Abbott peritoneal dialysis products in each
twelve month period following the acquisition closing and ending in February
1998. Over the next two years, the minimum purchase commitments under the
agreement are approximately $22.0 million annually.
The Company obtained funds for the payment at closing of the Abbott
Acquisition by borrowing $6.0 million under existing short-term lines of credit
and by borrowing $25.0 million under a new, five-year term loan due February 17,
1998 with Dresdner Bank which carries an interest rate of 5.68% per annum.
Repayment is required under this loan at $6.25 million per annum commencing
February 15, 1995. The Company's future acquisition payment obligations to
Abbott, as well as additional amounts due for products supplied by Abbott to the
Company, are partially secured by a $10.0 million letter of credit (the "Abbott
Letter of Credit").
In 1995, the Company completed construction of a 104,000 square foot
addition to its manufacturing facility in Ogden, Utah for the manufacture of
polysulfone dialyzers. The Company expended $39.5 million for the construction
and equipping of the expanded facility as of December 31, 1995. 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 of the Company's dialyzer manufacturing facility at its Ogden, Utah
plant to the bank and the leaseback of the equipment under a four year operating
lease that has renewal options and a purchase option at fair market value.
Although the rent payments on the lease are variable based on the three-month
London Interbank Offered Rate (LIBOR), the Company has effectively fixed its
rent expense through the use of interest rate swap agreements. On December 29,
1995, an additional $8.0 million for similar new equipment was sold and leased
back under the above referenced four year renewable lease. If the Company
elects not to purchase the equipment or renew the lease at the end of the lease
term, the Company will be obligated to pay a termination fee of up to $20,250
to be offset by sales proceeds from the Company remarketing the equipment.
As of December 31, 1995, the Company had outstanding short-term
borrowings of $33.1 million under lines of credit with six commercial banks. 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 is secured by the Company's
accounts receivable. As of December 31, 1995, the Company had outstanding $7.5
million under this $20.0 million line of credit. These lines of credit provide
for total credit availability of $47.0 million. Fresenius AG provided credit
support to enable the Company to obtain the five-year term loan, the short-term
lines of credit and the Abbott Letter of Credit. In addition, at December 31,
1995, the Company had fully drawn the amount available under a $3.6 million
short-term line of credit with Fresenius AG, the terms of which are similar to
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22
those of the lines of credit with the four commercial banks described above. At
December 31, 1995, the Company also had outstanding two interest rate swap
agreements with a commercial bank for an aggregate of $25.0 million. These
agreements effectively change the Company's rent expense on its variable
payment operating lease to fixed rates based on 8.02% and 5.60%, respectively.
The Company believes that its committed and possible future bank or
other commercial financing, combined with internally generated funds and the
sale of additional debt or equity securities, will be sufficient to fund the
Company's working capital requirements and other obligations.
For a discussion of recent accounting pronouncements not yet adopted
by the Company, see Note 3 of Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item is indexed on page F-1 of this
Report and is contained on the pages following said page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 21 -
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Board of Directors of the Company consists of two classes of
directors, Preferred Directors who are elected by Fresenius AG as the holder of
the Series F Preferred Stock and Common Directors elected by vote of the holders
of the Common Stock. Each director has been elected to hold office until his
successor has been duly elected, and each officer has been elected to hold
office until he resigns or is removed by the Board of Directors.
The executive officers and directors of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Ben Lipps (1) 55 President, Chief Executive Officer, Chief
Operating Officer and Director
Robert E. Farrell 46 Corporate Group Vice President -
Administration, General Counsel and Clerk
Heinz Schmidt 45 Corporate Group Vice President - Finance and
Treasurer
Scott Walker 47 Corporate Group Vice President - Regulatory
Affairs
Gerd Krick (1)(2) 57 Chairman of the Board, Director
Francis E. Baker (3)(4) 66 Director
Robert S. Ehrlich (1)(2)(4) 56 Director
Mathias Klingler (3) 43 Director
James F. Marten(4) 64 Director
Ulrich Wagner (2)(3) 52 Director
- ------------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
(4) Member of the Independent Committee.
Dr. Ben Lipps has served as President, Chief Executive Officer, Chief
Operating Officer and a Preferred Director of the Company since October 1989.
Dr. Lipps also served as Chief Financial Officer of the Company until April
1991. Dr. Lipps has served as the President of Seratronics since 1982 and has
served as the President of Old FUSA since 1986; he continues to serve in both of
these offices. Prior to joining Old FUSA in 1985, Dr. Lipps held a position as a
Vice President of research and development for Cordis Dow Corporation and
founded Seratronics. Dr. Lipps joined Dow Chemical Company in 1966 and led the
research team that developed the first hollow fiber dialyzer between 1967 and
1969. Dr. Lipps holds a Bachelor of Science degree from Purdue University and a
masters degree and doctorate in chemical engineering from Massachusetts
Institute of Technology.
Mr. Robert Farrell joined the Company as Chief Financial Officer,
General Counsel, Treasurer and Clerk in April 1991. In March 1992, he became
Vice President -- Administration of the Company and ceased serving as Chief
Financial Officer and Treasurer. In October 1995, he was promoted to Corporate
Group Vice President -- Administration of the Company. From December 1985 until
joining the Company, he served as Vice President -- Corporate Finance of Genstar
Corporation, a Canadian corporation involved in the building products, food
service
- 22 -
24
and financial services industries. He holds a Bachelor of Arts degree from the
University of Notre Dame and a Juris Doctor degree from Hastings College of Law,
University of California. Mr. Farrell is a member of the California bar.
Mr. Heinz Schmidt joined the Company as Vice President -- Finance and
Treasurer in March 1992. In October 1995, he was promoted to Corporate Group
Vice President -- Finance and continues to serve as Treasurer. Since March 1988,
he has served as Vice President -- Finance and Administration for Old FUSA (and
continues to serve in that office). Mr. Schmidt also served as Vice President --
Finance and Administration for Seratronics from August 1986 to February 1988.
Mr. Schmidt holds a Bachelor of Arts degree from California State University,
Dominguez Hills, and a Masters Degree in Finance from Loyola Marymount
University of California.
Mr. Scott Walker joined Old FUSA in 1988 as Director of Quality
Assurance, later served as Product Manager, Reuse Systems, became Vice President
- -- Regulatory Affairs of the Company in March 1992, and was promoted to
Corporate Group Vice President -- Regulatory Affairs in October 1995. Since
1982, Mr. Walker has also worked with Seratronics, and is currently Vice
President -- Technical Services for Seratronics. From 1970 to 1982, Mr. Walker
held various positions with Dow Chemical relating to research and production of
hollow fiber dialyzers and other medical products. Mr. Walker holds a Bachelor
of Science degree from the University of California at Berkeley.
Dr. Gerd Krick was elected a Preferred Director by the Board of
Directors of the Company in October 1987 in connection with the acquisition by
Fresenius AG of the Series F Preferred Stock. He became Chairman of the Board of
Directors in October 1989. Since 1992 he has been Chairman of the Managing Board
of Fresenius AG. Until August 1992, he was a Director of the Medical Systems
Division of Fresenius AG and Deputy Chairman of the Managing Board of Fresenius
AG. Dr. Krick is also a director of Gull Medical Laboratories, Inc., a
publicly-held manufacturer and distributor of diagnostic test products.
Mr. Francis Baker has been a Common Director of the Company since March
1992. He is currently President and a director of Andersen Group, Inc., the
owner of Seratronics, and a director of Seratronics and the Connecticut Water
Service, Inc., a public utility.
Mr. Robert Ehrlich has been a director of the Company since 1987, and
is a Common Director. He served as Chairman of the Board from May 1988 to
October 1989. In addition, he served as the President and Chief Executive
Officer of the Company from February 1987 to October 1989, except for the
four-month period from May to October 1988. Mr. Ehrlich is a senior partner in
Ehrlich & Co., a private merchant banking firm engaged in corporate finance and
corporate restructuring. He currently serves as a director and member of the
Executive Committee of Photographic Sciences Corp., a publicly-held manufacturer
of laser bar code scanners, and as the Chairman, Chief Financial Officer and a
director of Electric Fuel Corp., a publicly-held developer of batteries for
electric vehicles.
Mr. Mathias Klingler has been a Preferred Director of the Company since
June 1993. Since April 1993, Mr. Klingler has been President of the Dialysis
Systems Division of Fresenius AG. From 1992 to April 1993 he held the position
of Executive Vice President of Dialysis Systems International at Fresenius AG.
From 1987 to 1991 he was General Manager and Vice President -- Sales and
Marketing of Pacesetter Systems GmbH, and from 1991 to 1992 he was General
Manager of Siemens AG after it acquired Pacesetter Systems.
Dr. James Marten has been a director of the Company since 1974 and is a
Common Director. He served as Chairman of the Board of Directors of the Company
from April 1986 to May 1988. Dr. Marten served as President and Chief Executive
Officer of the Company from October 1986 until February 1987 and was a Vice
President of the Company from 1976 to 1984. From 1988 to 1994, Dr. Marten served
as Chief Executive Officer of UltraCision, Inc., a medical device manufacturing
company, and from 1988 to 1995 he served as Chairman of the Board of Directors
of that company. Dr. Marten served as Chairman of the Board of Directors of
Med-Chem Products, Inc., a
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25
publicly-held health care company from 1988 to 1995, when the company was
acquired, and is also a director of several privately-held health care
companies. Since 1993, Dr. Marten has served as a member of the Trustee Council
of Boston University Medical Center.
Dr. Ulrich Wagner has been a Preferred Director of the Company since
March 1992. He previously served as a director of the Company from October 1987
to October 1989. He is a partner of O'Melveny & Myers, a law firm which the
Company has retained from time to time, and which also represents Fresenius AG.
Dr. Wagner is also a director of Gull Medical Laboratories, Inc., a
publicly-held manufacturer and distributor of diagnostic test products.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the total compensation paid or to be
paid by the Company for services rendered during 1993, 1994 and 1995 to the
Chief Executive Officer of the Company, Mr. Farrell, Mr. Schmidt and Mr. Walker,
the only executive officers of the Company who had 1995 compensation in excess
of $100,000 (the "Specified Executives"):
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
UNDERLYING
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (SHARES)(1)
- --------------------------- ---- ------ ----- -----------
Ben J. Lipps (2) 1995 225,000 200,000 450,000
President, Chief Executive Officer and 1994 202,500 200,000 -
Chief Operating Officer 1993 180,000 200,000 125,000
Robert E. Farrell 1995 119,203 41,665 -
Corporate Group Vice President -- Administration, 1994 113,597 55,900 -
General Counsel and Clerk 1993 104,230 67,039 40,000
Heinz Schmidt 1995 89,274 54,150 -
Corporate Group Vice President -- 1994 84,835 78,000 -
Finance and Treasurer 1993 78,075 65,961 40,000
Scott Walker 1995 102,890 70,772 -
Corporate Group Vice President 1994 90,729 57,600 -
Regulatory Affairs 1993 85,355 39,727 40,000
- ------------------
(1) Options shown as granted in 1993 were granted in that year by the
Compensation Committee of the Company's Board of Directors, subject to
approval by the stockholders of the Company to an increase in the
number of shares issuable under the Company's 1987 Stock Option Plan.
This approval was received in June 1994. Options shown as granted to
Dr. Lipps in 1995 were granted in that year by the Compensation
Committee of the Company's Board of Directors, subject to approval by
the stockholders of the Company at the Company's next meeting of
stockholders of the maximum number of shares for which options may be
granted to any individual under the Company's 1987 Stock Option Plan.
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26
(2) Includes amounts paid to Dr. Lipps by Seratronics which decreased the
annual salary and bonus payable by the Company to Dr. Lipps. In each
year Seratronics paid $66,500 and $0 of salary and bonus, respectively,
to Dr. Lipps. See the description below of Dr. Lipps employment
arrangement with the Company.
During 1995, the Compensation Committee of the Board of Directors
granted options to Dr. Lipps contingent upon stockholder approval of the maximum
number of shares for which options may be granted to any individual under the
Company's 1987 Stock Option Plan. The Company intends to seek this approval at
its next meeting of stockholders. Fresenius AG has agreed to vote all shares of
Series F Preferred Stock and Common Stock owned by them to approve the
amendment to the 1987 Stock Option Plan.
During 1993, the Compensation Committee of the Board of Directors
granted options to the Specified Executives, together with other employees of
the Company, contingent upon stockholder approval of an increase in the number
of shares of Common Stock available under the Company's 1987 Stock Option Plan.
The Company obtained this approval by the stockholders at its 1994 Annual
Meeting of Stockholders. In January 1994, the Board of Directors voted to
increase this number of shares of Common Stock from 500,000 to 2,000,000, and
the stockholders approved the amendment at the 1994 Annual Meeting.
The following table summarizes the stock options granted by the
Company, subject to stockholder approval, during 1995 to the Specified
Executives:
OPTION GRANTS IN LAST FISCAL YEAR
Potential
Realized Value
at Assumed Annual
Rates of Stock Price
Number of % of Total Appreciation
Securities Options for Option Term
Underlying Granted to Exercise --------------------
Options Granted Employees in Price Expiration 5% 10%
Name (Shares) Fiscal Year ($) Date ($) ($)
- ---- -------- ------------ -------- ---------- --- ---
Ben J. Lipps 450,000 98% $12.75 July 17, 2005 $3,609,000 $9,144,000
The following table summarizes the stock options held at December 31,
1995 by the Specified Executives:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE AT DECEMBER 31, 1995 AT DECEMBER 31, 1995
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE (#) EXERCISABLE/UNEXERCISABLE ($)
- ---- ----------- -------- ------------------------------ -----------------------------
Ben J. Lipps -- -- 420,000/275,000 4,569,375/2,240,625
Robert E. Farrell 10,250 $126,312 28,750/12,000 364,688/150,000
Heinz Schmidt -- -- 34,000/12,000 449,250/150,000
Scott Walker 3,000 $ 46,125 31,000/12,000 400,500/150,000
Pursuant to an employment agreement between the Company and Dr. Lipps,
which became effective as of January 1, 1992, Dr. Lipps is required to devote
substantially all of his business efforts and time to serving as the President
of the Company, subject to his also serving as the President and Chief Executive
Officer of Seratronics. Dr. Lipps receives from the Company an annual base
salary of $225,000, together with bonuses up to a maximum of $200,000 based on
the attainment of certain sales and profits targets set annually by management
and reviewed by the Board of Directors. The Company and Dr. Lipps have agreed
that the Company's obligations in respect of such salary and bonus are decreased
by amounts payable to Dr. Lipps by Seratronics. Dr. Lipps has also been granted
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27
incentive stock options with respect to 120,000 shares of Common Stock at an
exercise price of $3.125 per share, which were fully vested as of December 31,
1995. This employment agreement is terminable upon 30 days' advance notice by
the Company, in which event Dr. Lipps is owed one year's base salary payable
over the year following such termination plus $100,000 payable upon such
termination. The agreement may also be terminated by Dr. Lipps upon one year's
notice, as well as by the Company for cause and under certain other
circumstances. Upon any such termination, the Company may require that Dr. Lipps
refrain, for up to two years, from carrying on a business in competition with
the Company's business, in which event the Company must pay an additional annual
amount to Dr. Lipps equal to his annual salary (or, if greater, the aggregate
premiums on certain life and disability policies carried by Dr. Lipps). During
1993, Dr. Lipps was granted options for an additional 125,000 shares at $7.125
per share, vesting over five years, and during 1995, he was granted options for
an additional 450,000 shares at $12.75 per share, subject to stockholder
approval of an amendment to the Company's 1987 Stock Option Plan designating the
maximum number of shares for which options may be granted to any individual.
Fresenius AG has indicated that it will vote its shares in favor of the
amendment. Options for 225,000 vest when the last sale price as reported by
American Stock Exchange (Composite Transactions) has been $16.00 or more for a
period of 10 consecutive trading days, if Dr. Lipps has been continuously
employed by the Company, and for the remaining shares when such last sale price
has been $20.00 or more for a period of 10 consecutive trading days, if Dr.
Lipps has been continuously employed by the Company. As of December 31, 1995,
options for 225,000 of these shares had vested, and since that date, options for
the remaining 225,000 shares have vested. See "Certain Relationships and Related
Transactions."
Dr. Wagner, Dr. Marten, Mr. Ehrlich, Mr. Baker and Mr. Klingler each
receive directors fees of $20,000 per annum. Commencing in 1994, members of the
Audit and Compensation Committees (other than Dr. Krick and Mr. Klingler and
their respective successors as Preferred Directors) each received $1,500 per
meeting for each such committee meeting attended. Dr. Krick receives $60,000
annually for serving as Chairman of the Board of Directors. In June 1994, the
stockholders of the Company approved a Non-Employee Directors' Stock Option
Plan, pursuant to which each current non-employee director of the Company
received a grant of options for 30,000 shares of Common stock vesting at a rate
of 10,000 per year in each of 1994, 1995 and 1996. In June 1995, the
stockholders of the Company approved an amendment to the Non-Employee Directors'
Stock Option Plan permitting participating directors to receive all directors
fees in the form of options to purchase shares of the Company's common stock
rather than in cash. Only Dr. Marten made an election to receive fees in the
form of options. Future non-employee directors will receive a grant of options
for 30,000 shares of Common stock upon their election. The options will vest at
a rate of 10,000 per year on each of the first, second and third anniversaries
of the directors' initial election. Dr. Krick and Mr. Klingler declined to
accept any options under the directors' plan.
In January 1996, in connection with the Reorganization, the directors
elected Messrs. Ehrlich and Baker and Dr. Marten to serve on a special
committee of the Board of Directors, the Independent Committee. Each member of
the Independent Committee will be paid a retainer fee of $25,000, an additional
per diem of $1,500 for each meeting of the Independent Committee attended in
person or by telephone or for each substantial expenditure of time on Committee
business or related matters, and will be reimbursed for out-of-pocket expenses
incurred in connection with Committee business or related matters.
In June 1994 the Board of Directors approved the extension of the
expiration date for options to acquire 31,000 shares of the Company's common
stock held by Dr. Marten. The expiration date was extended from August 6, 1994
to October 1, 1996, for 6,000 shares, and from June 28, 1994 to October 1, 1996
for 25,000 shares.
The Company and Mr. Ehrlich are parties to a consulting agreement
pursuant to which Mr. Ehrlich receives $10,000 annually. The agreement
terminates in June 1996.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Board of Directors
during 1995 were Mr. Ehrlich, Dr. Krick and Dr. Wagner. Dr. Krick served as the
Chairman of the Board of Directors during this year, and Mr. Ehrlich was
formerly the Chairman and the President of the Company. Dr. Krick is the
Chairman of the Managing Board of Fresenius AG, with which the Company has
various business dealings. During 1992, the Company agreed to purchase certain
stock options held by Mr. Ehrlich, and to issue new options to him in exchange
for other options held by him and in 1994 the Company made a secured loan to him
to allow him to exercise certain stock options. Dr. Wagner is a partner in the
law firm of O'Melveny & Myers, which from time to time provides
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28
legal services to the Company and which also represents Fresenius AG. See
"Certain Relationships and Related Transactions" and "Directors and Executive
Officers of the Registrant."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of December 31, 1995 certain
information with respect to each person who is known by the Company to own
beneficially more than 5% of any class of the voting securities of the Company,
each director, each Specified Executive and all directors and executive officers
of the Company as a group:
SHARES BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED (1) OF CLASS
- ------------------------------------- --------- --------
Series F Preferred Stock
Fresenius Aktiengesellschaft 200,000 (2) 100.0%
Borkenberg 14
61343 Bad Homburg v.d.H., Germany
Common Stock
5% Stockholders
Fresenius Aktiengesellschaft 18,673,325 (2)(3) 70.9%
Borkenberg 14
61343 Bad Homburg v.d.H., Germany
Fresenius Securities, Inc. 7,833,202 (4) 29.7%
2637 Shadelands Drive
Walnut Creek, CA 94598
Abbott Laboratories 1,750,000 (5) 7.5%
One Abbott Park Road
Abbott Park, Illinois 60064-3500
J.P. Morgan & Co. Incorporated 1,268,060 (6) 5.9%
60 Wall Street
New York, NY 10260
Directors
Ben Lipps 725,000 (7) 3.5%
2637 Shadelands Drive
Walnut Creek, CA 94598
Robert S. Ehrlich 103,166 (8) *
2637 Shadelands Drive
Walnut Creek, CA 94598
James F. Marten 101,446 (8) *
2637 Shadelands Drive
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29
Walnut Creek, CA 94598
Francis E. Baker 15,000 (10) *
2637 Shadelands Drive
Walnut Creek, CA 94598
Mathias Klingler 0 0%
Borkenberg 14
61343 Bad Homburg v.d.H., Germany
Gerd Krick 0 0%
Borkenberg 14
61343 Bad Homburg v.d.H., Germany
Ulrich Wagner 20,000 (11) *
54th Floor
153 East 53rd Street
New York, NY 10022
Specified Officers
Robert E. Farrell 34,000 (12) *
2637 Shadelands Drive
Walnut Creek, CA 94598
Heinz Schmidt 34,000 (13) *
2637 Shadelands Drive
Walnut Creek, CA 94598
Scott Walker 31,500 (14) *
2637 Shadelands Drive
Walnut Creek, CA 94598
All directors and executive officers as a group 1,064,112 (15) 4.8%
---------- ----
- ------------------
* Less than 1%
(1) Except as otherwise indicated, the named owner has sole voting and
investment power with respect to the shares set forth. The figures in
this table are calculated in accordance with Rule 13d-3 under the
Exchange Act.
(2) Each share of Series F Preferred Stock currently is convertible into
approximately 15.65 shares of Common Stock and, on any matters to come
before a meeting of stockholders except the election of directors, the
holders of Series F Preferred Stock are entitled to cast approximately
15.65 votes for each share of Series F Preferred Stock voting with the
Common Stock as a single class. In February, 1996, Fresenius AG
disclosed that it is considering converting the Series F Preferred
Stock into Common Stock.
(3) Includes 3,129,883 shares presently issuable upon conversion of shares
of Series F Preferred Stock, 1,700,000 shares issuable upon the
exercise of a warrant issued to Fresenius AG in connection with the
Abbott Acquisition and 50,000 shares issuable upon exercise of a
warrant issued to Fresenius AG in consideration for its providing
credit support. See "Certain Relationships and Related Transactions."
Also
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includes 7,833,202 shares owned by Fresenius Securities, Inc., a
wholly-owned subsidiary of Fresenius AG.
(4) These shares are also beneficially owned by Fresenius AG. See Note 3.
(5) Represents shares issuable upon exercise of the Abbott Warrant. See
"Business-Overview" and "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources."
(6) In February 1996, J.P. Morgan & Co. Incorporated made a Schedule 13G
filing with the Securities & Exchange Commission reporting this
ownership as of December 29, 1995, and indicating that the securities
were acquired in the normal course of business and were not acquired
for the purpose of changing or influencing the control of the Company.
(7) Includes 645,000 shares issuable upon exercise of options, 450,000 of
which are subject to stockholder approval of an amendment to the
Company's 1987 Stock Option Plan to designate the maximum number of
shares that may be granted to any individual under the plan.
(8) Includes 58,416 shares issuable upon exercise of options.
(9) Includes 86,546 shares issuable upon exercise of options.
(10) Includes 10,000 shares issuable upon exercise of options.
(11) Includes 20,000 shares issuable upon exercise of options.
(12) Includes 28,750 shares issuable upon exercise of options.
(13) Includes 34,000 shares issuable upon exercise of options.
(14) Includes 31,000 shares issuable upon exercise of options.
(15) The amount shown includes any shares owned of record or issuable upon
exercise of options by the directors and all executive officers.
On February 4, 1996, Grace and Fresenius AG entered into a definitive
agreement to combine NMC with Fresenius AG's worldwide dialysis business,
including the Company. Pursuant to this agreement, Fresenius AG has agreed with
Grace that the Company would become a wholly-owned subsidiary of the new
company, and that, when the economic terms on which the Company's shareholders,
other than Fresenius AG and its affiliates, will participate in this
transaction, have been established, will vote its shares in the Company in
favor of the transaction.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Item 1, "Business" above, under "Recent Development", "Patents,
Trademarks and Licenses" and "Research and Development."
On February 4, 1996, Grace and Fresenius AG entered into a definitive
agreement to combine NMC with Fresenius AG's worldwide dialysis business,
including the Company. Pursuant to this agreement, Fresenius AG has agreed with
Grace that the Company would become a wholly-owned subsidiary of the new
company, and that, when the economic terms on which the Company's shareholders,
other than Fresenius AG and its affiliates, will participate in this
transaction, have been established, will vote its shares in the Company in
favor of the transaction.
TECHNOLOGY FROM FRESENIUS AG
The Company is dependent on Fresenius AG for the technology and
proprietary processes and know-how necessary to manufacture polysulfone
dialyzers successfully in the expanded Ogden, Utah plant. The Company also has
the contractual right to Fresenius AG's know-how relating to certain peritoneal
dialysis products incorporating the Safe-Lock technology in the United States,
Canada and Mexico. See "Business -- Patents, Trademarks and Licenses."
Pursuant to a technology license and know-how agreement, Fresenius AG
has granted the Company an exclusive North American license for the technology,
processes and know-how necessary to manufacture polysulfone dialyzers. Beginning
January 1, 1996, the Company will pay a royalty to Fresenius AG of 4.5% of the
Company's net sales of the dialyzers so produced by the Company for a ten-year
period, after which the Company will have a paid-up exclusive license. Fresenius
AG may make this license non-exclusive if it ceases to own a majority of the
Company's Common Stock. The agreement may be terminated by Fresenius AG upon
specified defaults, and in addition, may be terminated if a majority of the
voting power of the Company is acquired by a company engaged in the treatment,
research, development, manufacture or sale of products for treatment of renal
disease.
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PRODUCTS FROM FRESENIUS AG
The Company and Fresenius AG are parties to an agreement (the
"Distribution Agreement") pursuant to which Fresenius AG has confirmed that the
Company acts as the sole North American distributor for Fresenius AG products
related to ESRD treatment by hemodialysis and to intensive medicine and
infection control applications (excluding pharmaceutical and certain other
products) and a distribution and manufacturing agreement for certain of
Fresenius AG's intensive care and diagnostic products (the "Intensive Care
Agreement"), including the Fresenius AS 104 Cell Separator. The Intensive Care
Agreement was entered into during 1994 for an initial term of five years and
will continue thereafter from year to year unless terminated. The Company is
given both exclusive and non-exclusive rights to manufacture and distribute
certain products in North and South America. If the Company fails to meet
certain sales goals during the five year initial term, Fresenius AG has the
option to terminate the agreement with respect to one or more products or to
convert the Company's exclusive rights with respect to one or more products to a
non-exclusive right. The Distribution Agreement gives the Company first
negotiation rights with respect to products covered by the agreement which
Fresenius AG proposes to have manufactured in North America. With respect to the
products acquired from Abbott, the Company has retained the exclusive rights in
the United States (the rights to Canada and Mexico were retained by Abbott), has
granted Fresenius AG a non-exclusive sublicense with respect to these products
in Central and South America, Australia and New Zealand and an exclusive (with
respect to the Company) sublicense with respect to all other areas acquired from
Abbott, including Europe. Taken together, these agreements effectively limit the
Company's activities primarily to North America, with limited possibilities for
expansion outside of this area.
In the ordinary course of the Company's business, the Company and
Fresenius AG and certain subsidiaries of Fresenius AG enter into various
transactions involving the purchase and sale of hemodialysis systems and
supplies for assembly and/or distribution by the Company. During 1995, the
Company purchased such products for an aggregate purchase price of approximately
$90.6 million. Also during 1995, the Company sold products to Fresenius AG and
certain of its subsidiaries having an aggregate sales price of approximately
$2.5 million. The prices charged to the Company under the Distribution Agreement
are negotiated each year by the Company and Fresenius AG based on Fresenius AG's
estimated costs and desired profit margins, taking into account the competitive
environment in the United States market, and are not to exceed the average of
the prices charged to Fresenius AG's other affiliated distributors (except for
costs attributable to the manufacture of products for sale primarily in the
United States). The Company believes that these prices are no more or less
favorable to the Company than the Company could obtain from unaffiliated third
parties. The only source of supply for several of the Company's products is
Fresenius AG, and there can be no assurance that the prices negotiated will
enable the Company to maintain its profit margins on these products. If
Fresenius AG is unable to deliver products in accordance with the quantities
stipulated in the Company's purchase orders, Fresenius AG is required to
allocate its production capacity to the Company's orders in proportion to the
greater of the percentage of Fresenius AG's total unit business represented by
the Company's purchases during the prior year or the three prior years. Under
the Distribution Agreement, Fresenius AG indemnifies the Company for any claims
of bodily injury or property damage alleged to have arisen from the possession,
use or operation of Fresenius AG's hemodialysis products purchased pursuant to
this agreement. While the Company is obligated to provide installation,
training, repair, warranty and maintenance services for these products and is
responsible for defects in assembly, Fresenius AG reimburses the Company for
material costs associated with warranty repairs other than repairs on components
or parts purchased by the Company from a source other than Fresenius AG. The
Distribution Agreement terminates on the earlier of December 31, 2011, or the
date that Fresenius AG loses the power to elect 51% of the Company's board of
directors, unless a cause for early termination arises. The prices charged to
the Company under the Intensive Care Agreement are based on Fresenius AG's
manufacturing cost plus a set profit margin.
During 1995, trade payables owed by the Company to Fresenius AG and one
of its subsidiaries were due in 150 days, and those amounts past due bore
interest at a rate of 5.5% per annum. As of December 31, 1995, none of the
approximately $41.2 million of trade payables due to Fresenius AG and this
subsidiary were over 150 days old.
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INVESTMENTS BY FRESENIUS AG
Fresenius AG is the beneficial owner of all 200,000 outstanding shares
of the Company's Series F Preferred Stock, currently convertible into 3,129,883
shares of Common Stock. Fresenius AG also beneficially owns 13,793,442 shares of
the Company's outstanding Common Stock and warrants to purchase 1,700,000 shares
of Common Stock exercisable at $8.00 per share and warrants to purchase 50,000
shares of Common Stock at an exercise price of $10.57 per share. If Fresenius AG
were to convert the Series F Preferred Stock and exercise all warrants currently
exercisable, it would hold 18,673,325 shares of Common Stock, or approximately
70.9% of all outstanding shares.
The practical effect of the provisions relating to the Series F
Preferred Stock is to give Fresenius AG, through its ownership of all of the
outstanding shares of Series F Preferred Stock and its direct and indirect
ownership of Common Stock, an absolute majority of the voting power attributable
to each class of the Company's voting securities with respect to all matters.
Accordingly, Fresenius AG possesses the ability, through its voting power and
its power to elect a majority of the Company's directors and to approve any
actions requiring the vote of the Company's stockholders.
Pursuant to an agreement dated September 8, 1987 (the "1987
Agreement"), on October 2, 1987, Delmed issued and sold to Fresenius AG 200,000
shares of Series F Preferred Stock and a warrant (the "1987 Warrant"),
exercisable after December 31, 1987, and on or prior to December 31, 1992. In
order to assure the continued effectiveness of certain favorable tax rulings
with respect to utilization of the Company's net operating loss carryforwards,
in December 1992, the Company repurchased the 1987 Warrant from Fresenius AG at
a purchase price of $20,067 (which was determined to be the fair market value of
the 1987 Warrant on the date of repurchase).
The terms of the 1987 Agreement relating to the Series F Preferred
Stock, of the Company's Articles of Organization and of the Company's By-laws
(adopted in connection with the issue and sale of the Series F Preferred Stock)
provide the following special rights to the holders of Series F Preferred Stock.
- So long as there are at least 100,000 shares of Series F Preferred
Stock outstanding:
There will be an odd number of directors, a simple majority of
whom will be Preferred Directors, while the remaining
directors will be Common Directors;
All committees of the Board of Directors will have an odd
number of members, a simple majority of whom will be elected
by the Preferred Directors while the remaining directors will
be elected by the Common Directors;
A quorum for the conduct of any business by the Board of
Directors or a committee of the Board will require the
presence of at least one Preferred Director, or at least one
director elected to serve on the committee by the Preferred
Directors; and
Any action taken by the Board of Directors or a committee of
the Board will require the affirmative vote of at least one
Preferred Director, or at least one director elected to serve
on the committee by the Preferred Directors.
- So long as Fresenius AG holds at least 100,000 shares of Series F
Preferred Stock, no person will be nominated to be a Common Director if
Fresenius AG reasonably objects to that person.
- So long as there are at least 50,000 shares of Series F Preferred
Stock outstanding:
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33
The Articles of Organization of the Company will not be
amended without the affirmative vote of a majority of the
holders of Series F Preferred Stock voting separately as a
class, unless such amendment relates solely to an increase or
decrease in the number of authorized shares of Common Stock, a
stock split or combination or a limit on the liability of
directors; and
The Company will not become a party to any transaction
involving its merger into another corporation, a merger of
another corporation into the Company, the consolidation of the
Company with one or more other corporations, the sale or lease
of all or substantially all of the assets of the Company or
the liquidation of the Company without the affirmative vote of
a majority of the holders of Series F Preferred Stock voting
separately as a class.
- So long as any Series F Preferred Stock is outstanding, the Articles
of Organization or By-laws of the Company will not be amended, altered
or repealed so as to diminish materially the rights, privileges or
preferences of the holders of the Series F Preferred Stock without the
approval of a majority of the holders of Series F Preferred Stock
voting separately as a class.
- With respect to any matter submitted to a vote of the Company's
stockholders with respect to which the holders of Series F Preferred
Stock are not entitled to a separate class vote, the holders of Series
F Preferred Stock will vote together with the holders of Common stock
as a single class, with each holder of Series F Preferred Stock
entitled to a number of votes per share equal to the number of shares
of Common stock into which such share of Series F Preferred Stock could
then be converted (approximately 15.59 votes per share) and each holder
of Common stock entitled to one vote per share of Common Stock.
On February 14, 1990, Delmed entered into an agreement with Fresenius
AG and Old FUSA pursuant to which Delmed granted options (the "Options") to
Fresenius AG and Old FUSA allowing them to acquire a number of shares of Common
stock which would increase their aggregate ownership of Delmed's equity from its
then current level of approximately 44% to approximately 80% (excluding the 1987
Warrant). The purchase price for the Options was $5.0 million in cash, which was
paid by Fresenius AG and Old FUSA in August 1990 when the Options were approved
by Delmed's stockholders. Upon exercise of the Options at the end of 1991,
Delmed issued to Fresenius AG and Old FUSA an aggregate of approximately 10.8
million shares of Common stock and received Old FUSA's assets and $11.9 million
in cash, which was used to pay indebtedness to another subsidiary of Fresenius
AG assumed by the Company in the combination.
In December 1992, the Company sold 1,501,235 shares of Common stock to
Fresenius AG for $7.6 million (approximately $5.06 per share, the closing price
of the Company's Common stock on that date). The Company used this cash to pay,
in part, indebtedness which the Company owed to a wholly-owned subsidiary of
Fresenius AG.
Fresenius AG and the Company are parties to a Registration Agreement
dated February 24, 1993, which supersedes a 1987 agreement between the parties.
This agreement grants Fresenius AG demand registration rights with respect to
all shares of Common stock held by Fresenius AG or certain of its subsidiaries
on February 24, 1993 or issuable to them upon conversion of shares of Series F
Preferred Stock or exercise of the Abbott Warrant or exercise of a warrant
issued to Fresenius AG, in connection with its agreement to provide credit
support for a $25.0 million long-term line of credit (collectively, the
"Registrable Shares"). The $25.0 million long-term line of credit, and the
related credit support for this line, are no longer available. The Company is
to pay all expenses in connection with the first such registration; the
holder(s) is responsible for the expenses of subsequent registrations. A holder
of Registrable Shares may also request that the Company include its Registrable
Shares in registration statements filed by the Company in connection with a
public offering of Common stock on behalf of the Company and/or another holder
of Common Stock. Except for the shares covered by the agreements, this
registration agreement is identical to a registration agreement entered into
between the Company and Abbott at the same time with respect to the Common
Stock issuable upon exercise of the Abbott Warrant.
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FINANCIAL SUPPORT FROM FRESENIUS AG
Fresenius AG has provided substantial financial support to the Company.
Fresenius AG currently provides the following credit support: provision of
credit support to assist the Company in obtaining short-term lines of credit and
the Abbott Letter of Credit and participation in and assistance with the
Company's foreign exchange contracts. Fresenius AG also participated in letters
of credit in connection with the Company's industrial revenue bonds until these
bonds were pre-paid in 1994.
As compensation for these services, the Company agreed to pay Fresenius
AG an aggregate fee of $336,000 in quarterly payments, the last of which was due
in June 1994. Future finance fees will be negotiated depending upon the level of
credit support supplied by Fresenius AG. In addition, in February 1993, as
consideration for certain past comfort letters given in support of certain
short-term borrowings and Fresenius AG's commitment to provide up to $40.0
million of credit support in connection with the Abbott Acquisition, the Company
issued Fresenius AG a warrant for 1,700,000 shares of Common stock at an
exercise price of $8.00 per share, and granted a sublicense with respect to the
Abbott peritoneal dialysis products discussed above. In exchange for its
agreement to provide support for a $25.0 million long-term line of credit, the
Company issued to Fresenius AG a ten-year warrant for the purchase of 50,000
shares of Common stock at an exercise price of $10.57 per share. This line of
credit is no longer available to the Company.
OTHER RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Lipps is the President and Chief Executive Officer of Seratronics.
Mr. Baker is President of Andersen Group, Inc., which owns a majority of the
outstanding capital stock of Seratronics. Pursuant to a series of agreements
with Seratronics and Andersen Group, Inc. entered into in 1985 and extended and
amended in 1995, the Company manages, and acts as sole distributor for, the
dialyzer reuse business of Seratronics. These agreements required the Company to
make minimum net payments of $100,000 per year to Seratronics through 1995 and
require the Company to make minimum payments of $50,000 per quarter through
February 29, 2000, when the agreements expire by their terms. The agreements,
and the payment obligation, originally expired in 1995. The Company has the
right to acquire the assets and liabilities of the reuse business for a nominal
purchase price and, if it exercises this option, its obligation to make the
quarterly payments ends; this option was also extended during 1995, so that it
now expires on February 29, 2000. During 1995, the Company, as distributor,
purchased dialyzer reuse systems and supplies from Seratronics for an aggregate
purchase price of approximately $1.9 million. Management of the Company
believes that the terms of such purchases were on a basis no less favorable to
the Company than the Company could have obtained with unaffiliated third
parties. The results of operations and the assets and liabilities of the
Seratronics' reuse business are included in the Company's consolidated
financial statements. A portion of Dr. Lipps' salary is paid each year by
Seratronics. See"Management -- Executive Compensation."
The Company and Abbott are parties to a registration agreement dated
February 24, 1993. This agreement grants Abbott demand registration rights with
respect to all shares issuable upon the exercise of the Abbott Warrant. Pursuant
to the terms of a purchase agreement between the Company and Abbott entered into
in connection with the Abbott Acquisition, the Company is obligated to purchase
stated quantities of Inpersol products through 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Liquidity and Capital Resources" and Notes 11 and 12 of Notes to Consolidated
Financial Statements.
Mr. Ehrlich, a senior employee and several past employees of the
Company were granted options under the Company's 1989 Special Stock Option Plan,
which replaced grants made under the Company's 1987 Key Employee Stock Purchase
Plan. The Company obtained the favorable tax rulings relating to utilization of
net operating loss carryforwards discussed above under "Investments by Fresenius
AG," in part on the assumption that these grants/options would not expire
unvested/unexercised, and the ruling obtained in 1992 also applied to the
repurchase
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of these options at their fair market value. On October 4, 1992, the Board of
Directors determined that the Company should also repurchase these options at
their then fair market value, which the Board determined to be $0.15 per share.
During early 1993, the Company repurchased Mr. Ehrlich's and the senior
employee's options at this price. These options would have expired in August
1994 and had a per-share exercise price of $7.50. In June 1994 the Company made
secured loans totaling $255,570 to Mr. Ehrlich to allow him to exercise options
for 135,000 shares of the Company's Common Stock. The loans included an amount
necessary to pay taxes incurred by him by virtue of the exercise. The annual
interest rate on the loans was 6%. The largest aggregate amount outstanding
during 1995 was $274,737. The loans came due in January 1996 and were paid in
full in March 1996.
The Company and Mr. Ehrlich are parties to a consulting agreement
pursuant to which Mr. Ehrlich receives $10,000 annually. The agreement
terminates in June 1996.
Dr. Wagner is a partner of O'Melveny & Myers, a law firm which provided
certain legal services to the Company in 1995.
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PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements and financial statement schedules filed as
part of this Report are listed and indexed at Page F-1-A.
Listed below are all Exhibits filed as part of this Report. Certain
Exhibits are incorporated herein by reference to documents filed by the
Registrant with the Securities and Exchange Commission (the "Commission")
pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended.
As permitted by Regulation S-K Item 10(d), certain Exhibits are incorporated
herein by reference to certain periodic reports filed by the Registrant more
than five yars ago. These periodic reports were filed by the Registrant,
Commission File Number 1-8350, and are located in Commission file number 2-33,
according to section 200.80f of Title 17 of the Code of Federal Regulations.
3.1 - Restated Articles of Organization of the Registrant, as amended, are
incorporated herein by reference to the Registrant's Form 10-K for the
1994 fiscal year.
3.2 - By-laws of the Registrant, as amended, are incorporated herein by
reference to the Registrant's Form 10-K for the 1993 fiscal year.
4.1 - See Exhibit 3.1 for description of capital stock contained in the
Restated Articles of Organization of the Registrant, and see Exhibit
3.2 for the rights given to the holders of certain shares of the
Registrant.
4.2 - Preferred Stock and Warrant Purchase Agreement dated as of September
8, 1987 between the Registrant and Fresenius Aktiengesellschaft is
incorporated herein by reference to the Registrant's Form 10-K for the
1992 fiscal year.
4.3 - Option Agreement dated as of February 14, 1990 among the Registrant,
Fresenius Aktiengesellschaft and Fresenius Securities, Inc. is
incorporated herein by reference to the Registrant's Form 8-K dated
February 15, 1990, located in Commission file number 2-33.
4.3.1 - Amendment No. 1 dated December 31, 1991 to Option Agreement among
the Registrant, Fresenius Aktiengesellschaft and Fresenius Securities,
Inc. is incorporated herein by reference to the Registrant's Form 10-K
for the 1991 fiscal year.
4.4 - Warrant dated February 24, 1993 issued by the Registrant to Abbott
Laboratories is incorporated herein by reference to the Registrant's
Form 8-K dated February 24, 1993.
4.5 - Warrant dated February 24, 1993 issued by the Registrant to
Fresenius Aktiengesellschaft is incorporated herein by reference to
the Registrant's Form 8-K dated February 24, 1993.
4.6 - Agreement dated February 16, 1993 between the Registrant and
Dresdner Bank is incorporated herein by reference to the Registrant's
Form 8-K dated February 24, 1993.
4.7 - Agreement dated February 19, 1993 between the Registrant and
Deutsche Bank is incorporated herein by reference to the Registrant's
Form 8-K dated February 24, 1993.
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37
4.9. - Warrant dated April 15, 1994 issued by the Registrant to Fresenius
Aktiengesellschaft is incorporated herein by reference to the
Registrant's Form S-1, No. 33-78422.
10.1 - 1987 Stock Option Plan is incorporated herein by reference to the
Registrant's Form S-8, No. 33-59999.
10.2 - 1989 Special Stock Option Plan is incorporated herein by reference
to the Registrant's definitive proxy statement dated May 12, 1989,
located in Commission file number 2-33.
10.3 - Supply, License and Know-How Agreement dated June 30, 1981, as
amended, between Fresenius Aktiengesellschaft and Registrant is
incorporated herein by reference to the Registrant's Form 10-K for the
1990 fiscal year, located in Commission file number 2-33.
10.4 - Agreement Confirming Exclusive Distribution Arrangement dated
December 30, 1991 between the Registrant and Fresenius AG is
incorporated herein by reference to the Registrant's Form 10-K for the
1991 fiscal year.
10.5 - Asset Purchase Agreement dated as of February 24, 1993 between the
Registrant and Abbot Laboratories is incorporated herein by reference
to the Registrant's Form 8-K dated February 24, 1993.
10.6 - License Agreement dated as of February 24, 1993 between the
Registrant and Abbott Laboratories is incorporated herein by reference
to the Registrant's Form 10-K for the 1992 fiscal year.
10.7 - Registration Agreement dated as of February 24, 1993 between the
Registrant and Fresenius Aktiengesellschaft is incorporated herein by
reference to the Registrant's Form 10-K for the 1992 fiscal year.
10.7.1. - Letter Agreement dated April 15, 1994 between the Registrant and
Fresenius Aktiengesellschaft amending Exhibit 10.7 is incorporated
herein by reference to the Registrant's Form S-1, No. 33-78422.
10.8 - Stock Purchase and Warrant Repurchase Agreement dated as of
September 25, 1992 between the Registrant and Fresenius
Aktiengesellschaft is incorporated herein by reference to the
Registrant's Form 10-K for the 1992 fiscal year.
10.9 - Agreement dated May 14, 1992 between the Registrant and Fresenius
Aktiengesellschaft regarding the acquisition of certain assets of
Critikon, Inc. is incorporated herein by reference to the Registrant's
Form 10-K for the 1992 fiscal year.
10.10 - Agreement dated July 16, 1992 between the Registrant and Fresenius
Aktiengesellschaft regarding Fresenius Pharma (USA) Inc. is
incorporated herein by reference to the Registrant's Form 10-K for the
1992 fiscal year.
10.11 - Employment Agreement effective as of January 1, 1992 between the
Registrant and Ben Lipps is incorporated herein by reference to the
Registrant's Form 10-K for the 1992 fiscal year.
10.12 - Lease, as amended, of premises located at 2367 Shadelands Drive,
Walnut Creek, California is incorporated herein by reference to the
Registrant's Form 10-K for the 1993 fiscal year.
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38
10.13 - Sublicense Agreement dated as of June 1, 1993 between the
Registrant and Fresenius Aktiengesellschaft regarding certain assets
purchased by the Registrant from Abbott Laboratories is incorporated
herein by reference to the Registrant's Form 10-K for the 1993
fiscal year.
10.14 - Purchase Agreement dated December 1, 1992 between the Registrant
and Fresenius Aktiengesellschaft regarding cell separators and
infusion pumps is incorporated herein by reference to the
Registrant's Form 10-K for the 1993 fiscal year.
10.15 - License Agreement dated as of April 22, 1994 between the
Registrant and Fresenius Aktiengesellschaft regarding polysulfone
dialyzers is incorporated herein by reference to the Registrant's
Form S-1, No. 33-78422.
10.16 - The Registrant's 1993 Stock Option Plan for Non-Employee Directors
is incorporated herein by reference to the Registrant's Form S-8,
No. 33-61411.
10.17 - Security Agreement dated as of June 13, 1994 between the
Registrant and Robert S. Ehrlich is incorporated herein by reference
to the Registrant's Form 10-K for the 1994 fiscal year.
10.17.1 - Option Exercise Note of Robert S. Ehrlich is incorporated herein
by reference to the Registrant's Form 10-K for the 1994 fiscal year.
10.17.2 - Tax Note of Robert S. Ehrlich is incorporated herein by reference
to the Registrant's Form 10-K for the 1994 fiscal year.
10.18. - Limited Distribution Agreement dated as of December 2, 1994
between the Registrant and Fresenius Aktiengesellschaft regarding
intensive care products is incorporated herein by reference to the
Registrant's Form 10-K for the 1994 fiscal year.
10.19 - Participation Agreement, dated as of March 31,1995, among the
Registrant, First Security Bank of Utah, N.A. and Deutsche Bank A.G.
is filed herewith.
10.19.1 - Amendment No. 1 dated as of June 30, 1995 to Participation
Agreement among the Registrant, First Security Bank of Utah, N.A.
and Deutsche Bank A.G. is filed herewith.
10.19.2 - Amendment No. 2 dated as of July 31, 1995 to Participation
Agreement among the Registrant, First Security Bank of Utah, N.A.
and Deutsche Bank A.G. is filed herewith.
10.19.3 - Amendment No. 3 dated December 29, 1995 to Participation Agreement
among the Registrant, First Security Bank of Utah, N.A. and Deutsche
Bank A.G. is filed herewith.
10.20 - Lease Agreement dated as of March 31, 1995 between the Registrant
and First Security Bank of Utah, N.A. is filed herewith.
10.21 - Credit Agreement dated as of January 3, 1995 between the Registrant
and Deutsche Bank A.G. is filed herewith.
11. - Calculation of Earnings Per Share is filed herewith.
21. - A list of the Registrant's subsidiaries is incorporated herein by
reference to the Registrant's Form S-1, No. 33-78422.
23. - The consent of independent public accountants KPMG Peat Marwick LLP
is filed herewith.
27. - The Registrant's Financial Data Schedule is filed herewith.
- 37 -
39
Pursuant to Item 4(iii) of Item 601 Regulation S-K, the Registrant has
filed as Exhibits only the instruments defining the rights of holders of
long-term debt with respect to which the total amount of securities authorized
thereunder exceeds 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis. The Registrant agrees to furnish to the
Commission upon its request copies of other instruments defining the rights of
holders of long-term debt. The Registrant also agrees to furnish to the
Commission upon its request copies of any omitted schedule or exhibit to any
exhibit filed herewith.
(b) No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of 1995.
- 38 -
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BEN LIPPS
-------------------
Ben Lipps
President and Chief
Executive Officer
Date: March 30, 1996
- 39 -
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
GERD KRICK Chairman of the Board and Director March 30, 1996
- -----------------------
Gerd Krick
BEN LIPPS President, Chief Executive Officer March 30, 1996
- ----------------------- (Principal Executive Officer)
Ben Lipps and Director
ROBERT E. FARRELL Corporate Group Vice President - Administration, March 30, 1996
- ----------------------- General Counsel and Clerk
Robert E. Farrell
HEINZ SCHMIDT Corporate Group Vice President - Finance and March 30, 1996
- ----------------------- Treasurer (Principal Financial and
Heinz Schmidt Accounting Officer)
ROBERT S. EHRLICH Director March 30, 1996
- -----------------------
Robert S. Ehrlich
JAMES F. MARTEN Director March 30, 1996
- -----------------------
James F. Marten
FRANCIS E. BAKER Director March 30, 1996
- -----------------------
Francis E. Baker
MATHIAS KLINGLER Director March 30, 1996
- -----------------------
Mathias Klingler
ULRICH WAGNER Director March 30, 1996
- -----------------------
Ulrich Wagner
- 40 -
42
FRESENIUS USA, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FOR ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
DECEMBER 31, 1995, 1994 AND 1993
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-2
Consolidated Statements of Operations for the Years ended December 31, 1995, 1994
and 1993 F-3
Consolidated Statements of Stockholders' Equity for the Years ended December 31,
1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the Years ended December 31, 1995,
1994 and 1993 F-5
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule F-32
- F-1-A -
43
Independent Auditors' Report
The Board of Directors and Stockholders Fresenius USA, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Fresenius USA,
Inc. and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1995. In connection
with our audits of the consolidated financial statements, we also have audited
the accompanying financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fresenius USA, Inc.
and subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
San Francisco, California
February 2, 1996
F-1
44
FRESENIUS USA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
(Dollars and shares in thousands, except per share amounts)
Assets 1995 1994
---- ----
Current assets:
Cash $ 2,330 2,315
Trade accounts receivable, less allowance for doubtful
accounts of $1,324 in 1995 and $1,744 in 1994 57,052 42,671
Inventories, net 65,706 52,704
Prepaid expenses and other current assets 3,258 1,893
Deferred taxes 4,594 --
--------- ---------
Total current assets 132,940 99,583
Property, plant and equipment, net 48,492 45,956
Intangible assets, net 36,863 39,498
Other assets, net 6,626 311
--------- ---------
$ 224,921 185,348
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 16,276 13,128
Accounts payable to affiliates, net 41,229 33,361
Accrued expenses 13,577 12,214
Short-term borrowings 33,149 22,330
Short-term borrowings from Fresenius AG 3,650 4,380
Current portion of long-term debt and capital lease obligations 11,703 9,496
Income taxes payable 365 95
--------- ---------
Total current liabilities 119,949 95,004
Note payable, less current portion 1,275 1,861
Note payable to FNA 274 274
Long-term debt and capital lease obligations, less current portion 24,821 27,637
--------- ---------
Total liabilities 146,319 124,776
--------- ---------
Commitments and contingencies (notes 12, 13, 16, 19 and 21)
Stockholders' equity
Series F preferred stock, authorized 600 shares, $1.00 par value,
200 shares issued and outstanding 200 200
Common stock, authorized 40,000 shares, $.01 par value,
issued and outstanding 21,465 shares in 1995 and
21,205 shares in 1994 215 212
Capital in excess of par value 141,136 139,510
Currency translation adjustment (80) (94)
Accumulated deficit (62,869) (79,256)
--------- ---------
Total stockholders' equity 78,602 60,572
--------- ---------
$ 224,921 185,348
========= =========
See accompanying notes to consolidated financial statements.
F-2
45
FRESENIUS USA, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1995, 1994 and 1993
(Dollars and shares in thousands, except
per share amounts)
1995 1994 1993
---- ---- ----
Net sales $ 304,964 254,344 205,960
Cost of sales 212,102 175,766 140,960
--------- ------- -------
Gross profit 92,862 78,578 65,000
Operating expenses:
Selling, general and administrative 72,547 64,643 54,213
Research and development 2,289 1,846 1,500
--------- ------- -------
Operating income 18,026 12,089 9,287
Other expense (income):
Interest income (218) (303) (204)
Interest expense 5,142 4,498 4,835
Equity in earnings of Fresenius Brent -- -- (86)
Other, net 149 17 149
--------- ------- -------
Income before income taxes 12,953 7,877 4,593
Income tax expense (benefit) (3,434) 723 900
--------- ------- -------
Net income $ 16,387 7,154 3,693
========= ======= =======
Net income per common and common equivalent share:
Primary $ .61 .32 .18
========= ======= =======
Fully diluted $ .59 .31 .18
========= ======= =======
Weighted average number of shares of common
stock and common stock equivalents used to
compute net income per common and
common equivalent share:
Primary 26,647 23,926 20,660
========= ======= =======
Fully diluted 27,844 23,926 20,660
========= ======= =======
See accompanying notes to consolidated financial statements.
F-3
46
FRESENIUS USA, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
(In thousands)
Preferred stock Common stock
--------------- --------------- Capital Total
Number Number in excess Currency Accumu- stock-
of of of par translation lated holders'
shares Amount shares Amount value adjustment deficit equity
------ ------ ------ ------ --------- ----------- -------- --------
Balances, December 31, 1992 200 $200 17,169 $172 $ 120,796 $(28) $(90,103) $ 31,037
Conversion of note receivable into common
stock -- -- 468 4 1,705 -- -- 1,709
Issuance of common stock warrants -- -- -- -- 449 -- -- 449
Proceeds from issuance of common stock -- -- -- -- 162 -- -- 162
Currency translation adjustment -- -- -- -- -- (44) -- (44)
Net income -- -- -- -- -- -- 3,693 3,693
--- ---- ------ ---- --------- ---- -------- --------
Balances, December 31, 1993 200 200 17,637 176 123,112 (72) (86,410) 37,006
Proceeds from issuance of common stock in
public offering -- -- 3,450 35 16,142 -- -- 16,177
Proceeds from issuance of common stock
through exercise of options -- -- 118 1 511 -- -- 512
Loan receivable for exercise of stock option -- -- -- -- (255) -- -- (255)
Currency translation adjustment -- -- -- -- -- (22) -- (22)
Net income -- -- -- -- -- -- 7,154 7,154
--- ---- ------ ---- --------- ---- -------- --------
Balances, December 31, 1994 200 200 21,205 212 139,510 (94) (79,256) 60,572
Common stock offering costs -- -- -- -- (188) -- -- (188)
Proceeds from issuance of common stock
through exercise of options -- -- 260 3 1,605 -- -- 1,608
Repayment of loan receivable for exercise
of stock option -- -- -- -- 209 -- -- 209
Currency translation adjustment -- -- -- -- -- 14 -- 14
Net income -- -- -- -- -- -- 16,387 16,387
--- ---- ------ ---- --------- ---- -------- --------
Balances, December 31, 1995 200 $200 21,465 $215 $ 141,136 $(80) $(62,869) $ 78,602
=== ==== ====== ==== ========= ==== ======== ========
See accompanying notes to consolidated financial statements.
F-4
47
FRESENIUS USA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income $ 16,387 7,154 3,693
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,591 8,772 6,893
Equity in earnings of Fresenius Brent -- -- (86)
Deferred tax benefit (4,666) -- --
Gain on sale of fixed assets -- (46) (75)
Stock warrant issued to Fresenius AG as
compensation for credit support -- -- 75
Changes in operating assets and liabilities:
Trade accounts receivable, net (14,381) (2,679) (14,090)
Accounts receivable from affiliated
companies, net -- -- 1,820
Inventories, net (13,410) (9,199) (6,800)
Other current and non-current assets (1,219) 696 (837)
Accounts payable and accrued expenses 4,511 (299) 12,514
Income taxes payable 270 (358) 453
Increase in net operating assets resulting from
the acquisition of Fresenius Brent -- -- 782
-------- ------- -------
Net cash (used in) provided by operating
activities (1,917) 4,041 4,342
-------- ------- -------
Cash flows from investing activities:
Purchase of Abbott's renal dialysis business -- -- (31,000)
Expenditures for the direct costs of acquisitions -- -- (737)
Purchases of property, plant and equipment (37,106) (25,963) (8,226)
Dispositions of property, plant and equipment 1,312 429 --
Proceeds from sale of property, plant and equipment -- 46 128
Validation cost expenditures (6,642) -- --
-------- ------- -------
Net cash used in investing activities (42,436) (25,488) (39,835)
-------- ------- -------
(Continued)
See accompanying notes to consolidated financial statements.
F-5
48
FRESENIUS USA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
---- ---- ----
Cash flows from financing activities:
Changes in accounts payable to affiliates, net $ 7,868 5,083 5,386
Proceeds from short-term borrowings 55,949 17,911 10,264
Proceeds from capital lease financing 9,103 -- --
Proceeds from sale/leaseback of equipment 26,970 -- --
Repayment of short-term borrowings (45,130) (9,785) (2,430)
(Repayments of) proceeds from long-term payable (586) (556) 2,417
Proceeds from long-term borrowings -- -- 25,000
Principal payments of long-term debt and capital lease
obligations (11,435) (10,877) (1,178)
Proceeds from issuance of common stock 1,629 16,689 162
Loan receivable for exercise of stock option -- (255) --
-------- ------- -------
Net cash provided by financing
activities 44,368 18,210 39,621
-------- ------- -------
Net increase (decrease) in cash 15 (3,237) 4,128
Cash at beginning of year 2,315 5,552 1,424
-------- ------- -------
Cash at end of year $ 2,330 2,315 5,552
======== ======= =======
Supplementary cash flow information:
Cash paid for interest, net of amounts capitalized $ 4,848 2,793 3,237
======== ======= =======
Cash paid for income taxes $ 966 1,126 477
======== ======= =======
Supplementary schedule of non-cash activities:
Acquisition of equipment through obligations under
capital leases $ 1,248 1,094 1,231
======== ======= =======
Disposal of assets under capital leases $ 255 135 --
======== ======= =======
Acquisition of license technology in exchange for
inventory and debt $ -- 908 --
======== ======= =======
Note payable issued as partial consideration for the
Abbott acquisition $ -- -- 10,629
======== ======= =======
Issuance of common stock warrants $ -- -- 449
======== ======= =======
Common stock issued upon conversion of
the note receivable from Fresenius Brent $ -- -- 1,709
======== ======= =======
See accompanying notes to consolidated financial statements.
F-6
49
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(Dollars in thousands, except per share amounts)
(1) DESCRIPTION OF BUSINESS
Fresenius USA, Inc. and subsidiaries (the Company) is a manufacturer and
distributor of medical products and systems for sale primarily in the
United States and Canada 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 products
are used to cleanse a patient's blood of waste products and fluids
normally eliminated by properly functioning kidneys. The Company also
sells cell separation products designed for the therapeutic removal of
diseased blood components as well as collection of donor blood
components for transfusion.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Fresenius
USA, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) Inventories
Inventories are stated at the lower of cost (determined by using the
first-in, first-out method) or market value.
(d) Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Property and
equipment under capital leases are stated at the present value of future
minimum lease payments at the inception of the lease.
Depreciation on property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the assets
ranging from three to thirty years. Property and equipment held under
capital leases and leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or estimated
useful life of the asset.
The Company capitalizes interest on borrowed funds during construction
periods. Interest capitalized during 1995, 1994 and 1993 was $526, $481,
and $22, respectively.
(Continued)
F-7
50
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(e) Intangible Assets
Intangible assets consist of goodwill (the excess cost over net assets
acquired), manufacturing technology, patents, distribution rights,
licenses and other intangible assets. Intangible assets are amortized on
a straight line basis over the estimated useful lives of the assets
ranging from four to twenty-five years.
The Company assesses the recoverability of intangible assets by
determining whether the amortization of the asset's balance over its
remaining life can be recovered through projected undiscounted future
cash flows.
(f) Other Assets
In 1995, the Company completed construction of a dialyzer plant addition
to its manufacturing facility in Ogden, Utah. Included in other assets
are $6,375 of validation costs, net of accumulated amortization of $267,
incurred to qualify the products and the associated manufacturing
processes for approval by the U.S. Food and Drug Administration. Such
costs are being amortized on a straight-line basis over an estimated
useful life of 3 years upon commencement of manufacturing.
(g) Financial Instruments
Derivative financial instruments are used by the Company in the
management of its interest rate and foreign currency exposures and are
accounted for on an accrual basis. Income and expense are recorded in
the same category as that arising from the related asset or liability
being hedged. Gains and losses resulting from effective hedges of
existing assets, liabilities or firm commitments are recognized when the
offsetting revenues and expenses are recognized on the related hedged
items.
(h) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. Net assets of the subsidiaries with
"functional" currencies other than the U.S. dollar are translated at the
year-end rate of exchange. Income and expense items are translated at
the average exchange rate for the year. The resulting translation
adjustments are recorded as a separate component of stockholders'
equity.
(i) Revenue Recognition Policy
Revenues are recognized when title to the product has passed to the
buyer, either at the time of shipment or upon receipt by the customer.
(Continued)
F-8
51
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
(k) Net Income Per Common and Common Equivalent 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 outstanding during each year based on the modified treasury
stock method. Stock options, common stock warrants, and the Series F
preferred stock are considered to be common stock equivalents.
The application of the treasury stock method is modified when the
outstanding number of common shares which would be issued if all
outstanding options and warrants and their equivalents were exercised
exceeds 20% of the number of common shares outstanding at the end of the
period. When this 20% test is met, the treasury stock method is first
applied to purchase no more than 20% of the number of common shares
outstanding at the end of the period. The balance of any proceeds
remaining is then applied to reduce debt with appropriate recognition
given for any interest expense savings net of income tax expense. These
calculations are aggregated to determine whether the effect on net
income per common share is dilutive or antidilutive. When dilutive, all
of the calculations are utilized when computing net income per common
share.
The computation of fully diluted income per common share would also
include the effect of converting other outstanding securities such as
convertible debt, 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 price for the period.
(l) Major Customers and Concentrations of Credit Risk
Trade receivables are financial instruments which potentially expose the
Company to concentrations of credit risk. As of December 31, 1995,
approximately 10% of the recorded trade receivables were concentrated
with a major customer. To reduce credit risk, the Company performs
ongoing credit evaluations of its customers' financial condition. The
Company does not require collateral on credit sales to its customers.
Revenues from the major customer constituted 12% of total revenues for
the year ended December 31, 1995.
(m) Reclassifications
Certain reclassifications not affecting the Company's net income have
been made to the 1994 and 1993 consolidated financial statements to
conform to the 1995 presentation.
(Conitnued)
F-9
52
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(3) RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 123
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation. SFAS No. 123 is effective beginning
January 1, 1996 and applies to all transactions in which an entity
acquires goods or services by issuing equity instruments such as common
stock, except for employee stock ownership plans. SFAS No. 123
establishes a new method of accounting for stock-based compensation
arrangements with employees which is fair value based. The statement
encourages (but does not require) employers to adopt the new method in
place of the provisions of Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees. Companies may continue to
apply the accounting provisions of APB No. 25 in determining net income,
however, they must apply the disclosure requirements of SFAS No. 123. If
the Company adopts the fair value based method of SFAS No. 123, a higher
compensation cost would result for fixed stock option plans and a
different compensation cost will result for the Company's contingent or
variable stock option plans. The Company will adopt the disclosure
provisions of SFAS No. 123 on January 1, 1996. Such adoption is not
expected to impact operating results.
SFAS No. 121
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 31, 1995. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by the
Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future
cash flows is less than the carrying amount of the asset, an impairment
loss is recognized. Measurement of an impairment loss for long-lived
assets and identifiable intangibles that the Company expects to hold and
use should be based on the fair value of the asset. Adoption of this
statement in 1996 is not expected to effect the Company's accounting
treatment for long-lived assets.
(Continued)
F-10
53
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(4) INVESTMENTS AND ACQUISITIONS
Investment in Fresenius Brent
On January 17, 1990, the Company formed a joint venture (Fresenius
Brent) with Medihold Ltd. to market and sell the Company's medical
products in Canada. The Company's initial investment in Fresenius Brent,
a Canadian operation, was $200 Canadian dollars (approximately $168
U.S.). This investment was accounted for using the equity method through
May 1993. The Company's 1992 investment balance differed from the
Company's 50% underlying equity in Fresenius Brent due to the
elimination of intercompany profits remaining in Fresenius Brent's
ending inventories.
During May 1993, the Company purchased the remaining 50% equity in
Fresenius Brent from Medihold Ltd. in exchange for a $1,709 convertible
note. The excess of the purchase price over the fair value of the net
assets acquired of $1,318 has been recorded as goodwill and is being
amortized on a straight-line basis over 20 years. In July 1993, the note
was converted into 434,000 shares of the Company's common stock.
The balance sheet of Fresenius Brent has been included in the Company's
consolidated financial statements as of December 31, 1995 and 1994. The
results of operations of Fresenius Brent have been included in the
consolidated financial statements since May 1, 1993. All significant
intercompany balances and transactions have been eliminated.
Critikon Purchase
On July 15, 1992, the Company purchased from Critikon, Inc., a
subsidiary of Johnson and Johnson, certain patents, inventory and other
assets used in connection with its RATEMINDER fluid delivery product
line for approximately $3,700. The $3,700 purchase price included a cash
payment of $500 and an obligation of $3,200 paid as inventory is used.
At December 31, 1995, the Company owed $1,565 to be paid as inventory is
used. The acquisition has been accounted for using the purchase method
of accounting.
Abbott Acquisition
On February 24, 1993, the Company purchased from Abbott Laboratories
(Abbott) certain assets used in connection with its renal dialysis
business in the United States, Australia and New Zealand for a total
purchase price of $41,857. As consideration for the purchase, the
Company paid $31,000 in cash, issued a term note payable for $10,629,
and granted a common stock warrant for the purchase of 1,750,000 shares
of the Company's common stock which was valued at $228. The common stock
issuable upon exercise of the warrant is subject to certain registration
rights. The acquisition has been accounted for using the purchase method
of accounting and, accordingly, the results of operations from the
acquisition have been included in the Company's consolidated financial
statements from February 24, 1993 (note 23). The excess of the purchase
price over the fair value of the net identifiable assets acquired of
$19,378 has been recorded as goodwill and is being amortized on a
straight-line basis over 25 years. The assets acquired from Abbott
consisted of the following:
(Continued)
F-11
54
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Rental equipment $ 3,000
Manufacturing technology 15,629
Patents 2,500
Distribution rights 1,250
Covenant not to compete 100
Goodwill 19,378
-------
$41,857
=======
With respect to the products acquired from Abbott, the Company has
retained the exclusive rights in the United States (the rights to Canada
and Mexico were retained by Abbott), has granted Fresenius
Aktiengesellschaft (Fresenius AG) a non-exclusive sublicense with
respect to these products in Central and South America, Australia and
New Zealand and an exclusive (with respect to the Company) sublicense
with respect to all other areas acquired from Abbott, including Europe
in exchange for the credit support provided by Fresenius AG to finance
the acquisition.
(5) INVENTORIES
As of December 31, inventories consisted of the following:
1995 1994
---- ----
Raw materials and purchased components $ 32,192 23,071
Work in process 10,504 4,237
Finished goods 25,707 27,464
-------- -------
68,403 54,772
Reserves (2,697) (2,068)
-------- -------
Inventories, net $ 65,706 52,704
======== =======
Depreciation expense for demo and evaluation inventory was $408
for the year ended December 31, 1995 which was charged to the
inventory reserve. There was no depreciation expense for this
inventory in 1994 or 1993.
(Continued)
F-12
55
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(6) PROPERTY, PLANT AND EQUIPMENT
As of December 31, property, plant and equipment consisted of the
following:
1995 1994
---- ----
Land $ 344 325
Buildings and improvements 19,013 10,353
Machinery and equipment 29,071 14,596
Machinery, equipment and rental equipment
under capital leases 9,816 11,429
Rental equipment 17,031 17,160
Loaned equipment 2,784 2,353
Construction in progress 2,693 16,286
-------- -------
80,752 72,502
Accumulated depreciation and amortization (32,260) (26,546)
-------- -------
Property, plant and equipment, net $ 48,492 45,956
======== =======
Depreciation and amortization expense for property, plant and equipment
amounted to $7,281, $6,541 and $5,140 for the years ended December 31,
1995, 1994 and 1993, respectively.
Included in property, plant and equipment as of December 31, 1995 and
1994, was $14,619 and $11,521, respectively, of net rental equipment.
The rental equipment consists of peritoneal dialysis cycler machines
which the Company leases to customers with end stage renal disease on a
month-to-month basis. Rental income for this equipment was $1,767,
$2,203 and $1,586 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Included in property, plant and equipment as of December 31, 1995 were
approximately $2 million of engineering charges from Fresenius AG
associated with construction of the dialyzer plant in Odgen, Utah.
Accumulated depreciation related to machinery, equipment and rental
equipment under capital leases was $2,588 and $9,094 at December 31,
1995 and 1994, respectively.
(Continued)
F-13
56
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(7) INTANGIBLE ASSETS
As of December 31, intangible assets consisted of the following:
1995 1994
-------- -------
Goodwill $ 20,795 20,795
Manufacturing technology 15,629 15,629
Patents 3,421 3,421
Distribution rights 1,250 1,250
Other 2,927 2,927
-------- -------
44,022 44,022
Accumulated amortization (7,159) (4,524)
-------- -------
Intangible assets, net $ 36,863 39,498
======== =======
Amortization expense for intangible assets amounted to $2,635, $2,231
and $1,753 for the years ended December 31, 1995, 1994 and 1993,
respectively.
(8) SHORT-TERM BORROWINGS
Short-term borrowings of $33,149 and $22,330 at December 31, 1995 and
1994, respectively, represent amounts borrowed under lines of credit
with six commercial banks. The Company pays commitment fees ranging from
1/8% - 1/4% per annum on the unused portion of the commitments. The
weighted average interest rate on short-term borrowings outstanding as
of December 31, 1995 and 1994 was 6.55% and 5.48%, respectively. The
lines of credit at December 31, 1995 expire through May 1996 and are
expected to be renewed by the Company. 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 and contains various covenants including,
but not limited to, requirements for maintaining defined levels of
working capital, net worth, capital expenditures and various financial
ratios.
The Company had lines of credit totaling $47,000 of which $13,851
remains available to be borrowed at December 31, 1995. Fresenius AG has
provided credit support for $27,000 of these lines of credit (note 19).
(9) SHORT-TERM BORROWINGS FROM FRESENIUS AG
At December 31, 1995 and 1994, short-term borrowings under a line of
credit from Fresenius AG consist of $3,650 and $4,380, respectively. As
of December 31, 1995, the total borrowing available under the line of
credit is $3,650 with a weighted average interest rate of 7.563%. The
line expires in the first quarter of 1996 and is expected to be renewed
by the Company.
(Continued)
F-14
57
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(10) NOTE PAYABLE
In connection with the Abbott acquisition, the Company entered into an
obligation relating to the purchase of OPTUM devices. During 1993, the
Company fulfilled this obligation by taking possession of these OPTUM
devices and entering into a note payable agreement. This note payable
was discounted with an imputed interest rate of 5.68%. As of December
31, 1995, the long-term portion of the discounted note payable was
$1,275 due over the next three years.
(11) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
As of December 31, long-term debt consisted of the following:
1995 1994
-------- -------
Term loan (a) $ 18,750 25,000
Note payable, discounted to present value (b) 6,724 8,731
Capital leases (c) 10,562 2,814
Other, discounted to present value 488 588
-------- -------
36,524 37,133
Less current maturities (11,703) (9,496)
-------- -------
$ 24,821 27,637
======== =======
(a) In connection with the purchase of certain assets from
Abbott, the Company entered into a term loan with a
commercial bank to borrow $25,000 at 5.68% per annum, due
quarterly. The loan is due in annual installments of
$6,250 beginning February 1995 and each year thereafter
through February 1998. The term loan is guaranteed by
Fresenius AG.
(b) In consideration for proprietary technology acquired from
Abbott, the Company paid $5,000 to Abbott in cash at
closing and issued a note to Abbott for $12,500 due in
annual installments of $2,500 beginning February 1994
through February 1998. The remaining obligation has been
discounted with an imputed interest rate of 5.68%. This
note is secured by a standby letter of credit expiring
March 31, 1998, totaling $10,000. The Company must pay a
commitment fee of 0.5% per annum due quarterly on the
outstanding letter of credit.
(Continued)
F-15
58
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(c) Future minimum lease payments under capital leases as of
December 31, 1995 are:
For the years ended December 31:
1996 $ 4,143
1997 3,647
1998 3,210
1999 1,406
2000 3
--------
12,409
Amount representing interest (at 9%-10%) (1,847)
--------
Present value of capital lease obligations 10,562
Current portion of capital lease obligations (3,203)
--------
Capital lease obligations, less current portion $ 7,359
========
Aggregate annual payments applicable to long-term debt for the
three years subsequent to December 31, 1995 are:
For the years ended December 31:
1996 $ 8,500
1997 8,673
1998 8,789
-------
$25,962
(Continued)
F-16
59
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(12) COMMITMENTS
Operating Leases
The Company leases facility space and machinery and equipment under
various lease agreements expiring at dates through 1998.
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 of the Company's dialyzer manufacturing
facility at its Ogden, Utah plant to the bank and the leaseback of the
equipment under a four year operating lease that has renewal options and
a purchase option at fair market value. Although the rent payments on
the lease are variable based on the three-month London Interbank Offered
Rate (LIBOR), the Company has effectively fixed its rent expense through
the use of interest rate swap agreements (note 13). On December 29,
1995, an additional $8.0 million for similar new equipment was sold and
leased back under the above referenced four year renewable lease. If
the Company elects not to purchase the equipment or renew the lease at
the end of the lease term, the Company will be obligated to pay a
termination fee of up to $20,250 to be offset by sales proceeds from
the Company remarketing the equipment.
Rental expense under operating leases was $2,626, $1,462 and $2,428 for
the years ended December 31, 1995, 1994 and 1993, respectively. Future
minimum rental payments under noncancelable operating leases, including
the effective fixed payments under the above leaseback, as of December
31, 1995 are:
For the years ended December 31:
1996 $ 3,801
1997 2,909
1998 2,429
1999 1,104
2000 257
-------
$10,500
Purchase Commitments
Under the terms of the purchase agreement with Abbott, the Company is
obligated to purchase stated quantities of Inpersol dialysis solutions,
saline solutions and other renal dialysis ancillary products. Over the
next two years, the minimum purchase commitments under the agreement are
approximately $22 million annually.
(Continued)
F-17
60
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(13) FINANCIAL INSTRUMENTS
Foreign Exchange Contracts
The Company has entered into foreign exchange contracts as a hedge
against foreign currency exchange risks associated with the settlement
of Deutsche mark denominated trade payables to Fresenius AG. Gains and
losses on these contracts are offset against foreign exchange gains or
losses realized on the settlement of those payables.
At December 31, 1995, the Company had contracts to purchase 48.0 million
Deutsche marks at a fixed rate on the date of settlement. The contracts
mature at various dates through 1996. The fair value of the foreign
exchange contracts is the estimated amount that the Company would
receive or pay to terminate the agreements. As of December 31, 1995, the
cost to terminate the foreign exchange contracts is estimated to be
insignificant.
Interest Rate Swap Agreements
At December 31, 1995, the Company had two interest rate swap agreements
outstanding with a commercial bank for notional amounts of $17,400 and
$7,634, respectively. These agreements effectively change the Company's
rent expense on its variable payment operating lease to fixed rates
based on 8.02% and 5.60%, respectively. The interest rate swap
agreements outstanding as of December 31, 1995 expire in March, 1999.
While the Company does not anticipate nonperformance by counterparties,
the Company is exposed to credit loss in the event of nonperformance by
the other parties to the interest rate swap agreement.
The fair value of the interest rate swaps is the estimated amount that
the Company would receive or pay to terminate the swap agreements. This
estimate is subjective in nature and involves uncertainties and matters
of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates. As of December 31, 1995, the cost to terminate the swap
agreements is estimated to be $1,190.
(14) STOCKHOLDERS' EQUITY
Common Stock Offering
During 1994, the Company successfully completed a public offering of
3,450,000 shares of its common stock, realizing proceeds, after payment
of expenses, of approximately $16,177. During the first quarter of 1995,
the Company paid an additional $188 of expenses related to the cost of
the public offering.
(Continued)
F-18
61
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Preferred Stock
The 200,000 shares of Series F preferred stock were issued to Fresenius
AG in October 1987 and is presently convertible into 3,129,883 shares of
common stock. The holder is entitled to elect a majority of the
Company's directors and is entitled to preference in liquidation over
common stockholders of $100 per Series F share, but is not entitled to
receive dividends. The holder is entitled to an adjustment in the number
of common shares into which the Series F preferred stock is convertible
under certain circumstances.
(15) COMMON STOCK OPTIONS
The Company has four stock option plans (the Plans) which grant
employees and officers the option to purchase the Company's common
stock. At December 31, 1995, a total of 2,764,420 shares of the
Company's common stock were reserved for issuance of stock options
already granted or available for future grant, of which 635,525 shares
were available for future issuance. During 1995, all stock options were
granted with an exercise price equal to fair market value on the date of
grant.
The 1976 Plan
The Company's 1976 Stock Option Plan (the 1976 Plan) provided for the
purchase of the Company's common stock by officers and key employees of
the Company. The 1976 Plan provided for non-incentive stock options, all
of which vested over a period not to exceed four years from the date of
grant and expire not more than ten years from the date of grant. No
options were granted under the 1976 Plan after December 1986.
The 1985 Plan
The Company's 1985 Special Stock Option Plan (the 1985 Plan) provided
for the grant of non-incentive options to certain employees as
compensation for an unanticipated two-week shutdown which occurred in
1985. All options under the 1985 Plan were granted in 1985 and vested in
1986. The 1985 Plan expired in 1995.
The 1987 Plan
The Company's 1987 Stock Option Plan (the 1987 Plan) currently provides
for granting non-incentive and incentive stock options to key employees
of the Company. In general the stock options outstanding under the 1987
Plan vest in a period not to exceed four years and expire not more than
ten years from the date of grant. However, certain options granted under
the 1987 Plan are exercisable on such other terms as determined by the
Compensation Committee or the Board of Directors.
(Continued)
F-19
62
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
In July 1995, the Board of Directors granted options to the President of
the Company to purchase 450,000 shares of the Company's common stock
under the 1987 plan subject to shareholder approval of an amendment to
the 1987 Plan to provide that the maximum number of shares for which
options maybe granted under the 1987 Plan to any individual during the
remaining term of the 1987 Plan shall be limited to 1,000,000 shares.
These options vest upon the earlier of (a) the Company's common stock
attaining certain market prices, or (b) on June 30, 2002. As of December
31, 1995, options to purchase 225,000 shares of the total 450,000 shares
of the Company's common stock has vested.
The 1989 Plan
In 1989, the Board of Directors approved the 1989 Special Stock Option
Plan (the 1989 Plan) effectively replacing another plan which has since
terminated. All options granted under the 1989 Plan expire starting in
August 1996 through May 1997 and are immediately exercisable upon
issuance. No options were granted under the 1989 Plan after 1991.
The Directors' Plan
In June 1994, the stockholders of the Company approved a Directors'
Stock Option Plan (the Directors' Plan), pursuant to which each current
non-employee director of the Company received a grant of options for
30,000 shares of common stock vesting at a rate of 10,000 per year in
each of 1994, 1995, and 1996. Two directors who are also either officers
and/or directors of Fresenius AG declined to accept any options under
the Directors' Plan. Future non-employee directors will receive a grant
of options for 30,000 shares of common stock upon their election. The
options will vest at a rate of 10,000 per year on the first, second, and
third anniversaries of the director's initial election.
During 1995, the Directors' Plan was amended to permit each director to
elect whether to receive all or none of the directors' fees due to that
director during a calendar year in the form of options. All options
received in lieu of directors' fees vest 100% upon grant. With respect
to each directors' fee payable in options, a non-employee director will
receive an option for a number of shares of the Company's common stock
determined by the following formula: (Amount of directors' fee otherwise
payable in cash) divided by (60% of the exercise price of the option),
where the exercise price of the option is the closing price of the
Company's stock on the date the directors' fee would otherwise be paid.
The number of shares determined by application of this formula will be
rounded to the nearest whole share. The options will expire ten years
from the date of grant.
(Continued)
F-20
63
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Stock option transactions are summarized as follows:
Average
Shares price
(in thousands) range
-------------- -----
Balance at December 31, 1992 964 $ 1.88--9.38
Granted 1,232 5.25--7.38
Exercised 32 3.63--7.13
Canceled or expired 234 6.25--9.38
----- -------------
Balance at December 31, 1993 1,930 1.88--9.38
Granted 135 7.38--7.50
Exercised 118 3.63--7.13
Canceled or expired 19 5.63--7.50
----- -------------
Balance at December 31, 1994 1,928 1.88--9.38
Granted 461 12.75--17.25
Exercised 260 1.88--9.38
----- -------------
Balance at December 31, 1995 2,129 $ 3.13--17.25
===== =============
Exercisable at December 31, 1995 1,362 $ 3.13--15.25
===== =============
Stock option balances for the years ended December 31, 1995, 1994 and
1993, respectively and exercisable at December 31, 1995 do not include
options to purchase 20,500 shares with options prices ranging from
$32.00 to $88.70 per share. These options expire August 4, 1996.
(16) COMMON STOCK WARRANTS
During 1993, the Company issued a stock warrant for the purchase of
1,750,000 shares of the Company's common stock, at an exercise price of
$8 per share expiring in 2003, to Abbott as partial consideration for
the acquisition of Abbott's renal dialysis business. In addition, the
Company issued a warrant to Fresenius AG for the purchase of 1,700,000
shares of the Company's common stock, at an exercise price of $8 per
share expiring in 2003, as consideration for certain past comfort
letters given in support of certain short-term borrowings and Fresenius
AG's commitment to provide up to $40 million of credit support in
connection with the Abbott acquisition. In 1994, the Company issued a
second warrant to Fresenius AG for the purchase of 50,000 shares of the
Company's common stock, at an exercise price of $10.5685 per share
expiring in 2004, as consideration for providing credit support to the
Company. At December 31, 1995, the Company had 3,500,000 shares of
common stock reserved for the exercise of stock warrants.
(Continued)
F-21
64
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(17) INCOME TAXES
Income tax expense (benefit) for the years ended December 31 consisted
of the following:
1995 1994 1993
------- ------- -------
Current:
Federal income taxes $ 313 226 212
Foreign income taxes (72) (123) 88
State income taxes 991 620 600
Deferred (4,666) -- --
------- ------- -------
Total $(3,434) 723 900
======= ======= =======
For the years ended December 31, 1995, 1994 and 1993, income tax expense
differed from the amounts computed by applying the federal income tax
rate of 34% to income before income taxes as a result of the following:
1995 1994 1993
---- ---- ----
Computed "expected" tax expense $ 4,404 2,678 1,562
Increase (decrease) in income taxes resulting from:
Items not deductible for tax purposes 287 610 1,239
Change in valuation allowance (4,404) -- --
Utilization of net operating loss
carryforwards for which no tax
benefit had previously been
recognized (4,332) (2,920) (2,385)
State taxes, net of federal income tax
benefit 683 478 396
Foreign income taxes (72) (123) 88
------- ------ ------
$(3,434) 723 900
======= ====== ======
(Continued)
F-22
65
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
The tax effects of the temporary differences that give rise to deferred
tax assets and liabilities at December 31 are presented below:
1995 1994
-------- --------
Deferred tax assets (liabilities):
Inventory, primarily due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and inventory
reserve accounts $ 1,248 1,069
Accounts receivable, primarily due to allowance
for doubtful accounts 516 679
Compensated absences, principally due to
accrual for financial accounting reporting
purposes 330 326
State taxes 337 185
Product warranty, principally due to accrual for
financial accounting reporting purposes 135 135
Capital leases, principally due to capitalization
of costs for tax purposes (138) 346
Alternative minimum tax credit carryforward 721 388
Net operating loss carryforwards 13,055 17,336
Plant and equipment, principally due to
differences in depreciation 1,429 1,466
Intangibles, principally due to amortization
pursuant to Tax Reform Act of 1993 1,547 1,454
Other 134 87
-------- --------
Total gross deferred tax assets 19,314 23,471
Less: Valuation allowance (14,720) (23,471)
-------- --------
Net deferred tax assets $ 4,594 --
======== ========
The valuation allowance for the years ended December 31, 1995 and 1994
decreased by $8,751 and $2,625, respectively. During 1995, the Company
reduced the valuation allowance to reflect the deferred tax asset
utilized in 1995 to the extent of current income taxes and to recognize
a deferred tax asset of $4,594. The recognized deferred tax asset is
based upon expected utilization of net operating loss carryforwards that
the Company expects will more likely than not be realized through the
results of future operations.
At December 31, 1995, the Company had net operating loss carryforwards
of approximately $38,397 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 the carryforwards to offset
taxes on its future income is also subject to certain annual cumulative
limitations.
(Continued)
F-23
66
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(18) EMPLOYEE BENEFIT PLANS
Employees are eligible to join the Company's 401(k) Savings Plan once
they have achieved a minimum of one year of service, 1,000 hours of
service, and attained the age 18. Under the provisions of the Plan, the
Company contributes 2% of eligible employee base salary to the Plan. The
Company's obligation to the Plan was approximately $420, $540 and $376,
respectively for the years ended December 31, 1995, 1994 and 1993.
(19) RELATED PARTY TRANSACTIONS
Relationship with Fresenius AG
Majority Stockholder
Fresenius AG and Fresenius Securities, Inc. (FSI) currently hold
13,793,442 shares of the Company's common stock; 200,000 shares of the
Company's Series F Preferred Stock which are convertible into 3,129,883
shares of common stock; and warrants to purchase 1,750,000 shares of the
Company's common stock. As of December 31, 1995, Fresenius AG
beneficially owned 70.9% of the Company's common stock.
Distribution Agreement
The Company has a paid-up license to Fresenius AG's know-how relating to
certain peritoneal dialysis products, including those incorporating the
Safe-Lock technology, in the United States, Canada and Mexico. The
Company and Fresenius AG are also parties to an agreement pursuant to
which Fresenius AG has confirmed that the Company acts as the sole North
American distributor for Fresenius AG products related to end-stage
renal disease treatment by hemodialysis and to intensive medicine and
infection control applications, excluding pharmaceutical and certain
other products, and has granted to the Company first negotiation rights
with respect to products covered by the agreement which Fresenius AG
proposes to have manufactured in North America.
In the ordinary course of the Company's business, the Company and
Fresenius AG and certain subsidiaries of Fresenius AG enter into various
transactions involving the purchase and sale of dialysis systems and
supplies for distribution by the Company. The prices charged to the
Company under the distribution agreement are negotiated each year by the
Company and Fresenius AG based on Fresenius AG's estimated costs and
desired profit margins, and generally have not exceeded the average of
the prices charged to Fresenius AG's other affiliated distributors
(except for costs attributable to the manufacture of products for sale
primarily in the United States). The Company believes that these prices
are no less favorable to the Company than the Company could obtain with
unaffiliated third parties. However, the only source of supply for
several of the Company's products is Fresenius AG, and there can be no
assurance that the prices negotiated will enable the Company to maintain
its profit margins on these products.
(Continued)
F-24
67
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Under its distribution agreement with Fresenius AG, Fresenius AG
indemnifies the Company for any claims of bodily injury or property
damage alleged to have arisen from the possession, use or operation of
Fresenius AG's products purchased pursuant to the agreement, and while
the Company is obligated to provide installation, training, repair,
warranty and maintenance services for these products, Fresenius AG
reimburses the Company for material costs associated with warranty
repairs. The distribution agreement is stated to terminate on the
earlier of December 31, 2011 or the date that Fresenius AG ceases to be
able to elect 51% of the Company's board of directors, unless a cause
for early termination arises.
Intensive Care Agreement
The Company and Fresenius AG are parties to a distribution and
manufacturing agreement for certain of Fresenius AG's intensive care and
diagnostic products, including the Fresenius AS 104 Cell Separator. The
Intensive Care Agreement was entered into during 1994 for an initial
term of five years and will continue thereafter from year to year unless
terminated. The company is given both exclusive and non-exclusive rights
to manufacture and distribute certain products in North and South
America. If the Company fails to meet certain sales goals during the
five year initial term, Fresenius AG has the option to terminate the
agreement with respect to one or more products or to convert the
Company's exclusive rights with respect to one or more products to a
non-exclusive right.
Technology License Agreement
Pursuant to a technology license and know-how agreement, Fresenius AG
has granted the Company an exclusive North American license for the
technology, processes and know-how necessary to manufacture polysulfone
dialyzers. Beginning January 1, 1996, the Company will pay a royalty to
Fresenius AG of 4.5% of the Company's net sales of the dialyzers so
produced by the Company for a ten-year period, after which the Company
will have a paid-up exclusive license. Fresenius AG may make this
license non-exclusive if it ceases to own a majority of the Company's
common stock. The agreement may be terminated by Fresenius AG upon
specified defaults, and in addition, may be terminated if a majority of
the voting power of the Company is acquired by a company engaged in the
treatment, research, development, manufacture or sale of products for
treatment of renal disease.
Financial Support
Fresenius AG has provided substantial financial support to the Company.
This support has included participating in letters of credit in
connection with the Company's previously outstanding industrial revenue
bonds, providing credit support to assist the Company in securing lines
of credit, participating in and assisting with the Company's foreign
exchange contracts as well as various miscellaneous general management
assistance.
As consideration for these services, the Company granted Fresenius AG
certain warrants (note 16) and agreed to pay Fresenius AG a quarterly
fee of $42 for the period from July 1992 to June 1994.
(Continued)
F-25
68
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Registration Rights Agreement
Fresenius AG and the Company are party to a Registration Rights
Agreement dated February 24, 1993. This agreement grants Fresenius AG
demand registration rights with respect to all shares of common stock
held by Fresenius AG or certain of its subsidiaries on February 24, 1993
or issuable to them upon conversion of shares of Series F preferred
stock or exercise of a warrant for 1,700,000 shares issued to Fresenius
AG in connection with the Abbott acquisition (collectively, the
"Registrable Shares"). The Company is to pay all expenses in connection
with the first such registration; the holder(s) is responsible for the
expenses of subsequent registrations. A holder of Registrable Shares may
also request that the Company include its Registrable Shares in
registration statements filed by the Company in connection with a public
offering of common stock on behalf of the Company and/or another holder
of common stock.
Trade Transactions with Fresenius AG
As of December 31, net amounts due to Fresenius AG and affiliates, were
as follows:
1995 1994
-------- --------
Trade accounts payable $ 41,847 34,588
Trade accounts receivable (618) (1,227)
-------- --------
Accounts payable to affiliates, net $ 41,229 33,361
======== ========
Effective January 1, 1992, trade payables to Fresenius AG and its wholly
owned subsidiaries were due in 150 days. Amounts not paid in 150 days
bear interest at an annual rate of 5.5%. During 1995 and 1994, the
Company paid no interest related to the trade payables.
For the years ended December 31, the Company had the following trade
transactions with Fresenius AG:
1995 1994 1993
---- ---- ----
Purchases from Fresenius AG $90,627 63,507 52,442
Sales to Fresenius AG 2,517 4,029 4,197
Warranty costs charged by the Company to Fresenius AG for
purchased materials 911 836 343
Miscellaneous charges by the Company to Fresenius AG 54 107 322
In 1995, 1994 and 1993, Fresenius AG granted the Company purchase price
credits of $8.4 million, $1.4 million, and $0, respectively, which were
credited against cost of goods sold throughout the year.
(Continued)
F-26
69
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note Payable to FNA
In 1991, the Company used the proceeds of $11,900 from the exercise of
stock options by Fresenius AG and FSI to reduce its original
indebtedness to Fresenius North America, Inc. (FNA), a wholly owned
subsidiary of Fresenius AG, from $19,774 to $7,874. During 1992, the
Company issued additional shares of common stock to Fresenius AG for
$7,600, the proceeds of which were used to further reduce the Company's
note payable to FNA. The balance outstanding on the note payable to FNA
was $274 at December 31, 1995 and 1994.
Other
The Company provides various administrative services and advances to
Fresenius Pharma U.S.A., Inc. (Fresenius Pharma), another wholly owned
subsidiary of Fresenius AG. There were no receivables related to these
services from Fresenius Pharma at December 31, 1995 and 1994. During
1992, the Company acquired from Fresenius Pharma the rights to
distribute within North America certain transplantation pharmaceutical
products of Fresenius AG. The Company incurred no costs for the
distribution rights under this agreement.
Pursuant to a series of agreements with Seratronics and Andersen Group,
Inc., entered into in 1985 and extended and amended in 1995, the Company
manages, and acts as sole distributor for the dialyzer reuse business of
Seratronics. These arrangements require the Company to make minimum net
payments of $100 per year to Seratronics through February 1995, and
starting in March 1995 require the Company to make minimum payments of
$50, per quarter through February 29, 2000, when the agreements expire
by their terms. As of February 1995, the Company has the right to
acquire the assets and liabilities of the reuse business for a nominal
purchase price and, if it exercises this option, its obligation to make
the quarterly payments discussed above ends. During 1995 and 1994, the
Company, as distributor, purchased dialyzer reuse systems and supplies
from Seratronics totaling approximately $1.9 million and $1.6 million,
respectively. The results of operations and the assets and liabilities
of the Seratronics' reuse business are included in the Company's
consolidated financial statements. The President and Chief Executive
Officer of the Company is also the President and Chief Executive
Officer of Seratronics. A director of the Company is the President of
Andersen Group, Inc. which owns a majority of the outstanding capital
stock of Seratronics. A portion of the salary of the President and
Chief Executive Officer of the Company is paid each year by
Seratronics.
A member of the Company's Board of Directors is also a partner in a law
firm which provided certain legal services for the Company and Fresenius
AG. The Company paid the law firm approximately $259, $6, and $52 in
1995, 1994 and 1993, respectively.
(Continued)
F-27
70
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the year ended December 31, 1995
--------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net sales $68,176 76,744 78,933 81,111
Gross profit 21,136 22,956 23,331 25,439
Operating income 4,088 4,180 4,622 5,136
Net income 3,318 3,473 3,747 5,849
Net income per common share $ .13 $ .13 $ .14 $ .21
Weighted average number of
shares of primary and fully
dilutive common stock and
common stock equivalents 25,872 26,694 27,215 27,925
The Company recognized additional income tax benefit in the fourth
quarter resulting from an adjustment to its deferred tax asset valuation
allowance.
For the year ended December 31, 1994
--------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net sales $59,689 61,139 65,370 68,146
Gross profit 18,552 19,222 19,708 21,096
Operating income 3,036 3,047 3,291 2,715
Net income 1,537 1,519 1,978 2,120
Net income per common share $ .07 $ .07 $ .08 $ .09
Weighted average number of
shares of primary and fully
dilutive common stock and
common stock equivalents 20,953 21,525 24,745 25,542
Increased demand in the fourth quarter for hemodialysis products
necessitated additional air freight and overtime expenses resulting in
lower operating income in the fourth quarter. In addition, adjustments
were recorded in the fourth quarter to decrease income taxes and
interest expense as estimates were revised based on new information.
(21) LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in various
legal actions. In the opinion of management, based upon the advice of
counsel, the resolution of these legal actions will not have a material
effect upon the Company or its financial condition.
(Continued)
F-28
71
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(22) SUBSEQUENT EVENT
In February 1996, the Company announced that Fresenius AG had entered
into a definitive agreement (the "Agreement") with W.R. Grace & Co.
("Grace") to combine Fresenius AG's worldwide dialysis business,
including the Company, with Grace's National Medical Care, Inc. to
create a fully integrated dialysis company. The Agreement provides that
an aggregate of 55.2% of the shares of the combined company, to be
called Fresenius Medical Care, will be issued to Fresenius AG and the
Company's public shareholders provided that Fresenius AG must retain at
least 51% of the shares of the combined company and that Grace
shareholders will acquire the remaining 44.8%. Fresenius AG agreed with
Grace that the Company would become a wholly-owned subsidiary of
Fresenius Medical Care and that, when the economic terms of the
participation of the Company's minority shareholders in the transaction
have been established, Fresenius AG will vote its shares of the Company
in favor of the transaction.
(Continued)
F-29
72
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(23) ABBOTT ACQUISITION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations
is presented for the year ended December 31, 1993 and gives effect to
the Abbott acquisition transaction as if it occurred on January 1, 1993,
after giving effect to certain adjustments, including amortization of
intangible assets, additional depreciation expense, increased interest
expense on debt related to the acquisition, and related income tax
effects. The pro forma consolidated statement of operations should be
read in conjunction with the related notes that follow and are not
necessarily indicative of what the actual results of operations of the
Company would have been had the transaction occurred on January 1, 1993,
nor does it purport to indicate the future results of operations of the
Company.
Year ended December 31, 1993
--------------------------------------------
(Unaudited)
(dollars and shares in thousands, except
per share amounts)
Before
Pro Forma Pro Forma
adjustments adjustments Adjusted
----------- ----------- --------
Net sales $ 205,960 4,682 (a) 210,642
Cost of sales 140,960 2,258 (b) 143,218
--------- --------- -------
Gross profit 65,000 2,424 67,424
Operating expenses:
Selling, general and administrative 54,213 1,549 (c) 55,762
Research and development 1,500 -- 1,500
Litigation settlements -- -- --
--------- ------- --------
Operating income 9,287 875 10,162
Other income:
Interest income 204 -- 204
Interest expense (4,835) (358)(d) (5,193)
Other, net (63) -- (63)
--------- --------- -------
Income before income taxes 4,593 517 5,110
Income tax expense (900) (50)(e) (950)
--------- --------- -------
Net income $ 3,693 467 4,160
========= ========= =======
Net income per common share $ .18 .20
========= =======
Weighted average number of shares of common
stock and common stock equivalents 20,660 20,660
========= =======
(Continued)
F-30
73
FRESENIUS USA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(23) ABBOTT ACQUISITION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS,
(CONTINUED)
Notes to Pro Forma Condensed Consolidated Statement of Operations
(a) Net Sales
To reflect the estimated increase in sales as a result of the purchase
transaction.
(b) Cost of Sales
To reflect the estimated increase in cost of sales as a result of the
purchase transaction.
(c) Selling, General and Administrative Expenses
To reflect the estimated increase in selling, general and administrative
expenses resulting from the purchase.
(d) Interest Expense
To reflect increase in interest expense for additional debt financing.
(e) Income Tax Expense
To reflect increase in income tax expense as a result of projected
additional net income.
(Continued)
F-31
74
Schedule II
FRESENIUS USA, INC. AND SUBSIDIARIES
Consolidated Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
(In thousands)
Balance at Charged to Deductions/ Balance
beginning costs and Write-offs/ at end
of period expenses Recoveries of period
--------- -------- ---------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1995 $1,744 - (420) 1,324
Year ended December 31, 1994 $1,718 79 (53) 1,744
Year ended December 31, 1993 $ 923 875 (80) 1,718
Balance at Charged to Deductions/ Balance
beginning costs and Write-offs/ at end
of period expenses Recoveries of period
--------- -------- ---------- ---------
Inventory reserves:
Year ended December 31, 1995 $2,068 2,476 (1,847) 2,697
Year ended December 31, 1994 $2,832 813 (1,577) 2,068
Year ended December 31, 1993 $1,473 2,291 (932) 2,832
F-32
75
INDEX OF EXHIBITS FILED WITH THIS REPORT
10.19 - Participation Agreement, dated as of March 31,1995, among the
Registrant, First Security Bank of Utah, N.A. and Deutsche Bank A.G.
10.19.1 - Amendment No. 1 dated as of June 30, 1995 to Participation
Agreement among the Registrant, First Security Bank of Utah, N.A.
and Deutsche Bank A.G.
10.19.2 - Amendment No. 2 dated as of July 31, 1995 to Participation
Agreement among the Registrant, First Security Bank of Utah, N.A.
and Deutsche Bank A.G.
10.19.3 - Amendment No. 3 dated as of December 29, 1995 to Participation
Agreement among the Registrant, First Security Bank of Utah, N.A.
and Deutsche Bank A.G.
10.20 - Lease Agreement dated as of March 31, 1995 between the Registrant
and First Security Bank of Utah, N.A.
10.21 - Credit Agreement dated as of January 3, 1995 between the Registrant
and Deutsche Bank A.G.
11. - Calculation of Earnings Per Share.
23. - The consent of independent public accountants KPMG Peat Marwick
LLP.
27. - The Registrant's Financial Data Schedule (with SEC version only).
- i -