10-Q 1 b46540fme10vq.txt FRESENIUS MEDICAL CARE HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2003 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________________ TO __________________ COMMISSION FILE NUMBER: 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New York 13-3461988 (State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.) 95 Hayden Avenue, Lexington, MA 02420 (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code: 781-402-9000 -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicated by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark whether the registrant is an accelerated filer (As defined in Rule 12b-2 of the Act). Yes | | No |X| 1 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of the date hereof, 90,000,000 shares of common stock, par value $1.00 per share, are outstanding, all of which are held by Fresenius Medical Care AG. 2 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PAGE Unaudited Consolidated Statements of Earnings .............. 4 Unaudited Consolidated Statements of Comprehensive Income .. 5 Unaudited Consolidated Balance Sheets ...................... 6 Unaudited Consolidated Statements of Cash Flows ............ 7 Notes to Unaudited Consolidated Financial Statements ....... 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................ 20 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................................ 24 ITEM 4: CONTROLS AND PROCEDURES .................................... 24 PART II: OTHER INFORMATION ITEM 1: Legal Proceedings .......................................... 25 ITEM 6: Exhibits and Reports on Form 8-K ........................... 28
3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ---------------------- 2003 2002 -------- -------- NET REVENUES Health care services .......................................... $823,760 $784,022 Medical supplies .............................................. 106,041 109,882 -------- -------- 929,801 893,904 -------- -------- EXPENSES Cost of health care services .................................. 586,244 563,655 Cost of medical supplies ...................................... 73,549 73,123 General and administrative expenses ........................... 87,487 76,171 Provision for doubtful accounts ............................... 22,617 21,340 Depreciation and amortization ................................. 31,438 35,435 Research and development ...................................... 2,145 1,998 Interest expense, net, and related financing costs including $24,890 and $33,679, of interest with affiliates ........... 51,310 55,023 -------- -------- 854,790 826,745 -------- -------- INCOME BEFORE INCOME TAXES ........................................ 75,011 67,159 PROVISION FOR INCOME TAXES ......................................... 29,702 26,701 -------- -------- NET INCOME ......................................................... $ 45,309 $ 40,458 ======== ======== Basic and fully dilutive net income per share ...................... $ 0.50 $ 0.45
See accompanying Notes to Unaudited, Consolidated Financial Statements 4 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ----------------------- 2003 2002 -------- -------- NET INCOME ....................................... $ 45,309 $ 40,458 Other comprehensive income Foreign currency translation adjustments ..... 1,342 (432) Derivative instruments net of deferred tax (benefit) expense of $(165) and $3,813 ..... (1,995) 5,910 -------- -------- Total other comprehensive income (loss) ...... (653) 5,478 -------- -------- COMPREHENSIVE INCOME ............................. $ 44,656 $ 45,936 ======== ========
See accompanying Notes to Unaudited, Consolidated Financial Statements 5 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 2003 2002 ----------- ------------ ASSETS Current Assets: Cash and cash equivalents ..................................... $ 38,163 $ 30,013 Accounts receivable, less allowances of $126,122 and $121,620 ................................................... 498,046 387,222 Inventories ................................................... 187,491 185,892 Deferred income taxes ......................................... 152,836 157,353 Other current assets .......................................... 136,340 128,619 ----------- ----------- Total Current Assets ..................................... 1,012,876 889,099 ----------- ----------- Properties and equipment, net ..................................... 532,831 531,081 ----------- ----------- Other Assets: Goodwill ...................................................... 2,932,465 2,934,581 Other intangible assets, net of accumulated amortization of $305,007 and $299,917 ..................................... 508,201 491,988 Other assets and deferred charges ............................. 188,853 163,595 ----------- ----------- Total Other Assets ....................................... 3,629,519 3,590,164 ----------- ----------- Total Assets ....................................................... $ 5,175,226 $ 5,010,344 =========== =========== LIABILITIES AND EQUITY Current Liabilities: Current portion of long-term debt and capitalized lease obligations ................................................ $ 5,820 $ 2,303 Current portion of borrowing from affiliates .................. 328,975 315,394 Accounts payable .............................................. 111,709 100,603 Accrued liabilities ........................................... 238,558 261,888 Accrued special charge for legal matters ...................... 185,883 191,130 Net accounts payable to affiliates ............................ 31,960 28,897 Accrued income taxes .......................................... 68,830 61,754 ----------- ----------- Total Current Liabilities ................................ 971,735 961,969 Long-term debt ..................................................... 717,800 616,900 Non-current borrowings from affiliates ............................. 654,469 654,693 Capitalized lease obligations ...................................... 707 1,120 Deferred income taxes .............................................. 99,754 96,453 Other liabilities .................................................. 180,660 185,200 ----------- ----------- Total Liabilities ........................................ 2,625,125 2,516,335 ----------- ----------- Mandatorily Redeemable Preferred Securities ........................ 791,681 771,209 ----------- ----------- Equity: Preferred stock, $100 par value ................................ 7,412 7,412 Preferred stock, $.10 par value ................................ -- 8,906 Common stock, $1 par value; 300,000,000 shares authorized; outstanding 90,000,000 ............................. 90,000 90,000 Paid in capital ................................................ 1,942,755 1,942,755 Retained deficit ............................................... (197,667) (242,846) Accumulated comprehensive loss ................................. (84,080) (83,427) ----------- ----------- Total Equity .............................................. 1,758,420 1,722,800 ----------- ----------- Total Liabilities and Equity ....................................... $ 5,175,226 $ 5,010,344 =========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements. 6 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------ 2003 2002 --------- -------- Cash Flows from Operating Activities: Net income ............................................................. $ 45,309 $ 40,458 Adjustments to reconcile net income to net cash from Operating activities: Depreciation and amortization ..................................... 31,438 35,435 Provision for doubtful accounts ................................... 22,617 21,340 Deferred income taxes ............................................. 7,983 9,728 Loss on disposal of properties and equipment ...................... 255 461 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Decrease (increase) in accounts receivable ........................ 1,012 (21,945) Increase in inventories ........................................... (1,409) (9,044) Increase in other current assets .................................. (7,721) (8,981) Decrease (increase) in other assets and deferred charges .......... 6,038 1,031 Increase in accounts payable ...................................... 11,106 20,043 (Decrease) increase in accrued income taxes ....................... 7,076 (10,899) Decrease in accrued liabilities ................................... (26,408) (14,770) Decrease in accrued special charge for legal matters .............. (5,247) (4,296) Decrease in other long-term liabilities ........................... (4,763) (11,001) Net changes due to/from affiliates ................................ 3,063 (14,785) Other, net ........................................................ (4,171) 436 --------- -------- Net cash provided by operating activities .............................. 86,178 33,211 --------- -------- Cash Flows from Investing Activities: Capital expenditures .............................................. (29,623) (27,364) Proceeds from sale of property and equipment ...................... 1,116 3,413 Payments for acquisitions, net of cash acquired ................... (15,598) (2,333) --------- -------- Net cash used in investing activities .................................. (44,105) (26,284) --------- -------- Cash Flows from Financing Activities: Net increase in borrowings from affiliates ........................ 13,357 1,084 Cash dividends paid ............................................... (130) (130) Net (decrease) increase in receivable financing facility .......... (133,000) 29,000 Redemption of Series D Preferred Stock ............................ (8,906) -- Net increase (decrease) in debt and capitalized leases ............ 104,004 (28,837) Debt issuance costs ............................................... (12,325) -- Other, net ........................................................ 1,735 -- --------- -------- Net cash (used in) provided by financing activities ..................... (35,265) 1,117 --------- -------- Effects of changes in foreign exchange rates ................................ 1,342 (444) --------- -------- Change in cash and cash equivalents ......................................... 8,150 7,600 Cash and cash equivalents at beginning of period ............................ 30,013 26,786 --------- -------- Cash and cash equivalents at end of period .................................. $ 38,163 $ 34,386 ========= ========
See accompanying Notes to Unaudited, Consolidated Financial Statements 7 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------- 2003 2002 ------- ------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net ............................. $48,306 $75,666 Income taxes paid, net .................... 14,831 27,982 Details for Acquisitions: Assets acquired ................................ 16,502 3,572 Liabilities assumed ............................ 904 1,239 ------- ------- Net cash paid for acquisitions ................. $15,598 $ 2,333 ======= =======
See accompanying Notes to Unaudited, Consolidated Financial Statements 8 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY Fresenius Medical Care Holdings, Inc., a New York corporation ("the Company") is a subsidiary of Fresenius Medical Care AG, a German corporation ("FMCAG"). The Company conducts its operations through five principal subsidiaries, National Medical Care, Inc. ("NMC"); Fresenius USA Marketing, Inc., Fresenius USA Manufacturing, Inc., and SRC Holding Company, Inc., all Delaware corporations and Fresenius USA, Inc., a Massachusetts corporation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and those financial statements where the Company controls professional corporations in accordance with Emerging Issues Task Force Issue 97-2. The Company is primarily engaged in (i) providing kidney dialysis services, and clinical laboratory testing, and (ii) manufacturing and distributing products and equipment for dialysis treatment. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at March 31, 2003 and 2002 and for the three month interim periods then ended are unaudited and should be read in conjunction with the audited, consolidated financial statements in the Company's 2002 report on Form 10-K. Such interim financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented. Certain amounts in the prior periods' consolidated financial statements have been reclassified to conform to the current periods' basis of presentation. The results of operations for the three month period ended March 31, 2003 are not necessarily indicative of the results of operations for the fiscal year ending December 31, 2003. All intercompany transactions and balances have been eliminated in consolidation. NET INCOME PER SHARE Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted net income per share includes the effect of all dilutive potential common shares that were outstanding during the year. The number of shares used to compute basic and diluted net income per share was 90,000 in all periods as there were no potential common shares and no adjustments to income available to common shareholders to be considered for purposes of the diluted net income per share calculation.
THREE MONTHS ENDED MARCH 31, ------------------- 2003 2002 ------ ------ The weighted average number of shares of Common Stock were as follows ....................... 90,000 90,000 ====== ======
9 Net income used in the computation of net income per share is as follows:
THREE MONTHS ENDED MARCH 31, ----------------------- 2003 2002 -------- -------- Net income ....................................... $ 45,309 $ 40,458 Dividends paid on preferred stocks ............... (130) (130) -------- -------- Income available to common shareholders .......... $ 45,179 $ 40,328 ======== ======== Basic and fully dilutive net income per share .... $ 0.50 $ 0.45 ======== ========
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to market risk due to changes in interest rates and foreign currencies. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations, forecasted raw material purchases and other obligations and Euro denominated mandatorily redeemable preferred stock. The interest rate swaps are designated as cash flow hedges effectively converting certain variable interest rate payments into fixed interest rate payments. After tax losses of $0.1 million ($0.2 million pretax) for the three months ended March 31, 2003 and after tax gains of $6.3 million ($10.3 million pretax) for the three months ended March 31, 2002 were deferred in other comprehensive income. Interest payable and receivable under the swap terms are accrued and recorded as adjustments to interest expense at each reporting date. The Company enters into forward rate agreements that are designated and effective as hedges of forecasted raw material purchases and other obligations. After tax losses of $0.7 million ($1.1 million pretax) for the three months ended March 31, 2003 and after tax losses of $0.3 million ($0.5 million pretax) for the three months ended March 31, 2002 were deferred in other comprehensive income and will be reclassified into cost of sales in the period during which the hedged transactions affect earnings. All deferred amounts will be reclassified into earnings within the next twelve months. The Company enters into forward rate agreements that are designated and effective as hedges of changes in the fair value of the Euro denominated mandatorily redeemable preferred stock. Changes in fair value are recorded in earnings and offset against gains and losses resulting from the underlying exposures. After tax losses of $0.2 million ($0.4 million pretax) for the three months ended March 31, 2003 and after tax losses of $0.1 million ($0.1 million pretax) for the three months ended March 31, 2002 were deferred in other comprehensive income. Ineffective amounts had no material impact on earnings for the three months ended March 31, 2003 and March 31, 2002. Periodically, the Company enters into derivative instruments with related parties to form a natural hedge for currency exposures on intercompany obligations. These instruments are reflected in the consolidated balance sheets at fair value with changes in fair value recognized in earnings. Pre-tax (gains) losses recorded in the consolidated statements of operations for the three months ended March 31, 2003 and 2002 were ($4.2) million and $1.9 million, respectively. NEW PRONOUNCEMENTS In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less selling costs. SFAS 144 also broadens the reporting of discontinued operations and provides that discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 was adopted effective January 1, 2002. The adoption of SFAS 144 did not have an impact on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement 10 No. 13 and Technical Corrections ("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under Opinion 30 to determine if losses from extinguishment of debt should be classified as extraordinary items. SFAS 145 amends Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback arrangements be accounted for in a similar manner as sale-leaseback transactions. The Company has adopted SFAS No. 145 as related to SFAS No. 4 effective January 1, 2003. In the second quarter 2002, the Company reported an extraordinary loss of $9.8 million for the early redemption of borrowings from affiliates. This extraordinary loss will be reclassified and presented as a loss from operating earnings. The Company adopted the remaining provisions of SFAS 145 effective April 1, 2002. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The principal difference between this statement and EITF 94-3 relates to the requirements for the recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 were adopted effective January 1, 2003 for exit or disposal activities that are initiated after December 31, 2002. There is no material impact on the Company's financial statements related to the adoption of SFAS 146. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to recognize a liability measured at fair value at the inception of a guarantee for obligations undertaken, including its obligation to stand ready to perform over the term of the guarantee. The initial recognition and measurement provisions are applicable prospectively to guarantees issued or modified after December 31, 2002. FIN 45 also clarifies and expends the disclosure requirements related to guarantees and product warranties. The Company adopted those disclosures on December 31, 2002. There is no material impact on the Company's financial statements related to the adoption of FIN 45. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123. SFAS 148 provides alternative methods for a change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect the method used had on reported results. The Company adopted the annual disclosure requirement on December 31, 2002. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46") Consolidation of Variable Interest Entities. FIN 46 addresses the consolidation of variable interest entities by the primary beneficiary, when the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties and/ or the equity investor lacks certain essential characteristics of a controlling financial interest. FIN 46 requires existing variable interest entities to be consolidated if those entities do not effectively disburse risk among the parties involved. The interpretation becomes effective at various dates in 2003 and provides various transition rules. The Company is assessing the adoption of FIN 46 on its financial statements. NOTE 2. INVENTORIES
MARCH 31, DECEMBER 31, 2003 2002 --------- ------------ Inventories: Raw materials ............................................ $ 43,916 $ 44,670 Manufactured goods in process ............................ 12,006 11,127 Manufactured and purchased inventory available for sale .. 73,247 70,127 -------- -------- 129,169 125,924 Health care supplies .................................... 58,322 59,968 -------- -------- Total ............................................... $187,491 $185,892 ======== ========
11 NOTE 3. DEBT 2003 SENIOR CREDIT AGREEMENT On February 21, 2003, the Company entered into an amended and restated credit agreement (hereafter "2003 Senior Credit Agreement") with Bank of America N.A, Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan Chase Bank, The Bank of Nova Scotia and certain other lenders (collectively, the "Lenders"), pursuant to which the Lenders have made available to the Company and certain subsidiaries and affiliates an aggregate of up to $1,500,000 through three credit facilities: - a revolving credit facility of up to $500,000 (of which up to $250,000 is available for letters of credit, up to $300,000 is available for borrowings in certain non-U.S. currencies, up to $75,000 is available as swing lines in U.S. dollars, up to $250,000 is available as a competitive loan facility and up to $50,000 is available as swing lines in certain non-U.S. currencies, the total of which cannot exceed $500,000) which will be due and payable on October 31, 2007. - a term loan facility ("Loan A") of $500,000, also scheduled to expire on October 31, 2007. The terms of the 2003 Senior Credit Agreement require quarterly payments of $25,000 beginning in the third quarter of 2004 that permanently reduce the term loan facility. The remaining amount outstanding is due on October 31, 2007. - a term loan facility ("Loan B") of $500,000, scheduled to expire February 21, 2010 with a repayment provision that if the Trust Preferred Securities due February 1, 2008 are not repaid, refinanced or have their maturity extended, repayment will be due on October 31, 2007. The terms of the Loan B require repayments of 0.25% per quarter beginning with the second quarter of 2003. Loans under the 2003 Senior Credit Agreement bear interest at a base rate determined in accordance with the agreement. For the revolving credit facility and Loan A, interest will be at a rate equal to LIBOR plus an applicable margin, or an alternate base rate, defined as the higher of the Bank of America prime rate or the Federal Funds rate plus the applicable margin. The applicable margin is variable and depends on the ratio of EBITDA and funded debt as defined in the credit agreement. The interest rate for Loan B is LIBOR plus a percentage in accordance with the agreement. Fees are also payable at a percentage per annum on the portion of available borrowings under the 2003 Senior Credit Agreement that are not used. In addition to scheduled principal payments, indebtedness under the 2003 Senior Credit Agreement will be reduced by portions of the net cash proceeds from certain sales of assets, securitization transactions and the issuance of subordinated debt and equity securities. The 2003 Senior Credit Agreement includes covenants that require FMCAG to maintain certain financial ratios or meet other financial tests. Under the Senior Credit Agreement, FMCAG is obligated to maintain a minimum consolidated net worth, a minimum consolidated fixed charge ratio (ratio of consolidated funded debt to EBIDTA) and a maximum leverage ratio. In addition, the 2003 Senior Credit Agreement includes other covenants which, among other things, restrict or have the effect of restricting the Company's ability to dispose of assets, incur debt, pay dividends, create liens or make capital expenditures, investments and acquisitions. The breach of any of the covenants could result in a default under the 2003 Senior credit Agreement. In default, the outstanding balance under the 2003 Senior Credit Agreement becomes due and payable.
MARCH 31, DECEMBER 31, 2003 2002 --------- ------------ Long-term debt to outside parties consists of: 2003 Senior Credit Agreement .................... $720,000 $616,900 Other ........................................... 3,132 1,840 -------- -------- 723,132 618,740 Less amounts classified as current .............. 5,332 1,840 -------- -------- $717,800 $616,900 ======== ========
Borrowings (receivables) from affiliates consists of:
MARCH 31, DECEMBER 31, 2003 2002 --------- ------------ Fresenius Medical Care AG borrowings primarily at interest rates approximating 1.88% and 2.22%, respectively ............. $ 235,000 $214,000 RTC Holdings International, Inc. borrowings at a fixed interest rate of 2.70% ................................................. 11,000 11,000 Fresenius AG borrowing at interest rates approximating 2.21% and 2.22%, respectively .................................. (1,420) 6,000 Fresenius Medical Care Trust Finance S.a.r.l. borrowings at fixed interest rates of 8.25% and 8.43%, respectively ......... 654,244 654,244
12 Franconia Acquisition, LLC at interest rates approximating 1.60% and 1.69%, respectively .................................. 83,721 83,721 Other ............................................................ 899 1,122 --------- -------- Total ......................................................... 983,444 970,087 Less amounts classified as current ............................... 328,975 315,394 --------- -------- Total Long-term .................................................. $ 654,469 $654,693 ========= ========
NOTE 4. MANDATORILY REDEEMABLE PREFERRED SECURITIES During 2001 and 2000, a wholly-owned subsidiary of the Company issued shares of various series of Preferred Stock ("Redeemable Preferred Securities") to NMC which were then transferred to FMCAG for proceeds totaling $392,037 in 2001 and $305,500 in 2000. No Redeemable Preferred Securities were issued during the three months ended March 31, 2003. The table below provides information for Redeemable Preferred Securities for the periods indicated.
MARCH 31, DECEMBER 31, MANDATORILY REDEEMABLE PREFERRED SECURITIES 2003 2002 --------- ------------ Series A Preferred Stock, 1,000 shares ..... $113,500 $113,500 Series B Preferred Stock, 300 shares ....... 34,000 34,000 Series C Preferred Stock, 1,700 shares ..... 192,000 192,000 Series D Preferred Stock, 870 shares ....... 97,500 97,500 Series E Preferred Stock, 1,300 shares ..... 147,500 147,500 Series F Preferred Stock, 980 shares ....... 113,037 113,037 -------- -------- 697,537 697,537 Mark to Market Adjustment .................. 94,144 73,672 -------- -------- Total ...................................... $791,681 $771,209 ======== ========
These securities are similar in substance except for the order of preference both as to dividends and liquidation, dissolution or winding-up of the subsidiary. The order of preference among the various series corresponds to the alphabetical order of Series A through Series F. In addition, the holders of the Redeemable Preferred Securities are entitled to receive dividends in an amount of dollars per share that varies from approximately 3% to 8% of the purchase price depending on the Series. The dividends will be declared and paid in cash at least annually. All the Redeemable Preferred Securities have a par value of $.01 per share. Upon liquidation or dissolution or winding up of the issuer of the Redeemable Preferred Securities, the holders of the Redeemable Preferred Securities are entitled to an amount equal to the liquidation preference for each share of stock plus an amount equal to all accrued and unpaid dividends thereon through the date of distribution. The liquidation preference is the sum of the issuance price plus, for each year or portion thereof, an amount equal to one-half of one percent of the issue price, not to exceed 5% of the issue price in the aggregate. Redeemable Preferred Securities (Series A and C) originally due to be sold to the Company in 2002 for Euro 341,385 had their redemption dates extended until October and November 2003, respectively. The other Redeemable Preferred Securities will be sold back to the Company two years from their respective date of issuance for a total amount equal to Euros 160,388 (Series B and F) and US dollars $245,000 (Series D and E) plus any accrued and unpaid dividends. Redeemable Preferred Securities (Series B, E, and F) have redemption dates in August 2003. Redeemable Preferred Securities (Series D) are scheduled for redemption in April 2004. Dividends were recorded and classified as part of interest expense in the consolidated statement of operations in the amounts of $9,679 and $9,929 in the three month periods ended March 31, 2003 and 2002, respectively. During the three months ended March 31, 2003 and 2002, cash dividend payments were made totaling $8,733 and $29,850, respectively. The Euro Redeemable Preferred Securities are deemed to be a Euro liability and the risk of foreign currency fluctuations are hedged through forward currency contracts. The Company records mark to market adjustments based on fluctuations in currency rates and records the offset to accumulated comprehensive income. The holders of the Redeemable Preferred Securities have the same participation rights as the holders of all other classes of capital stock of the issuing subsidiary. 13 NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS GOODWILL Changes in the carrying amount of goodwill for the three months ended March 31, 2003 are as follows:
MARCH 31, 2003 --------- Carrying value as of December 31, 2002......... $2,934,581 Goodwill acquired for the three months ended March 31, 2003.......................... 13,493 Reclassifications.............................. (15,609) ---------- Carrying value as of March 31, 2003............ $2,932,465 ==========
At March 31, 2003 and December 31, 2002, other intangible assets consisted of the following:
MARCH 31, 2003 DECEMBER 31, 2002 -------------------------------------------- -------------------------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE --------- ------------ ---------- --------- ------------ ---------- AMORTIZABLE INTANGIBLE ASSETS: Patient Relationships $ 237,262 $(193,703) $ 43,559 $ 236,446 $(189,277) $ 47,169 Other Intangibles $ 108,754 $ (58,020) $ 50,734 $ 108,982 $ (57,356) $ 51,626 --------- --------- ---------- --------- --------- ---------- $ 346,016 $(251,723) $ 94,293 $ 345,428 $(246,633) $ 98,795 ========= ========= ========== ========= ========= ========== NON-AMORTIZABLE INTANGIBLE ASSETS Tradename $ 241,513 $ (31,376) $ 210,137 $ 241,513 $ (31,376) $ 210,137 Management Contracts $ 225,679 $ (21,908) $ 203,771 $ 204,964 $ (21,908) $ 183,056 --------- --------- ---------- --------- --------- ---------- $ 467,192 $ (53,284) $ 413,908 $ 446,477 $ (53,284) $ 393,193 ========= ========= ========== ========= ========= ==========
Amortization expense for amortizable intangible assets at March 31, 2003 is estimated to be $15,600 for the remaining nine months of 2003, $16,500 for 2004, $15,100 for 2005, $10,600 for 2006, and $7,900 for 2007. NOTE 6: SPECIAL CHARGE FOR LEGAL MATTERS In the fourth quarter of 2001, the Company recorded a $258 million ($177 million after tax) special charge to address 1996 merger-related legal matters, estimated liabilities and legal expenses arising in connection with the Grace Chapter 11 Proceedings and the cost of resolving pending litigation and other disputes with certain commercial insurers (see Note 9). The Company accrued $172 million principally representing a provision for income taxes payable for the years prior to the 1996 merger for which the Company has been indemnified by W.R. Grace, but may ultimately be obligated to pay as a result of Grace's Chapter 11 Proceedings. In addition, that amount included the estimated costs of defending the Company in all litigation arising out of Grace's Chapter 11 Proceedings (see Note 9). The Company included $55 million in the special charge to provide for settlement obligations, legal expenses and the resolution of disputed accounts receivable relating to various insurance companies. The remaining amount of the special charge ($30 million) was accrued mainly for (i) assets and receivables that are impaired in connection with other legal matters and (ii) anticipated expenses associated with the continued defense and resolution of the legal matters. At March 31, 2003, there is a remaining balance of $186 million for the accrual for the special charge for legal matters. The Company believes that these reserves are adequate for the settlement of all matters described above. During the three months ended March 31, 2003, $5 million in charges were applied against the accrued special charge for legal matters. 14 NOTE 7. EQUITY CLASS D PREFERRED STOCK On February 4, 2003, the Company announced the exercise of its right to redeem all of its outstanding shares of the Class D Preferred Stock ("Class D Shares"). The Class D Shares were issued to the common shareholders of W.R. Grace & Co. in connection with the 1996 reorganization involving W. R. Grace and Fresenius Medical Care. Commencing on March 28, 2003, Class D Shares that were properly transferred to, and received by, the redemption agent were redeemed at a redemption price of $0.10 per share. Upon completion of the redemption, FMCH will have redeemed the 89 million outstanding Class D Shares at a total cash outflow of $8,906. This transaction had no earnings impact for the Company. After March 28, 2003 the Class D Shares ceased to be deemed issued and outstanding shares of the Company's capital stock and were restored to the status of authorized but unissued shares of preferred stock. NOTE 8. PENSION PLANS During the first quarter of 2002, the Company recorded a gain of approximately $13.1 million resulting from the curtailment of the Company's defined benefit and supplemental executive retirement plans. The Company has retained all employee pension obligations as of the closing date for the fully-vested and frozen benefits for all employees. NOTE 9. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS COMMERCIAL LITIGATION The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-Merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company, and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. W.R. Grace & Co. and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Grace Chapter 11 Proceedings") on April 2, 2001. Pre-Merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); W. R. Grace & Co. has received the Service's examination report on tax periods 1993 to 1996; that during those years Grace deducted approximately $122,100 in interest attributable to corporate owned life insurance ("COLI") policy loans; that W.R. Grace & Co. has paid $21,200 of tax and interest related to COLI deductions taken in tax years prior to 1993; that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation and that W.R. Grace & Co. is seeking a settlement of the Service's claims. Subject to certain representations made by W.R. Grace & Co., the Company and Fresenius AG, W.R. Grace & Co. and certain of its affiliates agreed to indemnify the Company against this and other pre-Merger and Merger related tax liabilities. Prior to and after the commencement of the Grace Chapter 11 Proceedings, class action complaints were filed against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.- Conn., and by the asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy estate in the Grace Chapter 11 Proceedings, alleging among other things that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act and constituted a conspiracy. All such cases have been stayed and transferred to or are pending before the U.S. District Court as part of the Grace Chapter 11 Proceedings. On February 6, 2003, the Company reached a definitive agreement with the asbestos creditors' committees on behalf of the W.R. Grace and Co. bankruptcy estate in the matters pending in the Grace Chapter 11 Proceedings for the settlement of all fraudulent conveyance claims against it and other claims related to the Company that arise out of the bankruptcy of W.R. Grace & Co. Subsequently, the settlement agreement was amended and W.R. Grace was added as a settling party. Under the terms of the settlement 15 agreement as amended (the "Settlement Agreement"), fraudulent conveyance and other claims raised on behalf of asbestos claimants will be dismissed with prejudice and the Company will receive protection against existing and potential future W.R. Grace & Co. related claims, including fraudulent conveyance and asbestos claims, and indemnification against income tax claims related to the non-NMC members of the W.R. Grace & Co. consolidated tax group upon confirmation of a W.R. Grace & Co. bankruptcy reorganization plan that contains such provisions. Under the Settlement Agreement, the Company will pay a total of $115,000 to the W.R. Grace & Co. bankruptcy estate, or as otherwise directed by the Court, upon plan confirmation. No admission of liability has been or will be made. The Settlement Agreement is subject to the approval of the U.S. District Court. On April 15, 2003, W.R. Grace & Co. and the asbestos creditors' committees filed a motion before the U.S. District Court, seeking court approval of the Settlement Agreement and entry of a court order implementing the settlement. The foregoing summary of the material terms of the settlement is qualified in its entirety by reference to the full text of the Settlement Agreement. The Settlement Agreement has been filed with the Securities and Exchange Commission. Subsequent to the Merger, W.R. Grace & Co. was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Under the Settlement Agreement, upon confirmation of a plan that satisfies the conditions to the Company's payment obligation, this litigation will be dismissed with prejudice. In April 2003, the Company, NMC, and certain NMC subsidiaries agreed to settle all litigation filed by a group of insurance companies concerning allegations of inappropriate billing practices and misrepresentations and the Company's counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. The costs of the settlement will be charged against previously established accruals. See "Accrued Special Charge for Legal Matters" below. Other private payors have contacted the Company regarding similar claims and may file their own lawsuit seeking reimbursement and other damages. Although the ultimate outcome on the Company of any such proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the Anti-Kickback Statute, the False Claims Act, the Stark Statute, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. Enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and expects continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates many facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the Anti-Kickback Statute, the Stark Statute and the False Claims Act, among other laws. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the 16 Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS At December 31, 2001, the Company recorded a pre-tax special charge of $258,000 to reflect anticipated expenses associated with the continued defense and resolution of pre-Merger tax claims, Merger-related claims, and commercial insurer claims. The costs associated with the Settlement Agreement and settlement with insurers are charged against this accrual. While the Company believes that its remaining accruals reasonably estimate the Company's currently anticipated costs related to the continued defense and resolution of the remaining matters, no assurances can be given that the actual costs incurred by the Company will not exceed the amount of these accruals. 17 NOTE 10. INDUSTRY SEGMENTS INFORMATION The Company's reportable segments are Dialysis Services and Dialysis Products. For purposes of segment reporting, the Dialysis Services Division and Spectra Renal Management are combined and reported as Dialysis Services. These divisions are aggregated because of their similar economic classifications. These include the fact that they are both health care service providers whose services are provided to a common patient population, and both receive a significant portion of their net revenue from Medicare and other government and non-government third party payors. The Dialysis Products segment reflects the activity of the Dialysis Products Division only. The table below provides information for the three months ended March 31, 2003 and 2002 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT TOTAL SERVICES PRODUCTS SALES ---------- -------- ------------ ---------- NET REVENUES FOR THREE MONTHS ENDED 3/31/03 $ 828,164 $190,602 $88,965 $ 929,801 3/31/02 $ 788,533 $183,207 $77,836 $ 893,904 OPERATING EARNINGS FOR THREE MONTHS ENDED 3/31/03 100,083 34,559 -- 134,642 3/31/02 93,192 35,330 -- 128,522 ASSETS AT 3/31/2003 2,677,659 621,217 -- 3,298,876 12/31/2002 2,657,692 635,778 -- 3,293,470 DEPRECIATION AND AMORTIZATION FOR THE THREE MONTHS ENDED 3/31/2003 25,723 4,369 -- 30,092 3/31/2002 25,627 4,357 -- 29,984
Total assets at March 31, 2003 of $5,175,226 is comprised of total assets for reportable segments, $3,298,876; intangible assets not allocated to segments, $1,876,570; accounts receivable financing agreement ($312,249); and other corporate assets, $312,029. The table below provides the reconciliations of reportable segment operating earnings to the Company's consolidated totals.
THREE MONTHS ENDED SEGMENT RECONCILIATION MARCH 31, ---------------------- -------------------------- 2003 2002 --------- --------- INCOME BEFORE INCOME TAXES: Total operating earnings for reportable segments $ 134,642 $ 128,522 Corporate G&A (4,830) 1,109 Corporate depreciation and amortization (1,346) (5,451) Research and development expense (2,145) (1,998) Net interest expense (51,310) (55,023) --------- --------- Income Before Income Taxes $ 75,011 $ 67,159 ========= =========
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company. The discussion should be read in conjunction with the consolidated financial statements included elsewhere in this document. This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of the Company, government reimbursement, future plans and management's expectations regarding future performance. Actual results could differ materially from those contained in these forward-looking statements due to certain factors including, without limitation, changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, the realization of anticipated tax deductions, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this report and in other Company reports filed from time to time with the Securities and Exchange Commission, could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. RESULTS OF OPERATIONS The following table summarizes certain operating results of the Company by principal business unit for the periods indicated. Intercompany eliminations primarily reflect sales of medical supplies by Dialysis Products to Dialysis Services.
THREE MONTHS ENDED MARCH 31, --------------------- (DOLLARS IN MILLIONS) 2003 2002 ----- ----- NET REVENUES Dialysis Services ........... $ 828 $ 789 Dialysis Products ........... 191 183 Intercompany Eliminations ... (89) (78) ----- ----- Total Net Revenues .............. $ 930 $ 894 ===== ===== Operating Earnings: Dialysis Services ........... $ 100 $ 93 Dialysis Products ........... 34 35 ----- ----- Total Operating Earnings ........ 134 128 ----- ----- Other Expenses: General Corporate ........... $ 6 $ 4 Research & Development ...... 2 2 Interest Expense, Net ....... 51 55 ----- ----- Total Other Expenses ............ 59 61 ----- ----- Earnings Before Income Taxes .... 75 67 Provision for Income Taxes ...... 30 27 ----- ----- Net Income ...................... $ 45 $ 40 ===== =====
19 THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002 Net revenues for the first three months of 2003 increased by 4% ($36 million) over the comparable period in 2002. Net income for the first three months of 2003 increased by 12% to $45 million as compared to $40 million in 2002. This increase was due to increased operating earnings ($6 million), and decreased interest expense ($4 million), partially offset by increased general corporate expenses ($2 million) and increased income taxes ($3 million). DIALYSIS SERVICES Dialysis Services net revenues for the first three months of 2003 increased by 5% to $824 million (net of $5 million of intercompany sales). The growth in dialysis services revenue resulted primarily from a 7% increase in treatment volume reflecting base business growth (3%); the impact of 2003 and 2002 acquisitions (2%), and the transfer of billing for some Medicare peritoneal dialysis patients from Dialysis Products (Method II billing) to Dialysis Services (Method I billing) (2%). The increase in revenue was partially offset by a decrease in revenue per treatment from $284 in the first quarter of 2002 to $278 in the first quarter of 2003. The decrease in revenue rate per treatment is primarily due to the change from Method II to Method I billing and decreased ancillary revenues associated with new billing procedures for ancillary drugs (Zemplar and Vitamin D). Dialysis Services operating earnings for the first three months of 2003 increased by 7% ($7 million) as compared to the comparable period of 2002 resulting in an increased operating margin from 11.9% in the first quarter of 2002 to 12.1% in the first quarter of 2003. The increase in operating margin is primarily due to one-time severance and other payroll costs related to workforce reductions incurred in 2002, partially offset by lower ancillary margins in 2003 versus 2002. DIALYSIS PRODUCTS Dialysis Products gross revenues increased by 4% to $191 million in the first quarter 2003 as compared to $183 million in the comparable period 2002. Internal sales to Dialysis Services increased by 16% to $85 million and were partially offset by a decrease in external sales of 4% to $106 million. Dialysis Product external sales the first quarter of both 2003 and 2002 include the sales of machines to a third party leasing company which are leased back by Dialysis Services. Dialysis Product external sales in the first quarter 2002 also includes Method II PD revenues for Dialysis Services patients. Method II patients were transferred to Method I effective January 1, 2003 therefore there were no similar Method II revenues recorded in the first quarter 2003. Dialysis Products measures its external sales performance based on its sales to the "net available external market." The net available external market excludes machine sales and Method II revenues involving Dialysis Services as well as sales to other vertically integrated dialysis companies. Net available external market sales increased by 6% to $95 million in the first quarter of 2003 as compared to $89 million in 2002. The Company uses net available external market as a key operating metric as it eliminates the impact of internal sales and activity with another vertically integrated company to provide a true measure of product that is sold into the market. The following is a reconciliation of gross product revenues to net available market for the quarter ended March 31, 2003 and 2002, respectively:
Three Months Ended March 31, ------------------------- (dollars in millions) 2003 2002 -------- -------- Gross product revenues.............. $191 $183 Intercompany eliminations........... (85) (75) ---- ---- Net product revenues................ 106 108 Machine sales....................... (8) (6) Vertically integrated dialysis company sales...................... (3) (3) Method II sales..................... - (10) ---- ---- Net available external markets...... $ 95 $ 89 ==== ====
Dialysis Products operating earnings for the first three months of 2003 decreased by 3% to $34 million from $35 million in the comparable period of 2002. This decrease was primarily due to lower gross margins resulting from higher manufacturing costs. OTHER EXPENSES The Company's other expenses for the first three months of 2003 decreased by 3% to $59 million as compared to $61 million in the comparable period of 2002 due to a decrease of $4 million in interest expense partially offset by an increase of $2 million in general corporate expenses. The increase in general corporate overhead is primarily due a one-time gain on pension curtailment of $13 million that was realized in the first quarter 2002 and higher general costs incurred in the first quarter 2003 as compared to the comparable period 2002 partially offset by favorable fluctuations in foreign currency of $8 million (gains realized in the three months of 2003 as compared to losses of $2 million incurred in the comparable period 2002) and reduced amortization expense of $4 million. INCOME TAX RATE The effective tax rate from operations for the first three months of 2003 (39.6%) is lower than the rate for the comparable period of 2002 (39.8%) due to reductions in state taxes. 20 LIQUIDITY AND CAPITAL RESOURCES THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002. The Company's cash requirements for the first three months of 2003 and 2002 were funded by cash from operations, additional intercompany borrowings, borrowings under its credit facility and proceeds from a receivable financing facility. OPERATING ACTIVITIES The Company generated cash from operations of $86 million in the first quarter of 2003 as compared to $33 million in the first quarter of 2002. The increase in operating cash of $53 million is primarily related to lower interest payments of $27 million, decreased tax payments of $13 million, improvements in accounts receivable of $24 million resulting from favorable cash collections, and improvements in inventory management of $8 million partially offset by net other working capital $19 million. INVESTING ACTIVITIES Net cash used in investing activities was $44 million in the first quarter of 2003 as compared to $26 million in the first quarter of 2002. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations in 2003 and 2002. The increases in cash used in investing related to increased acquisition spending ($13 million) and increases in net capital expenditures ($5 million). Acquisition spending in the first quarter of 2003 and 2002 was approximately $16 million and $2 million respectively with no individually significant transactions. Capital expenditures totaling $30 million in the first quarter of 2003 and $27 million in the first quarter of 2002 respectively, were made for new clinics, improvements to existing clinics and maintenance of production facilities. FINANCING ACTIVITIES On February 21, 2003 the Company and FMCAG entered into an amended and restated credit agreement ("2003 Senior Credit Agreement") with the Bank of America N.A., Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan Chase Bank, the Bank of Nova Scotia, and certain subsidiaries and affiliates an aggregate of up to $1.5 billion through three credit facilities. The three facilities include a revolving facility of $500 million and two term loan facilities of $500 million each. The Company used the initial borrowings under the 2003 Senior Credit Agreement to refinance outstanding borrowings under our prior senior credit agreement and for general corporate purposes (See Note 3 of the Consolidated Financial Statements). Net cash flows used in financing activities were $35 million in the first quarter of 2003 as compared to cash flows provided by financing activities of $1 million in the first quarter of 2002 for a change of $36 million. Net cash used in financing activities in the first quarter of 2003 is principally related to an increase in borrowing from affiliates of $13 million, along with approximately $104 million in increases in borrowings from the Company's 2003 Senior Credit Facility. The Company has an asset securitization facility (the "Accounts Receivable Facility") whereby receivables are sold to NMC Funding Corporation (the "Transferor"), a wholly owned subsidiary of the Company, and subsequently the Transferor transfers and assigns percentage ownership interests in receivables to certain bank investors. The maximum securitization limit under the Accounts Receivable Facility is $560 million at March 31, 2003. The facility has a term of 364 days and matures on October 23, 2003. The Company has historically renewed this facility for a new 364 day term upon maturity. For the three months ended March 31, 2003, the Company decreased its sales under the Accounts Receivable Facility by $133 million primarily using funds drawn under the 2003 Senior Credit Agreement. Accounts receivable on the face of the balance sheet are shown net of the Account Receivable Facility. Approximately $9 million of cash was paid to redeem the Company's Series D Preferred Stock (See Note 7 of the Consolidated Financial Statements). In addition, approximately $12 million was used for payment of debt issuance costs related to the Company's 2003 Senior Credit Agreement. Cash from short-term borrowings can be generated by borrowings under the Accounts Receivable Facility and through borrowings from affiliates. Long-term financing is provided by the revolving credit portion of our senior credit facility. We believe that our existing credit facility, cash generated from operations and other current sources of financing are sufficient to meet our foreseeable cash requirements. 21 The 2003 Senior Credit Agreement includes covenants that require FMCAG to maintain certain financial ratios or meet other financial tests. Under the Senior Credit Agreement, FMCAG is obligated to maintain a minimum consolidated net worth, a minimum consolidated fixed charge ratio (ratio of consolidated funded debt to EBIDTA) and a maximum leverage ratio. In addition, the 2003 Senior Credit Agreement includes other covenants which, among other things, restrict or have the effect of restricting the Company's ability to dispose of assets, incur debt, pay dividends, create liens or make capital expenditures, investments and acquisitions. The breach of any of the covenants could result in a default under the 2003 Senior Credit Agreement. In default, the outstanding balance under the 2003 Senior Credit Agreement becomes due and payable. CRITICAL ACCOUNTING POLICIES The Company has identified the following selected accounting policies and issues that the Company believes are critical to understand the financial reporting risks presented in the current economic environment. These matters and judgments, and uncertainties affecting them, are also essential to understand the Company's reported and future operating results. See Notes to Consolidated Financial Statements - Note 2, "Summary of Significant Accounting Policies" included in the Company's 2002 report on Form 10- K. RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS The growth of the Company's business through acquisitions has created a significant amount of intangible assets, including goodwill, patient relationships, tradenames and other intangibles. At March 31, 2003, the carrying amount of net intangible assets amounted to $3,441 million representing approximately 66% of the Company's total assets. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews the carrying value of our long-lived assets for impairment at least once a year, at the end of the year, or whenever events or changes in circumstances indicate that the carrying amount of assets might be impaired. To comply with the provisions of SFAS No. 142, the fair value of the reporting unit is compared to the reporting unit's carrying amount. The Company estimates the fair value of each reporting unit using estimated future cash flows for the unit discounted by a weighted average cost of capital specific to that unit. Estimated cash flows are based on our budgets for the next three years, and projections for the following years based on an expected growth rate. The growth rate is based on industry and internal projections. The discount rates reflect any inflation in local cash flows and risks inherent to each reporting unit. If the fair value of the reporting unit is less than its carrying value, a second step is performed which compares the fair value of the reporting unit's goodwill to the carrying value of its goodwill. If the fair value of the goodwill is less than its carrying value, the difference is recorded as an impairment charge. A prolonged downturn in the healthcare industry with lower than expected increases in reimbursement rates and/or higher than expected costs for providing healthcare services could adversely affect our estimated future cashflows. Future adverse changes in a reporting unit's economic environment might affect the discount rate. A decrease in our estimated future cash flows and/or a decline in the macroeconomic environment could result in impairment charges to goodwill and other intangible assets which could materially and adversely affect our future financial position and operating results. LEGAL CONTINGENCIES The Company is a party to certain litigation including the commercial insurer litigation, W.R. Grace & Co. bankruptcy and Sealed Air Corporation indemnification litigation and other litigation arising in the ordinary course of the Company's business as described in Note 8 "Commitments and Contingencies" in the Company's Consolidated Financial Statements. The outcome of these matters may have a material effect on the Company's financial position, results of operations or cash flows. The Company regularly analyzes current information relating to these litigation matters and provides accruals for probable contingent losses including the estimated legal expenses to resolve the matter. In its decisions regarding the recording of litigation accruals, the Company considers the probability of an unfavorable outcome and its ability to make a reasonable estimate of the amount of contingent loss. 22 If an unfavorable outcome is probable but the amount of loss cannot be reasonably estimated by management, appropriate disclosure is provided, but no contingent losses are accrued. The mere filing of a suit or formal assertion of a claim or assessment does not necessarily require the recording of an accrual. REVENUE RECOGNITION Revenues are recognized on the date services and related products are provided/shipped and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare and Medicaid. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. The Company records an allowance for estimated uncollectible accounts receivable based upon an analysis of historical collection experience. The analysis considers differences in collection experience by payor mix and aging of the accounts receivable. From time to time, the Company reviews the accounts receivable for changes in historical collection experience to ensure the appropriateness of the allowances. A significant change in collection experience, a deterioration of the aging of accounts receivable, or a significant change in the mix of payers may adversely affect the Company's estimate of the allowance for doubtful accounts. Consequently, it is possible that our future operating results could be materially and adversely affected by additional charges for bad debt and our cash flows may be reduced by lower collection of receivables. Net Revenues from machine sales to a third party leasing company where there is a leaseback of the machines by the Dialysis Services Division were $7.9 million and $6.7 million for the three months ended March 31, 2003 and 2002, respectively. The profits on these sales are deferred and amortized to earnings over the lease terms. SELF INSURANCE PROGRAMS The Company is self-insured for professional, product and general liability, auto and worker's compensation claims up to predetermined amounts above which third party insurance applies. Estimates include ultimate costs for both reported and incurred but not reported claims. IMPACT OF INFLATION A substantial portion of the Company's net revenue is subject to reimbursement rates which are regulated by the federal government and do not automatically adjust for inflation. Moreover, non-governmental payors continue to exert downward pressure on reimbursement levels. Increased operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, may adversely affect the Company's business and results of operations. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its market risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations and purchase commitments. The Company does not hold or issue derivative instruments for trading or speculative purposes. Hedge accounting is applied if the derivative reduces the risk of the underlying hedged item and is designated at inception as a hedge. Additionally, changes in the value of the derivative must result in payoffs that are highly correlated to the changes in value of the hedged item. Derivatives are measured for effectiveness both at inception and on an ongoing basis. The Company enters into foreign exchange contracts that are designated as, and effective as, hedges for forecasted purchase transactions. Also, since the Company carries a substantial amount of floating rate debt, the Company uses interest rate swaps to synthetically change certain variable-rate debt obligations to fixed-rate obligations to mitigate the impact of interest rate fluctuations. Gains and losses on foreign exchange contracts accounted for as hedges are deferred in other assets or liabilities. The deferred gains and losses are recognized as adjustments to the underlying hedged transaction when the future sales or purchases are recognized. Interest rate swap payments and receipts are recorded as part of interest expense. The fair value of the swap contracts is recognized in other liabilities in the financial statements. Cash flows from derivatives are recognized in the consolidated statement of cash flows in the same category as the item being hedged. At March 31, 2003, the fair value of the Company's interest rate agreements, which consisted entirely of interest rate swaps, is recorded as a liability valued at approximately $99.4 million and the fair value of the Company's foreign exchange contracts, which consisted entirely of forward agreements, is recorded as an asset valued at approximately $109.7 million. The Company had outstanding contracts covering the purchase of 623.3 million Euros ("EUR") at an average contract price of $.8693 per EUR, for delivery between April 2003 and May 2004, contracts for the purchase of 127 million Mexican Pesos at an average contract price of 10.8344 pesos per US dollar, and contracts for the purchase of $10.4 million US dollars at an average contract price of $.6401 per Canadian Dollar. ITEM 4: CONTROLS AND PROCEDURES The Company's management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures within 90 days prior to filing of this report as contemplated by Securities Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in alerting them in a timely manner that all material information required to be filed in this annual report has been made known to them. There have been no significant changes to internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation. PART II OTHER INFORMATION LEGAL PROCEEDINGS COMMERCIAL LITIGATION The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-Merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company, and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. W.R. Grace & Co. and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Grace Chapter 11 Proceedings") on April 2, 2001. Pre-Merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); W. R. Grace & Co. has received the Service's examination report on tax periods 1993 to 1996; that during those years Grace deducted approximately $122,100 in interest attributable to corporate owned life insurance ("COLI") policy loans; that W.R. Grace & Co. has paid $21,200 of tax and interest related to COLI deductions taken in tax years prior to 1993; that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation and that W.R. Grace & Co. is seeking a settlement of the Service's claims. Subject to certain representations made by W.R. Grace & Co., the Company and Fresenius AG, W.R. Grace & Co. and certain of its affiliates agreed to indemnify the Company against this and other pre-Merger and Merger related tax liabilities. Prior to and after the commencement of the Grace Chapter 11 Proceedings, class action complaints were filed against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.- Conn., and by the asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy estate in the Grace Chapter 11 Proceedings, alleging among other things that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act and constituted a conspiracy. All such cases have been stayed and transferred to or are pending before the U.S. District Court as part of the Grace Chapter 11 Proceedings. On February 6, 2003, the Company reached a definitive agreement with the asbestos creditors' committees on behalf of the W.R. Grace and Co. bankruptcy estate in the matters pending in the Grace Chapter 11 Proceedings for the settlement of all fraudulent conveyance claims against it and other claims related to the Company that arise out of the bankruptcy of W.R. Grace & Co. Subsequently, the settlement agreement was amended and W.R. Grace was added as a settling party. Under the terms of the settlement agreement as amended (the "Settlement Agreement"), fraudulent conveyance and other claims raised on behalf of asbestos claimants will be dismissed with prejudice and the Company will receive protection against existing and potential future W.R. Grace & Co. related claims, including fraudulent conveyance and asbestos claims, and indemnification against income tax claims related to the non-NMC members of the W.R. Grace & Co. consolidated tax group upon confirmation of a W.R. Grace & Co. bankruptcy reorganization plan that contains such provisions. Under the Settlement Agreement, the Company will pay a total of $115,000 to the W.R. Grace & Co. bankruptcy estate, or as otherwise directed by the Court, upon plan confirmation. No admission of liability has been or will be made. The Settlement Agreement is subject to the approval of the U.S. District Court. On April 15, 2003, W.R. Grace & Co. and the asbestos creditors' committees filed a motion before the U.S. District Court, seeking court approval of the Settlement Agreement and entry of a court order implementing the settlement. The foregoing summary of the material terms of the settlement is qualified in its entirety by reference to the full text of the Settlement Agreement. The Settlement Agreement has been filed with the Securities and Exchange Commission. Subsequent to the Merger, W.R. Grace & Co. was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Under the Settlement Agreement, upon confirmation of a plan that satisfies the conditions to the Company's payment obligation, this litigation will be dismissed with prejudice. In April 2003, the Company, NMC, and certain NMC subsidiaries agreed to settle all litigation filed by a group of insurance companies concerning allegations of inappropriate billing practices and misrepresentations and the Company's counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. The costs of the settlement will be 25 charged against previously established accruals. See "Accrued Special Charge for Legal Matters" below. Other private payors have contacted the Company regarding similar claims and may file their own lawsuit seeking reimbursement and other damages. Although the ultimate outcome on the Company of any such proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the Anti-Kickback Statute, the False Claims Act, the Stark Statute, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. Enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and expects continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates many facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the Anti-Kickback Statute, the Stark Statute and the False Claims Act, among other laws. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. ACCRUED SPECIAL CHARGE FOR LEGAL MATTERS At December 31, 2001, the Company recorded a pre-tax special charge of $258,000 to reflect anticipated expenses associated with the continued defense and resolution of pre-Merger tax claims, Merger-related claims, and commercial insurer claims. The costs associated with the Settlement Agreement and settlement with insurers are charged against this accrual. While the Company believes that its remaining accruals reasonably estimate the Company's currently anticipated costs related to the continued defense and resolution of the remaining matters, no assurances can be given that the actual costs incurred by the Company will not exceed the amount of these accruals. 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION ----------- ----------- Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. dated July 6, 2001 (authorizing action by majority written consent of the shareholders) (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 2001). Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1* Amended and Restated Credit Agreement dated as of February 21, 2003 among Fresenius Medical Care AG, Fresenius Medical Care Holdings, Inc., and the agents and lenders named therein. (filed herewith) Exhibit 4.2 Fresenius Medical Care AG 1996 Stock Incentive Plan (incorporated herein by reference to the Fresenius Medical Care AG's Registrant Statement on Form S-8 dated October 1, 1996). Exhibit 4.3 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended effective as of August 3, 1998 (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 4.4 Fresenius Medical Care AG 2001 International Stock Incentive Plan (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG filed August 2, 2001 (Registration No. 333-66558)). Exhibit 4.5 Senior Subordinated Indenture dated as of February 19, 1998, among Fresenius Medical Care AG, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.6 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 3/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998).
27 Exhibit 4.7 Senior Subordinated Indenture dated as of June 6, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 4.8 Senior Subordinated Indenture dated as of June 15, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 10.1* Product Purchase Agreement effective January 1, 2002 between Amgen USA, Inc. and National Medical Care, Inc. (incorporated by reference to the Form 10-Q of the Registrant filed with the Commission on May 15, 2002). Exhibit 10.2 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.3 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.4 Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 2002). Exhibit 10.5 Amendment No.1 dated as of October 22, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 2002). Exhibit 10.6 Amendment No.2 dated as of November 8, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, Asset One Securitization, LLC, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent, (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 17, 2003). Exhibit 10.7 Amendment No.3 dated as of December 18, 2002 to the Second Amended and Restated Transfer and Administrative agreement dated as of September 24, 2002 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, Compass US Acquisition, LLC, Giro Multifunding Corporation, Asset One Securitization, LLC, the Bank Investors listed therein, WestLB AG, New York Branch (formerly known as Westdeutsche Landesbank Girozentrale, New York Branch), as an administrative agent and Bank of America, N.A., as an administrative agent, (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 17, 2003). Exhibit 10.8 Employment Agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992).
28 Exhibit 10.9 Modification to FUSA Employment Agreement effective as of January 1, 1998 by and between Ben J. Lipps and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.10 Employment Agreement dated March 15, 2000 by and between Jerry A. Schneider and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between Ronald J. Kuerbitz and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between J. Michael Lazarus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.13 Employment Agreement dated January 1, 2002 by and between Robert "Rice" M. Powell, Jr. and National Medical Care, Inc. (filed herewith). Exhibit 10.14 Employment Agreement dated July 1, 2002 by and between John F. Markus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on August 14, 2002). Exhibit 10.15 Employment Agreement dated October 15, 2002 by and between Mats Wahlstrom and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 17, 2003). Exhibit 10.16 Subordinated Promissory Note dated as of May 18, 1999, among National Medical Care, Inc. and certain Subsidiaries with Fresenius AG as lender (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 22, 1999). Exhibit 10.17 Corporate Integrity Agreement between the Offices of Inspector General of the Department of Health and Human Services and Fresenius Medical Care Holdings, Inc. dated as of January 18, 2000 (incorporated herein by reference to the Form 8-K of the Registrant filed with the Commission on January 21, 2000). Exhibit 10.18 First Amended Settlement Agreement dated April 14, 2003 by and among the Company, National Medical Care, Inc., the Official Committee of Asbestos Personal Injury Claimants, and the Official Committee of Asbestos Property Damage Claimants of W.R. Grace & Co., W.R. Grace & Co. and W.R. Grace & Co. - Conn (incorporated herein by reference to the Form 8-K of Registrant filed with Commission on April 21, 2003). Exhibit 11 Statement re: Computation of Per Share Earnings. Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K On February 12, 2003, the Company filed a current report on Form 8-K announcing the execution of a settlement agreement with the asbestos creditors' committees on behalf of the W.R. Grace Co. bankruptcy estate. On April 21, 2003, the Company filed a current report on Form 8-K with respect to (i) the amendment of Registrant's settlement agreement with the asbestos creditors' committees on behalf of the W.R. Grace & Co. bankruptcy estate and (ii) the announcement of the settlement of certain commercial health insurer litigation. * Confidential treatment has been requested as to certain portions of this Exhibit 29 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fresenius Medical Care Holdings, Inc. DATE: May 15, 2003 /s/ Ben J. Lipps ---------------------------------------- NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: May 15, 2003 /s/ Jerry A. Schneider ---------------------------------------- NAME: Jerry Schneider TITLE: Chief Financial Officer 30 CERTIFICATIONS CHIEF EXECUTIVE OFFICER I, Ben J. Lipps, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Fresenius Medical Care Holdings, Inc. 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report. 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Ben J. Lipps ---------------------------------------- Ben J. Lipps President and Chief Executive Officer 31 CHIEF FINANCIAL OFFICER I, Jerry A. Schneider, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Fresenius Medical Care Holdings, Inc. 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report. 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Jerry A. Schneider ---------------------------------------- Jerry A. Schneider Chief Financial Officer 32