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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-8350
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FRESENIUS USA, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2550576
- ---------------------------- --------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
2637 SHADELANDS DRIVE
WALNUT CREEK, CALIFORNIA 94598
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(510) 295-0200
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the most recent practicable date:
26,374,218 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE ISSUED
AND OUTSTANDING AT AUGUST 9, 1996.
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FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Assets June 30, December 31,
------ 1996 1995
------------ ------------
Current assets:
Cash $ 5,133 2,330
Trade accounts receivable, net 56,699 57,052
Inventories 70,644 65,706
Prepaid expenses and other
current assets 9,544 3,258
Deferred income taxes 6,628 4,594
------------ ------------
Total current assets 148,648 132,940
Property, plant, and equipment, net 49,471 48,492
Intangible assets 35,587 36,863
Other assets 10,442 6,626
------------ ------------
Total assets $ 244,148 224,921
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,219 16,276
Accounts payable to affiliates, net 39,249 41,229
Accrued expenses 18,072 13,577
Short term borrowings 41,148 33,149
Short term borrowings-Fresenius AG 3,116 3,650
Current portion long-term debt
and capital lease obligations 15,323 11,703
Income taxes payable (589) 365
------------ ------------
Total current liabilities 128,538 119,949
Long-term payable, less current portion 1,275 1,275
Note payable to Fresenius North America 274 274
Long-term debt and capital lease
obligations, less current portion 20,660 24,821
------------ ------------
Total liabilities 150,747 146,319
Stockholders' equity:
Series F preferred stock,
$1.00 par value --- 200
Common stock, $.01 par value 262 215
Capital in excess of par value 153,476 141,136
Currency translation adjustment (87) (80)
Accumulated deficit (60,250) (62,869)
------------ ------------
Total stockholders' equity 93,401 78,602
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$ 244,148 224,921
============ =============
See accompanying notes to consolidated condensed financial statements.
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FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
----------------------------
June 30, June 30,
1996 1995
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Net sales $ 87,564 76,744
Cost of sales 59,364 53,788
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Gross profit 28,200 22,956
Operating expenses:
Selling, general and
administrative 19,922 17,897
Research and development 684 879
Other compensation expense 9,758 ---
------------ ------------
Operating (loss) income (2,164) 4,180
Other expense (income):
Interest income (10) (57)
Interest expense 1,508 1,212
Other, net 83 48
------------ ------------
(Loss) income before income taxes (3,745) 2,977
Income tax benefit (1,017) (496)
------------ ------------
Net (loss) income $ (2,728) 3,473
============ ============
Net (loss) income per common and common
equivalent share:
Primary $ (.11) .13
============ ============
Fully diluted $ (.11) .13
============ ============
Weighted average number of shares
of common stock and common stock
equivalents used to compute net
(loss) income per common and common
equivalent share:
Primary 25,941 25,773
============ ============
Fully diluted 25,957 26,694
============ ============
See accompanying notes to consolidated condensed financial statements.
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FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended
----------------------------
June 30, June 30,
1996 1995
------------ ------------
Net sales $ 168,626 144,920
Cost of sales 114,930 100,828
------------ ------------
Gross profit 53,696 44,092
Operating expenses:
Selling, general and
administrative 38,289 34,459
Research and development 1,266 1,365
Other compensation expense 9,758 ---
------------ ------------
Operating income 4,383 8,268
Other expense (income):
Interest income (28) (64)
Interest expense 2,925 2,493
Other, net 146 72
------------ ------------
Income before income taxes 1,340 5,767
Income tax benefit (1,279) (1,024)
------------ ------------
Net income $ 2,619 6,791
============ ============
Net income per common and common
equivalent share:
Primary $ .10 .26
============ ============
Fully diluted $ .10 .26
============ ============
Weighted average number of shares
of common stock and common stock
equivalents used to compute net
income per common and common
equivalent share:
Primary 25,831 25,712
============ ============
Fully diluted 25,884 26,658
============ ============
See accompanying notes to consolidated condensed financial statements.
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FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
----------------------------
June 30, June 30,
1996 1995
------------ ------------
Net cash used in operating
activities $ (8,355) (6,119)
Cash flows from investing activities:
Purchases of property, plant and
equipment (5,966) (23,617)
------------ ------------
Net cash used in investing
activities (5,966) (23,617)
Cash flows from financing activities:
Principal payments under debt and
capital lease obligations (11,021) (8,705)
Proceeds from sale/leaseback of
property,plant and equipment ---- 18,393
Proceeds from capital lease
financing arrangement 10,480 5,000
Change in accounts payable to
affiliates, net (1,980) 11,368
Proceeds from short-term borrowings 27,699 33,818
Change in short-term borrowings
- Fresenius AG (534) 70
Repayment of short-term borrowings (19,700) (29,880)
Proceeds from issuance of common
stock, net 12,187 498
------------ ------------
Net cash provided by
financing activities 17,131 30,562
Effect of exchange rates on cash (7) 20
------------ ------------
Net increase in cash
and cash equivalents 2,803 846
Cash and cash equivalents at
beginning of period 2,330 2,315
------------ ------------
Cash and cash equivalents at
end of period $ 5,133 3,161
============ ============
See accompanying notes to consolidated condensed financial statements.
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FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
(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 machines and 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) Inventories
Inventories are stated at the lower of cost (determined by using
first-in, first-out method) or market value, and consist of the following as of
June 30, 1996 and December 31, 1995 (in thousands):
June 30, December 31,
1996 1995
------------ ------------
Raw Materials $ 34,803 32,192
Work in process 8,902 10,504
Finished goods 30,104 25,707
------------ ------------
73,809 68,403
Reserves (3,165) (2,697)
------------ ------------
Inventories, net $ 70,644 65,706
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FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
(3) Other Assets
In 1995, the Company completed construction of a dialyzer plant
addition to its manufacturing facility in Ogden, Utah. At June 30, 1996,
included in other assets are $7,989 of validation costs, less accumulated
amortization of $968, 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.
(4) Income taxes
At December 31, 1995, the Company had net operating loss carryforwards
of approximately $38.4 million for federal income tax reporting purposes. The
net operating losses expire in varying amounts beginning in 1998 through 2006.
The ability of the Company to use carryforwards to offset taxes on its future
income is also subject to certain annual cumulative limitations. The Company
believes that it has sufficient net loss carryforwards to offset any 1996 net
income for federal income tax reporting purposes.
(5) Recent Development
On February 4, 1996, W. R. Grace & Co. ("Grace") and Fresenius AG
entered into a definitive agreement ("Agreement") to combine Grace's National
Medical Care, Inc. ("NMC") with Fresenius AG's worldwide dialysis business,
including the 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.
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FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
(5) Recent Development (Continued)
On May 8, 1996, Fresenius AG and the Company jointly announced that an
agreement had been reached between Fresenius AG and a committee of independent
directors of the Company (the "Independent Committee") on the terms on which the
public stockholders of the Company will participate in the Reorganization and
the Company Merger. The Reorganization and the Company Merger were approved by
the Board of Directors of the Company on May 8, 1996.
Under the terms of the agreement with the Independent Committee, the
public shareholders of the Company were to receive the equivalent of 1.15
ordinary Shares of Fresenius Medical Care AG, based on the assumption that
Fresenius Medical Care AG would have 217,170,000 shares outstanding. It is
currently intended that Fresenius Medical Care AG will have an aggregate of
70,000,000 ordinary shares outstanding (instead of 217,170,000 as originally
proposed) and that U.S. stockholders will receive American Depository Shares
(ADSs) each evidencing one-third of an ordinary share of Fresenius Medical Care
AG. Thus, the public shareholders of the Company will receive, on a fully
diluted basis, approximately 1.112 ADSs of Fresenius Medical Care AG for each
share of Company Common Stock. The agreement with the Independent Committee also
assumes that the Company will reacquire outstanding stock options or other
equity securities, such that Fresenius AG's fully diluted interest in Fresenius
Medical Care AG is not reduced below 50.3%. Accordingly, the public stockholders
of the Company, on a fully diluted basis, will receive 4.9% of Fresenius Medical
Care AG's shares outstanding after the closing.
During the quarter ended June 30, 1996, Fresenius USA recorded
approximately $9.8 million in additional compensation expense in connection with
the repurchase from certain employees of shares of Fresenius USA Common Stock
and options to purchase Fresenius USA Common Stock. As described above, the
Company had agreed to reacquire such outstanding shares and options and other
equity securities in order to ensure that Fresenius AG's fully diluted interest
in Fresenius Medical Care AG was not reduced below 50.3%.
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FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
(6) Management Representation
The accompanying unaudited consolidated condensed financial statements
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments which, in the
opinion of management, consist only of normal and recurring adjustments that are
necessary for a fair statement of the results for the interim periods presented.
Operating results for the six month period ended June 30, 1996 are not
necessarily indicative of the results to be expected for the year.
Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to such rules and regulations.
It is suggested that these consolidated condensed financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
contained in the Company's Form 10-K for the year ended December 31, 1995.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1996 AND 1995
(UNAUDITED)
RESULTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1996 Compared to Three Months and Six
Months Ended June 30, 1995
NET SALES. Net sales were $87.6 million for the second quarter 1996, an
increase of $10.9 million or 14.1% compared with net sales of $76.7 million for
the second quarter 1995. Net sales for the first six months of 1996 were $168.6
million, an increase of $23.7 million or 16.4% compared with $144.9 million for
the first six months of 1995. The increase in sales for the first six months
of 1996 is the result of continued higher unit sales volumes for both
hemodialysis and peritoneal dialysis products.
GROSS PROFIT. Gross profit was $28.2 million for the second quarter
1996, an increase of $5.2 million or 22.8% compared with gross profit of $23.0
million for the second quarter 1995. Gross profit margin increased from 30.0%
for the second quarter 1995 to 32.2% for the second quarter 1996. Gross profit
was $53.7 million for the first six months of 1996, an increase of $9.6 million
or 21.8% compared with gross profit of $44.1 million for the first six months of
1995. Gross profit margin increased from 30.4% for the first six months of 1995
to 31.8% for the first six months of 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense were $19.9 million for the second quarter 1996, an
increase of $2.0 million or 11.3% compared with $17.9 million for the second
quarter 1995, and $38.3 million for the first six months of 1996, an increase of
$3.8 million or 11.1% compared to the first six months of 1995. These expenses
as a percentage of net sales were 22.8% for the second quarter 1996 compared to
23.3% for the second quarter of 1995, and 22.7% for the first six months of 1996
compared with 23.8% for the first six months of 1995.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense were
$684,000 for the second quarter 1996 compared with $879,000 for the same period
in 1995. Research and development expense were $1.3 million for the first six
months of 1996 compared with $1.4 million for the same period in 1995. Research
and development expenses as a percentage of sales were approximately 1.0% for
the second quarter 1996 and for the first six months of 1996, virtually
unchanged compared for the same periods in 1995. Fresenius USA relies primarily
on the research and development efforts of Fresenius AG, negotiating
distribution arrangements for new products from Fresenius AG when Fresenius AG
and Fresenius USA believe that there is market potential for these products in
the U.S. and when the products fit Fresenius USA's business strategy. Fresenius
USA believes that, in the absence of its access to the research and development
efforts of Fresenius AG, Fresenius USA would have had to spend significantly
more on research and development to develop its own line of dialysis products.
OTHER COMPENSATION EXPENSE. Other compensation expense was $9.8
million for the second quarter 1996, which the Company incurred in connection
with the repurchase from certain employees of shares of Fresenius USA Common
Stock and options to purchase Fresenius USA Common Stock. The Company had
agreed to reacquire such outstanding shares and options and other equity
securities in order to ensure that Fresenius AG's fully diluted interest in
Fresenius Medical Care AG was not reduced below 50.3%. The Company incurred no
such expense during the same period of 1995. (See Notes to the Consolidated
Condensed Financial Statements).
INTEREST EXPENSE (NET). Interest expense (net) was $1.5 million for the
second quarter 1996 and $2.9 million for the first six months ended June 30,
1996 compared to $1.2 million and $2.4 million for the same periods of 1995.
The increase is primarily related to the Company's increased short-term
borrowings.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit in the second quarter
of 1996 was $1.0 million, compared to an income tax benefit of $496,000 for the
same period in 1995. Income tax benefit for the first six months of 1996 was
$1.3 million, compared to income tax benefit of $1.0 in 1995. During the second
quarter of 1996, the Company recognized a tax benefit of approximately $1.0
million, compared with $850,000 during the same period in 1995. For the first
six months of 1996, the Company recognized a tax benefit of approximately $2.0
million, compared with $1.7 million during the same period in 1995. The
recognition of such tax benefit by the Company is related to the Company's net
operating loss carryforwards from previous years.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
NET INCOME (LOSS). Net (loss) for the second quarter of 1996 was $(2.7)
million, compared with net income of $3.5 million for the second quarter 1995, a
decrease of $6.2 million or 178.5%, compared to net income of $3.5 million for
the second quarter 1995. Included in the net (loss) for the second quarter of
1996 was additional compensation expense of approximately $9.8 million which the
Company recorded in connection with the repurchase from certain employees of
shares of Fresenius USA Common Stock and options to purchase shares of Fresenius
USA Common Stock. Net income was $2.6 million for the first six months of 1996,
a decrease of $4.2 million or 61.4%, compared to net income of $6.8 million for
the first six months of 1995. Net income for the first six months of 1996
included the additional other compensation expense described above. The Company
incurred no such other compensation expense during the same period of 1995. Net
income for the second quarter of 1996 and 1995 and for the first six months of
1996 and 1995 included a tax benefit described above which resulted from
recognition of a portion of the Company's deferred tax asset.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, working capital
and capital expenditures through bank borrowings obtained with credit support
from Fresenius AG, private placements of Preferred Stock and Common Stock to
Fresenius AG and internally generated funds. During 1995, the Company 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.
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 June 30, 1996. During 1995, the
Company entered into a sale leaseback arrangement with a bank which covers the
sale by the Company of approximately $27.0 million of certain new equipment of
the Company's dialyzer 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. 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 the sales
proceeds from the Company remarketing the equipment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
As of June 30, 1996, the Company had outstanding short-term borrowings
of $41.1 million under lines of credit with six commercial banks. Fresenius AG
has provided credit support to enable the Company to obtain various term loans
and short-term lines of credit. In June 1996, the Company increased one of its
lines of credit from $20.0 million to $30.0 million. As of June 30, 1996, the
Company had borrowed $14.3 million under this $30.0 million line of credit. The
Company's lines of credit provide for a total credit availability of $57.0
million. In addition, at June 30, 1996, the Company had fully drawn the amount
available under a $3.1 million short-term line of credit with Fresenius AG, the
terms of which are similar to those of the lines of credit with the six
commercial banks described above.
At June 30, 1996, the Company 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.
During June 1996, Fresenius AG exercised warrants to purchase 1,515,221
shares of the Company's common stock for which the Company received
approximately $12.1 million. During June 1996, the Company repurchased from
certain employees shares of Fresenius USA Common Stock and options to purchase
shares of Fresenius USA Common Stock of approximately $11.2 million. As
previously announced, the Company had agreed to reacquire such outstanding
shares and options and other equity securities in order to ensure that Fresenius
AG's fully diluted interest in Fresenius Medical Care AG was not reduced below
50.3%.
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.
On May 8, 1996, the Company entered into a letter agreement among the
Company, Fresenius AG and with W.R. Grace & Co. to which the Company will merge
with Fresenius Medical Care AG, a German corporation. (See Notes to the
Consolidated Condensed Financial Statements).
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PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 11 Statement of Computation of Net (Loss)
Income Per Common Share.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the registrant during the
period covered by this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fresenius USA, Inc.
August 12, 1996 /s/ Heinz Schmidt
-----------------------
Corporate Croup
Vice President Finance
(Principal Financial
Officer)
/s/ Robert E. Farrell
-----------------------
Corporate Group
Vice President
Administration and
General Counsel
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