<PAGE> 1
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: JUNE 30, 1997
-------------
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.)
TWO LEDGEMONT CENTER, 95 HAYDEN AVENUE,
LEXINGTON, MA 02173
--------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: 617-402-9000
------------
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC.
----------------------------------------------
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
--- ---
<PAGE> 2
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: 90,000,000 shares, all of
which are held by Fresenius Medical Care AG.
2
<PAGE> 3
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Statements of Earnings
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings
ITEM 4: Submission of Matters to a Vote of Security Holders
ITEM 6: Exhibits and Reports on Form 8-K
3
<PAGE> 4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
NET REVENUES
Health care services.................................... $527,322 $511,236
Medical supplies ....................................... 118,202 40,883
-------- --------
645,524 552,119
-------- --------
EXPENSES
Cost of health care services............................. 320,250 295,456
Cost of medical supplies ................................ 76,137 27,397
General and administrative expenses ..................... 98,795 103,691
Provision for doubtful accounts.......................... 19,934 21,442
Depreciation and amortization............................ 57,478 31,533
Research and development................................. 737 622
Allocation of Grace Chemicals expenses................... -- 1,769
Interest expense, net, and related financing costs....... 45,977 7,459
-------- --------
619,308 489,369
-------- --------
EARNINGS BEFORE INCOME TAXES ................................. 26,216 62,750
PROVISION FOR INCOME TAXES ................................... 15,682 28,832
-------- --------
NET EARNINGS ................................................. $ 10,534 $ 33,918
======== ========
Earnings per share ........................................... $ 0.12 $ 0.35
</TABLE>
See accompanying Notes to Unaudited, Consolidated Financial Statements
4
<PAGE> 5
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
NET REVENUES
Health care services ............................. $1,039,563 $ 999,607
Medical supplies ................................. 230,355 80,803
---------- ----------
1,269,918 1,080,410
---------- ----------
EXPENSES
Cost of health care services .................... 624,962 582,987
Cost of medical supplies ......................... 165,078 55,299
General and administrative expenses .............. 188,286 205,138
Provision for doubtful accounts .................. 42,432 42,928
Depreciation and amortization .................... 116,669 62,161
Research and development ......................... 1,870 1,308
Allocation of Grace Chemicals expenses ........... -- 3,786
Interest expense, net, and related financing costs 87,191 14,463
---------- ----------
1,226,488 968,070
---------- ----------
EARNINGS BEFORE INCOME TAXES .......................... 43,430 112,340
PROVISION FOR INCOME TAXES ............................ 26,259 51,977
---------- ----------
NET EARNINGS .......................................... $ 17,171 $ 60,363
---------- ----------
Earnings per share .................................... $ 0.19 $ 0.62
</TABLE>
See accompanying Notes to Unaudited, Consolidated Financial Statements
5
<PAGE> 6
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
---------- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................. $ 41,937 $ 50,422
Accounts receivable, less allowances of $149,876 and
$153,939 ............................................ 549,873 516,083
Inventories ........................................... 144,991 153,480
Deferred income taxes ................................. 123,806 146,751
Other current assets .................................. 100,928 86,907
----------- -----------
Total Current Assets ............................. 961,535 953,643
----------- -----------
Properties and equipment, net .............................. 597,614 525,988
----------- -----------
Other Assets:
Excess of cost over the fair value of net assets
acquired and other intangible assets, net of
accumulated amortization of $100,468 and $37,933 ..... 3,206,561 3,057,957
Other assets and deferred charges ..................... 56,932 58,491
----------- -----------
Total Other Assets ................................... 3,263,493 3,116,448
----------- -----------
Total Assets ............................................... $ 4,822,642 $ 4,596,079
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and capitalized lease
obligations ......................................... $ 22,819 $ 56,270
Short-term borrowings from affiliates ................ -- 12,193
Accounts payable ...................................... 109,011 131,314
Accrued liabilities ................................... 391,430 421,240
Net payable to affiliates ............................. 28,480 32,590
Accrued income taxes .................................. 16,165 18,530
----------- -----------
Total Current Liabilities ........................ 567,905 672,137
Long-term debt ............................................. 1,676,484 1,420,959
Non-current borrowings from affiliates ..................... 574,495 504,693
Capitalized lease obligations .............................. 11,737 17,246
Deferred income taxes ...................................... 152,703 179,290
Other liabilities .......................................... 31,207 34,015
----------- -----------
Total Liabilities ................................ 3,014,531 2,828,340
----------- -----------
Equity:
Equity ................................................ 1,819,904 1,768,574
Cumulative translation adjustment ..................... (11,793) (835)
----------- -----------
Total Equity ........................................ 1,808,111 1,767,739
----------- -----------
Total Liabilities and Equity ............................... $ 4,822,642 $ 4,596,079
=========== ===========
</TABLE>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
6
<PAGE> 7
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Cash Flows Provided by Operating Activities:
Net earnings ....................................................... $ 17,171 $ 60,363
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization ................................. 116,669 62,161
Provision for doubtful accounts ............................... 42,432 42,928
Provision for (benefit of) deferred income taxes .............. (3,642) (4,283)
Loss on disposal of properties and equipment .................. 4,579 3,194
Changes in operating assets and liabilities, net of effects of purchase
acquisitions and foreign exchange:
Increase in accounts receivable ............................... (56,666) (71,578)
Decrease (increase) in inventories ............................ 10,392 (778)
Increase in other current assets .............................. (7,610) (13,440)
Decrease (increase) in other assets and deferred charges ...... 1,327 (106)
Decrease in accounts payable .................................. (27,105) (5,403)
(Decrease) increase in accrued income taxes ................... (2,365) 9,971
Decrease in accrued liabilities ............................... (37,058) (10,809)
Decrease in other long-term liabilities ....................... (9,905) (8,155)
Net changes due to/from affiliates ............................ (4,110) --
Other, net .................................................... (1,919) (225)
--------- ---------
Net cash provided by operating activities .......................... 42,190 63,840
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures .......................................... (80,069) (58,545)
Payments for acquisitions, net of cash acquired ............... (277,639) (26,190)
--------- ---------
Net cash used in investing activities .............................. (357,708) (84,735)
--------- ---------
Cash Flows from Financing Activities:
Increase in borrowings from affiliates ........................ 57,609 --
Cash dividends paid ........................................... (260) --
Proceeds on issuance of debt .................................. 613,646 124,176
Payments on debt and capitalized leases ....................... (399,315) (161,540)
Contributed capital from Fresenius Medical Care, AG ........... 34,419 --
Advances from Grace Chemicals, net ............................ -- 61,260
--------- ---------
Net cash provided by financing activities .......................... 306,099 23,896
--------- ---------
Effects of changes in foreign exchange rates ............................ 934 3,508
--------- ---------
(Decrease) increase in cash and cash equivalents ........................ (8,485) 6,509
Cash and cash equivalents at beginning of period ........................ 50,422 33,530
--------- ---------
Cash and cash equivalents at end of period .............................. $ 41,937 $ 40,039
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................... $ 60,618 $ 13,429
Income taxes .................................................. 34,919 18,340
</TABLE>
See accompanying Notes to Unaudited, Consolidated Financial Statements
7
<PAGE> 8
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY, REORGANIZATION AND BASIS OF PRESENTATION
THE COMPANY
Fresenius Medical Care Holdings, Inc., ("FMCH" or the "Company"), formerly
known as W. R. Grace & Co. ("Grace New York"), together with its wholly owned
subsidiaries, National Medical Care, Inc. and its subsidiaries ("NMC") and
Fresenius USA, Inc. and its subsidiaries ("FUSA"), was formed as a result of a
series of transactions pursuant to the Agreement and Plan of Reorganization
dated as of February 4, 1996 by and between Grace New York and Fresenius AG (the
"Reorganization") which is more fully described hereunder.
The Company is primarily engaged in (i) providing kidney dialysis services,
(ii) manufacturing and distributing products and equipment for dialysis
treatment and providing clinical laboratory testing and other medical services,
and (iii) providing home infusion therapy and home respiratory services.
THE REORGANIZATION
The Reorganization, which was effective September 30, 1996, resulted from
the culmination of the following transactions: (1) NMC, which was a subsidiary
of W. R. Grace & Co. -- Conn. ("Grace Chemicals"), a wholly-owned subsidiary of
Grace New York, borrowed $2.3 billion and paid a cash dividend of approximately
$2.1 billion to Grace Chemicals; (2) the stock of NMC was transferred to Grace
New York, so that NMC and Grace Chemicals became sibling subsidiaries of Grace
New York; (3) the stock of Grace Chemicals was transferred to a newly formed
Delaware subsidiary of Grace New York ("New Grace") and the shares of New Grace
were spun-off to the Grace New York shareholders in a pro rata distribution; (4)
Grace New York was recapitalized such that each Grace New York shareholder
received one share of Class D Preferred Stock of Grace New York (the "Class D
Preferred Stock") for each share of Grace New York common stock held; and (5)
Grace New York, with NMC as its sole business, merged with a wholly-owned
subsidiary of Fresenius Medical Care AG ("FMC"), and Fresenius AG's worldwide
dialysis business ("FWD") was contributed as separate subsidiaries of FMC with
the result that 44.8% of the ordinary shares of FMC were exchanged for the
common stock held by Grace New York common shareholders in the merger
transaction and the balance of the ordinary shares of FMC were received by
Fresenius AG and the shareholders of FUSA, in consideration of the contribution
of FWD to FMC. All of the Grace New York [now Fresenius Medical Care Holdings,
Inc. ("FMCH")] common stock is held by FMC, while the Class D Preferred Stock
(which entitles its shareholders to a contingent dividend based on the
consolidated performance of FMC in the years 1997-2001) and other previously
issued classes of FMCH preferred stock remain outstanding.
Effective October 1, 1996, FMC contributed all of the assets and
liabilities of FUSA to FMCH. The contribution of FUSA to FMCH by FMC was
accounted for on the cost basis since FUSA was a subsidiary under control of a
common parent. These consolidated financial statements include the results of
FUSA's operations and cash flows for the period January 1, 1997 through June 30,
1997.
8
<PAGE> 9
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION - PREDECESSOR BASIS
The consolidated financial statements have been prepared as if the Company
had operated as an independent, stand alone entity for all periods presented.
Such financial statements have been prepared using the historical basis of
accounting prior to the Reorganization ("Predecessor") and include all of the
assets, liabilities, revenues, expenses and related taxes on income of the Grace
New York health care business operated by NMC (the "NMC Business") previously
included in the consolidated financial statements of Grace New York and its
subsidiaries prior to the Reorganization (the "Grace Consolidated Group").
Consequently, these consolidated financial statements include balances for
goodwill and other assets and liabilities related to the NMC Business that were
previously included in the financial statements of the Grace Consolidated Group,
except that there is no allocation to the NMC Business of Grace Chemicals'
borrowings and related interest expense. These consolidated financial statements
reflect only the borrowings and interest expense of NMC prior to the
Reorganization and interest expense of the Company after the Reorganization. In
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
55 ("SAB 55"), the financial statements have also been adjusted to include
certain expenses incurred by Grace Chemicals on the NMC Business's behalf prior
to the Reorganization.
These consolidated financial statements do not necessarily indicate the
financial position and results of operations that would have occurred if the NMC
Business were a stand-alone entity on the dates, and for the periods, indicated.
ACCOUNTING FOR THE REORGANIZATION - SUCCESSOR BASIS
The issuance of FMC ordinary shares for all of the common stock of NMC has
been recorded as an acquisition in accordance with the purchase method of
accounting. Accordingly, purchase accounting adjustments recorded by FMC have
been "pushed down" to NMC, thus establishing a new basis of accounting at NMC
("Successor"). The purchase price of the acquisition was determined as the
average of the mid-points of the ranges of valuation of NMC and FMC,
respectively, as assigned by independent financial advisors to Fresenius AG and
was approximately $1,152,000. The valuation has been increased for direct costs
incurred to consummate the transaction. The excess of the purchase price over
the cost of the net identifiable assets acquired at September 30, 1996 of
$1,696,698 has been allocated to the fair value of the assets acquired and
liabilities assumed with the remaining portion recorded as goodwill.
The Agreement and Plan for Reorganization also provides for the payment of
additional purchase price to the holders of the FMCH Class D Preferred Stock in
the form of a dividend, contingent upon the attainment of certain specific
consolidated operating results by FMC. Such future dividends, if any, will be
recorded as an increase in goodwill.
In order to properly allocate purchase price to assets acquired, the
Company obtained an independent appraisal to fair value all assets of NMC.
Accordingly, the carrying values of specifically identified intangible assets
and certain tangible assets were adjusted upward by $186,030 and $57,768,
respectively, to approximate their fair values.
The Company has also recorded adjustments to increase liabilities assumed
by approximately $123,000 for pre-acquisition contingencies primarily related to
legal settlements and the anticipated costs incurred in the defense of
litigation. These adjustments resulted from discussions with the government in
March 1997. The Company has provided an estimate of legal costs at the low end
of an expected range, but the ultimate costs could be significantly higher. The
Company is in discussions with the government regarding these matters. Any
difference between the final settlement and the Company's estimate would be
adjusted to goodwill, if determined within the allocation period, or charged to
income if determined thereafter. In addition, the Company has accrued
approximately $50,000 for certain costs related to the closing of certain renal
products manufacturing and distribution operations as well as the closing of
certain clinics of the Homecare Division. These restructuring costs primarily
relate to severance payments and lease commitments. Through the period ended
June 30, 1997 approximately $2,900 in payments have been applied against the
pre-acquisition contingencies and $33,500 against the restructuring costs.
OTHER
The accompanying unaudited consolidated financial statements and related
notes should be read in conjunction with the audited consolidated financials
which are contained in the Company's annual report on Form 10-K. In the opinion
of the Company, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been included in the interim financial
statements. The results for the six month period ended June 30, 1997 may not
necessarily be indicative of the results for the fiscal year ended December 31,
1997.
All intercompany transactions and balances have been eliminated in
consolidation.
9
<PAGE> 10
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Inventories:
Raw materials .................. $ 32,489 $ 41,659
Manufactured goods in process... 6,866 11,837
Manufactured and purchased ..... 74,060 64,156
-------- --------
inventory available for sale......
113,415 117,652
Health care supplies .......... 31,576 35,828
-------- --------
Total ..................... $144,991 $153,480
======== ========
</TABLE>
NOTE 3. DEBT
Long-term debt to outside parties consists of:
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Credit Agreement ................. $1,675,000 1,411,000
Third-party debt, primarily bank
borrowings at variable interest
rates (3% - 14%) with various
maturities 14,386 57,101
---------- ---------
1,689,386 1,468,101
Less amounts classified as current 12,902 47,142
---------- ---------
$1,676,484 1,420,959
========== =========
</TABLE>
INTEREST RATE SWAP AGREEMENTS
NMC has entered into interest rate swap agreements with various commercial
banks for notational amounts totaling $1,500,000. These agreements effectively
change NMC interest rate exposure on the majority of its revolving loans to
fixed rates of interest between 5.76% and 6.60%. The first set of swap
agreements became effective on April 3, 1997. The second set of swap agreements
were entered into on June 17, 1997 and become effective on December 19, 1997
and April 3, 1998, respectively. These swap agreements expire at various dates
between December 15, 1997 and December 19, 2003. NMC had agreed under its
Credit Agreement to have at least $500,000 of interest rate protection.
NOTE 4. EQUITY
At June 30, 1997, and December 31, 1996, respectively, the components of FMCH's
Equity, excluding Cumulative Translation Adjustment, as presented in the
Consolidated Balance Sheet are as follows:
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Preferred Stocks, $100 par value
- 6% Cumulative (1); 40,000
shares authorized; 36,460 outstanding ............... $ 3,646 3,646
- 8% Cumulative Class A (2); 50,000 shares authorized;
16,176 outstanding ................................ 1,618 1,618
- 8% Non-cumulative Class B (2); 40,000 shares
authorized; 21,483 outstanding .................. 2,148 2,148
----------- ----------
7,412 7,412
Preferred Stocks, $.10 par value - Non-cumulative Class D (3),
100,000,000 shares authorized; 89,061,590 outstanding ....... 8,906 8,906
----------- ----------
Total Preferred ........................................ 16,318 16,318
Common Stock, $1 par value:300,000,000 shares authorized,
90,000,000 outstanding ..................................... 90,000 90,000
Paid in Capital .............................................. 1,757,764 1,723,345
Retained Earnings (Deficit) .................................. (44,178) (61,089)
----------- ----------
Total Equity ....................................... $ 1,819,904 1,768,574
=========== ==========
</TABLE>
(1) 160 votes per share
(2) 16 votes per share
(3) 1/10 vote per share
10
<PAGE> 11
NOTE 5. COMMITMENTS AND CONTINGENCIES
CONTINGENT NON-NMC LIABILITIES OF GRACE NEW YORK (NOW KNOWN AS FRESENIUS MEDICAL
CARE HOLDINGS, INC.)
In connection with the Reorganization, Grace Chemicals has agreed to
indemnify Grace New York and NMC against all liabilities of Grace New York,
whether relating to events occurring before or after the Reorganization, other
than liabilities arising from or relating to NMC operations. After the
Reorganization, Grace New York will remain contingently liable for certain
liabilities with respect to pre-Reorganization matters that are not related to
NMC operations. Grace New York believes that in view of the nature of the
non-NMC liabilities and the expected impact of the Reorganization on Grace
Chemicals' financial position, the risk of significant loss from non-NMC
liabilities is remote.
Were events to violate the tax free nature of the Reorganization, the
resulting tax liability would be the obligation of FMCH. Subject to
representations by Grace Chemicals, FMCH and Fresenius AG, Grace Chemicals has
agreed to indemnify FMCH for such a tax liability. Were FMCH not able to collect
on the indemnity, the tax liability would have a material adverse effect on the
financial position of FMCH and the results of its operations.
OIG INVESTIGATIVE SUBPOENAS
In October 1995, NMC received five investigative subpoenas from the Office
of Inspector General of the U.S. Department of Health and Human Services (the
"OIG"). The subpoenas were issued in connection with an investigation being
conducted by the OIG, the U.S. Attorney for the District of Massachusetts and
others concerning possible violations of federal laws, including the
Anti-kickback Statute and the False Claims Act. The subpoenas call for extensive
document production relating to various aspects of NMC's business. A sixth
subpoena, clarifying the scope of one originally served, was received in May
1996.
The five subpoenas cover the following areas: (a) NMC's corporate
management, personnel and employees, organizational structure, financial
information and internal communications; (b) NMC's dialysis services business,
principally medical director contracts and compensation; (c) NMC's treatment of
credit balances resulting from overpayments received under the Medicare end
stage renal disease (ESRD) program, NMC's billing for home dialysis services and
payment of supplemental medical insurance premiums on behalf of indigent
patients; (d) NMC's LifeChem laboratory business ("LifeChem"), including
documents relating to testing procedures, marketing, customers, competition and
certain overpayments totaling approximately $4.9 million that were received by
LifeChem from the Medicare program with respect to laboratory services rendered
between 1989 and 1993; and (e) NMC's Homecare Division and, in particular,
information concerning the intradialytic parenteral nutrition ("IDPN") business
described below, including billing practices related to various services,
equipment and supplies and payments made by third parties as compensation for
administering IDPN therapy.
On July 15, 1997, NMC received an investigatory subpoena duces tecum
requesting production of a number of patient records, in connection with the
government's review of billing practices related to various services, equipment
and supplies and payments made by third parties as compensation for
administering IDPN therapy, described above.
Each of the patients whose records were subpoenaed is, or was, a Medicare
beneficiary. The subpoena calls for production of the records by August 15,
1997. The Company has discussed an extended schedule for production with the
government. The result of the government's review of these records, its
duration, and its effect, if any, on NMC cannot be predicted at this time.
In the event that a U.S. government agency believes that any wrongdoing
has occurred, civil and/or criminal proceedings could be instituted, and if any
such proceedings were to be instituted and the outcome were unfavorable, NMC
could be subject to substantial fines, penalties and damages or could become
excluded from government reimbursement programs. Any such result could have a
material adverse effect on NMC's financial position or the results of
operations of the Company.
FMC and NMC have provided the United States government with a joint and
several guarantee of payment of the obligations, if any, arising out of the
investigation by the OIG. In support of this guarantee, NMC has delivered to the
government an irrevocable standby letter of credit in the amount of $150
million.
11
<PAGE> 12
DIAGNOSTICS SUBPOENA
On October 31, 1996, Biotrax International Inc. ("Biotrax") and NMC
Diagnostic Services, Inc. ("DSI"), both of which are subsidiaries of FMCH,
received an investigatory subpoena from the OIG. The subpoena calls for the
production of extensive documents and was issued in connection with an
investigation being conducted by the OIG in conjunction with the U.S. Attorney
for the Eastern District of Pennsylvania concerning the possible submission of
false or improper claims to, and their payment by, the Medicare program. The
subpoena calls for the production of documents by December 30, 1996 on corporate
organization, business plans, document retention, personnel files, sales and
marketing and Medicare billing issues relating to certain procedures offered by
the prior owner of the Biotrax business before its assets were acquired by NMC
in March 1994 and by DSI following the acquisition. The Company has reviewed the
subpoena with its legal counsel and has begun to make extensive document
production in response to the subpoena. The outcome of this investigation, its
duration, and its effect, if any, on NMC cannot be predicted at this time. If,
however, the results of this investigation are adverse to the Company, the
Company could face the same types of potential consequences of the OIG
investigation.
QUI TAM ACTIONS
SOUTH FLORIDA
The Company and NMC have become aware that a qui tam action has been filed
in the United States District Court for the Southern District of Florida,
Southern Division (the "South Florida Action"). The original complaint in the
South Florida Action was filed under seal in 1996. The Relator filed an Amended
Complaint under seal on July 8, 1996. The seal with respect to the Amended
Complaint was partially lifted pursuant to court order to permit the government
to provide FMCH and NMC with a copy of the Amended Complaint. The Company and
NMC received copies of the Amended Complaint on July 10, 1996. Pursuant to a
court order dated July 26, 1996, the seal was further modified to permit the
Company to provide copies of the Amended Complaint to Fresenius AG, lenders
involved in the NMC credit facility and their respective counsel and to permit
the Company and NMC to describe the allegations of the Amended Complaint in
their securities filings with respect to the Reorganization.
The Amended Complaint alleges, among other things, that the Company, Grace
Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO. The Amended
Complaint alleges that as a result of this allegedly wrongful conduct, the
United States suffered actual damages in excess of $200 million and alleges that
the defendants are liable to the United States for three times the amount of the
alleged damages plus fines of up to $10,000 per false claim. The Amended
Complaint also seeks the imposition of a constructive trust on the proceeds of
the NMC dividend to Grace Chemicals for the benefit of the United States on the
ground that the Reorganization constitutes a fraudulent conveyance that will
render NMC unable to satisfy the claims asserted in the Amended Complaint.
TAMPA
The Company and NMC have become aware that a qui tam action has been filed
in the United States District Court for the Middle District of Florida, Tampa
Division (the "Tampa Action"). The original complaint in the Tampa Action was
filed under seal in 1995. The seal with respect to the complaint was partially
lifted pursuant to court order to permit the government to provide the Company
and NMC with a copy of the complaint. Pursuant to a court order dated November
7, 1996, the seal was further modified to permit the Company and NMC to disclose
the complaint to the underwriters involved in two public securities offerings by
FMC (the "Offerings") and their counsel, to Fresenius AG, and to lending
institutions to whom NMC has contractual obligations, their successors and
assigns and their respective counsel and to disclose allegations in the
complaint in FMC's filings under the Securities Act of 1933, as amended, with
respect to the Offerings and in FMC's and FMCH's periodic filings under the
Securities Exchange Act of 1934, as amended.
The complaint in the Tampa Action alleges, among other things, that the
Company, NMC and certain NMC subsidiaries violated the False Claims Act in
connection with the retention of overpayments made under the Medicare program,
the alleged submission of claims in violation of applicable cost caps and the
payment of supplemental Medicare insurance premiums as an inducement to patients
to obtain dialysis products and services from NMC. The complaint alleges that as
a result of this allegedly wrongful conduct, the United States suffered damages
in excess of $10 million including applicable fines, and alleges that the
defendants are liable to the United States for three times the amount of the
alleged damages plus fines of up to $10,000 per false claim.
12
<PAGE> 13
PENNSYLVANIA
The Company, FMCH and NMC have become aware that a qui tam action has been
filed in the United States District Court for the Eastern District of
Pennsylvania (the "Pennsylvania Action"). The original complaint in the
Pennsylvania Action was filed under seal in February of 1996. The seal with
respect to the complaint was partially lifted pursuant to court order to permit
the government to provide NMC with a copy of the complaint. Pursuant to a court
order dated November 15, 1996, the seal was further modified to permit the
Company and NMC to disclose the complaint to the underwriters involved in the
Offerings and their counsel, to Fresenius AG, and to lending institutions to
whom NMC has contractual obligations, their successors and assigns and their
respective counsel and to disclose allegations in the complaint in the Company's
filings under the Securities Act with respect to the Offerings and in the
Company's and FMCH's periodic filings under the Exchange Act.
The complaint in the Pennsylvania Action alleges, among other things, that
a pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC
violated the False Claims Act in connection with the submission of claims to the
Medicare program for a non-sterile intravenous drug and for intravenous drugs
which were allegedly billed in excess of permissible Medicare reimbursement
rates. The complaint also claims that the defendants violated the Medicare and
Medicaid anti-kickback statutes in connection with the receipt of discounts an
other in kind payments as alleged inducements to purchase intravenous drugs. The
complaint is focused on the business relationship between the pharmaceutical
manufacturer and several providers, one of which is NMC. The complaint claims
that as a result of the allegedly wrongful conduct, the United States suffered
damages and that the defendants are liable to the United States for three times
the amount of the alleged damages plus civil penalties of up to $10,000 per
false claim. An adverse result in the Pennsylvania Action or an adverse result
in any other qui tam action could have a material adverse affect on the
Company's business, financial condition or results of operations.
OMNIBUS BUDGET RECONCILIATION ACT OF 1993
The Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") affected the
payment of benefits under Medicare and employer health plans for certain
eligible ESRD patients. In July 1994, the Health Care Financing Administration
("HCFA") issued an instruction to Medicare claims processors to the effect that
Medicare benefits for the patients affected by OBRA 93 would be subject to a new
18- month "coordination of benefits" period. This instruction had a positive
impact on NMC's dialysis revenues because, during the 18-month coordination of
benefits period, the patient's employer health plan was responsible for payment,
which was generally at a rate higher than that provided under Medicare.
In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. Under the new instruction,
no 18-month coordination of benefits period would arise and Medicare would
remain the primary payor for the patients affected by OBRA93. HCFA further
proposed that its new instruction be effective retroactive to August 1993, the
effective date of OBRA 93. Consequently, FMCH may be required to refund payments
received from employer health plans for services provided after August 1993
under HCFA's original instruction and to re-bill Medicare for the same services,
which would result in a cumulative reduction of net revenues to NMC totaling
approximately $120,000 as of June 30, 1997. NMC believes that the April 1995
instruction letter issued by HCFA does not constitute a proper notice of final
rulemaking and, accordingly, NMC continued to recognize revenues through the end
of June 1995. If HCFA's instruction letter is adjudged by the courts to be the
equivalent of a notice of proposed rulemaking, then NMC believes that a 60-day
comment period would be required before the rule could become effective.
Therefore, NMC believes that it would be allowed to recognize the higher
reimbursement rate on dual eligible ESRD patients for 60 days subsequent to the
HCFA instruction letter, or approximately through July 1, 1995. Effective July
1, 1995, NMC ceased to recognize the incremental revenue realized under the
original instruction, which has resulted in a material reduction in NMC's
operating earnings in comparison to prior periods in which NMC recognized such
incremental revenue. However, NMC continued to bill the employer health plans as
primary payors through December 31, 1995, at which time NMC commenced billing
Medicare for the patients affected by OBRA 93.
In May 1995, NMC filed suit in the U.S. District Court for the District of
Columbia seeking a declaratory judgment with respect to HCFA's instructions
relating to OBRA 93. In June 1995, the court granted NMC's motion for a
preliminary injunction to preclude HCFA from retroactively enforcing its new
instruction. The litigation is continuing with respect to NMC's request to
permanently enjoin HCFA's new instruction, both retroactively and prospectively.
While there can be no assurance that a permanent injunction will be issued, NMC
believes that it will ultimately prevail in its claim that the retroactive
reversal by HCFA of its original instruction relating to OBRA 93 was
impermissible under applicable law. If HCFA's revised instruction is upheld and
applied retroactively, NMC's business, financial position and results of
operations would be materially adversely affected.
13
<PAGE> 14
INTRADIALYTIC PARENTERAL NUTRITION
NMC administers IDPN therapy to chronic dialysis patients who suffer from
severe gastrointestinal malfunctions. Since late 1993, Medicare claims
processors have sharply reduced the number of IDPN claims approved for payment
as compared to prior periods. NMC believes that the reduction in IDPN claims
currently being paid by Medicare represents an unauthorized policy coverage
change. Accordingly, NMC and other IDPN providers are pursuing various
administrative and legal remedies, including administrative appeals, to address
this reduction. In November 1995, NMC filed a complaint in the U.S. District
Court for the Middle District of Pennsylvania seeking a declaratory judgment and
injunctive relief to prevent the implementation of this policy coverage change.
NMC management believes that its IDPN claims were consistent with published
Medicare coverage guidelines and ultimately will be approved for payment. Such
claims represent substantial accounts receivable of NMC, amounting to
approximately $153 million (net of a reserve of $52,000) and $140,000 (net of a
reserve of $41,000) as of June 30, 1997 and December 31, 1996, respectively,
and currently increasing at the rate of approximately $2,000 per month. When
the coverage guidelines were revised effective July 1996, as described below,
some of NMC's claims continued to meet the more stringent coverage criteria
established in the new guidelines and will probably be approved for payment by
Medicare. NMC has reviewed the claims it has submitted for patients who started
on IDPN therapy before July 1996 and continued on therapy after July 1996, but
do not meet the new, more stringent coverage criteria, and believes that these
claims were consistent with published Medicare coverage guidelines. NMC
recognizes, however, that the regulations and coverage guidelines are ambiguous
as to whether these patients therapy continues to be covered by Medicare after
the effective date of the new coverage criteria. NMC has continued to provide
therapy to these patients and to pursue its appeals of these claims through the
administrative process. If the government determines that continued coverage
for these patients is inappropriate, such claims ultimately will not be paid.
Amounts in receivable for these patients are approximately $12,000. If NMC is
unable to collect its IDPN receivable, or if IDPN coverage is reduced or
eliminated, depending on the amount of the receivable that is not collected
and/or the nature of the coverage change, NMC's business, financial position
and results of operations could be materially adversely affected.
In May 1995 the Medicare claims processors circulated a draft coverage
policy which, if implemented in the form proposed, would have limited or
precluded continued coverage of parenteral and enteral nutrition ("PEN")
therapies, including IDPN therapy. In April 1996, NMC received a copy of a
revised final version of the new coverage policy, which became effective for
services billed on and after July 1, 1996. While the new policy permits
continued coverage of IDPN and other PEN therapies, and while the potential
impact of the new policy is subject to further analysis, NMC believes that the
new policy has made it substantially more difficult to qualify patients for
future coverage by, among other things, requiring certain patients to undergo
onerous and/or invasive tests in order to qualify for coverage. NMC, together
with other interested parties, is seeking to effect certain changes in the new
policy and NMC has made changes to its patient qualification procedures in order
to comply with the policy. However, if NMC is unable to achieve changes in the
new policy, if physicians and patients fail to accept the new qualification
procedures and/or if patients fail to qualify under such procedures, the policy
could significantly reduce the number of patients eligible for Medicare coverage
of IDPN and other PEN therapies, which would have a material adverse effect on
NMC's financial position and its results of operations.
OTHER LEGAL PROCEEDINGS
NMC has received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, NMC's efforts to
persuade the U.S. Food and Drug Administration to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland facility, whether NMC sold
defective products, the manner in which NMC handled customer complaints and the
development of a new dialyzer product line. Grace has also received two
subpoenas relating to this investigation. In February 1996, the U.S. Attorney
for the District of New Jersey notified NMC that it is a target of the New
Jersey grand jury investigation, insofar as it relates to possible violations of
federal criminal law in connection with efforts to affect the January 1991
import hold referred to above; the material element of the import hold was
lifted in 1992. In June 1996, NMC received a letter from the U.S. Attorney for
the District of New Jersey indicating that the U.S. Attorney had declined to
prosecute NMC with respect to a submission related to NMC's effort to lift the
import ban. The letter added that NMC remains a subject of a federal grand
jury's investigation into other matters. NMC also received a subpoena in June
1996 requesting certain documents in connection NMC's imports of the FoCus
[Registered Trademark] dialyzer from January 1991 to November 1995. The outcome
of these investigations and their impact, if any, on NMC's business, financial
condition and results of operations cannot be predicted at this time. However,
the Company believes that neither the Company nor any of its employees committed
any violations of law. Accordingly, the Company does not believe that the
results of these investigations will have a material adverse effect on the
Company's financial position and results of operations.
14
<PAGE> 15
NOTE 6. SUBSEQUENT EVENTS
FINANCING AGREEMENT
In July 1997, FMCH signed a letter of intent with NationsBank to establish a new
$200,000 receivables financing facility to replace the existing financing
facility with Citicorp. Proceeds from the NationsBank agreement will be used to
repay the Citicorp facility.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of the following discussion, Fresenius Medical Care Holdings,
Inc., ("FMCH" or the "Company") formerly known as W. R. Grace & Co. ("Grace New
York"), together with the wholly owned subsidiaries, National Medical Care, Inc.
and its subsidiaries ("NMC") and Fresenius USA, Inc. and its subsidiaries
("FUSA") was formed as a result of a series of transactions pursuant to the
Agreement and Plan of Reorganization dated as of February 4, 1996 by and between
Grace New York and Fresenius AG ("the Reorganization"). The following is a
discussion of the financial condition and results of operations of FMCH. The
discussion should be read in conjunction with the financial statements included
elsewhere in this document.
This section contains certain forward-looking statements. These
forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting FMCH, but no assurance can be given
that such events will occur or that the results will be as anticipated. Such
statements include, without limitation, discussions concerning the outlook of
FMCH, government reimbursement, future plans and management's expectations
regarding future performance.
OVERVIEW
FMCH is primarily engaged in (a) providing kidney dialysis services and
performing clinical laboratory testings and other medical services, (b)
manufacturing and distributing products and equipment for dialysis treatment,
and (c) providing home infusion and respiratory therapy. Throughout FMCH's
history, a significant portion of FMCH's growth has resulted from the
development of new dialysis centers and the acquisition of existing dialysis
centers, as well as from the acquisition and development of complementary
businesses in the health care field.
FMCH derives a significant portion of its net revenues from Medicare,
Medicaid and other government health care programs (approximately 62% in 1996).
The reimbursement rates under these programs, including the Composite Rate, the
reimbursement rate for EPO (which accounted for approximately 22% of dialysis
service's domestic net revenues in 1996), and the reimbursement rate for other
dialysis and non-dialysis related services and products, as well as other
material aspects of these programs, have in the past and may in the future be
changed as a result of deficit reduction and health care reform measures.
FMCH's business, financial position and results of operations also could be
materially adversely effected by an adverse outcome in the OIG investigations,
any whistleblower action, the pending challenge by FMCH of changes effected by
Medicare in approving reimbursement claims relating to the administration of
IDPN or by the recent adoption of a new coverage policy that will change IDPN
coverage prospectively. FMCH's business, financial position and results of
operations would also be materially adversely affected by an adverse outcome in
the pending litigation concerning the implementation of certain provisions of
OBRA 93 relating to the coordination of benefits between Medicare and employer
health plans in the case of certain dual eligible ESRD patients.
FMCH also derives a significant portion of its net revenues from
reimbursement by non-government payors. Historically, reimbursement rates paid
by these payors generally have been higher than Medicare and other government
program rates in all areas except for certain services provided by NMC Homecare.
However, non-government payors are imposing cost containment measures that are
creating significant downward pressure on reimbursement levels that FMCH
receives for its services and products.
Dialysis Services operated or managed dialysis centers in 14 foreign
countries at June 30, 1997. In certain countries, FMCH experiences lower
reimbursement rates per treatment for dialysis services than are generally
realized in the U.S. FMCH's international dialysis services operations
currently generate less operating profit per treatment than domestic dialysis
operations due to both the lower reimbursement rates in some countries and the
start-up nature of many of the centers in foreign countries.
16
<PAGE> 17
RESULTS OF OPERATIONS
The following table summarizes certain unaudited operating results of FMCH
by principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Renal Products to DSD.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Revenues:
Dialysis Services ................................ $ 484 $ 443 $ 944 $ 862
Dialysis Products ................................ 168 80 327 160
NMC Homecare ..................................... 55 78 119 156
Intercompany Eliminations ........................ (61) (49) (120) (98)
----- ----- ------- -------
Total Net Revenues .................................. $ 646 $ 552 $ 1,270 $ 1,080
===== ===== ======= =======
Operating Earnings:
Dialysis Services ................................ $ 61 $ 67 $ 122 $ 129
Dialysis Products ................................ 23 12 42 21
NMC Homecare ..................................... 2 5 5 12
----- ----- ------- -------
Total Operating Earnings ............................ $ 86 $ 84 $ 169 162
===== ===== ======= =======
Other Expenses:
General Corporate ................................ $ 13 $ 13 $ 37 $ 34
Research & Development ........................... 1 1 2 1
Interest Expense, Net ............................ 46 7 87 15
----- ----- ------- -------
Total Other Expenses ................................ $ 60 $ 21 $ 126 $ 50
----- ----- ------- -------
Earnings Before Income Taxes ........................ 26 63 43 112
Provision for Income Taxes .......................... 16 29 26 52
----- ----- ------- -------
Net Earnings ........................................ $ 10 $ 34 $ 17 $ 60
===== ===== ======= =======
</TABLE>
PROFORMA RESULTS OF OPERATIONS
The following table represents the unaudited pro forma statements of
operations of the Company for the three months ended and six months ended June
1996 assuming the Reorganization occurred on January 1, 1996 and the actual
statements of operations for the three months ended and six months ended June
1996.
<TABLE>
<CAPTION>
ACTUAL PROFORMA ACTUAL PROFORMA
------ -------- ------ --------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1996 1996 1996 1996
---- ---- ---- ----
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Revenues:
Dialysis Services ................................ $ 443 $ 443 $ 862 $ 862
Dialysis Products ................................ 80 150 160 298
NMC Homecare ..................................... 78 78 156 156
Intercompany Eliminations ........................ (49) (49) (98) (98)
----- ----- ------- -------
Total Net Revenues .................................. $ 552 $ 622 $ 1,080 $ 1,218
===== ===== ======= =======
Operating Earnings:
Dialysis Services ................................ $ 67 $ 67 $ 129 $ 129
Dialysis Products ................................ 12 8 21 21
NMC Homecare ..................................... 5 5 12 12
----- ----- ------- -------
Total Operating Earnings ............................ $ 84 $ 80 $ 162 $ 162
===== ===== ======= =======
Other Expenses:
General Corporate ................................ $ 13 $ 31 $ 34 63
Research & Development ........................... 1 1 1 3
Interest Expense, Net ............................ 7 39 15 76
----- ----- ------- -------
Total Other Expenses ................................ $ 21 $ 71 $ 50 $ 142
----- ----- ------- -------
Earnings Before Income Taxes ........................ 63 9 112 20
Provision for Income Taxes .......................... 29 11 52 20
----- ----- ------- -------
Net Earnings (Loss) ................................ $ 34 $ (2) $ 60 $-0-
===== ===== ======= =======
</TABLE>
17
<PAGE> 18
EFFECT OF REORGANIZATION ON RESULTS OF OPERATIONS
In accordance with U.S. GAAP relating to purchase accounting rules, the Company
adjusted to fair value its assets and liabilities which, on a pro forma basis,
would have resulted in increased amortization of approximately $15 million and
$30 million for the second quarter 1996 and first six months of 1996,
respectively, as shown in the pro forma statement of operations as part of
General Corporate expenses. In addition, as part of the Reorganization, the
Company incurred additional debt, which would have resulted in a net increase
in interest expense, including amortization of debt issuance costs and other
fees, in the amounts of $32 million and $62 million for the second quarter 1996
and the first six months of 1996, respectively, on a pro forma basis. In
connection with the Reorganization, the addition of FUSA for the first six
months of 1996 would have resulted in increased revenues for Dialysis Products
of $70 million and $138 million and decreased operating earnings for Dialysis
Products of $4 million and $0 million for the second quarter 1996 and first six
months of 1996, respectively, on a pro forma basis. The Reorganization would
have resulted in a decrease in the Company's provision for income taxes of $18
million and $32 million for the second quarter 1996 and the first six months of
1996, respectively, on a pro forma basis. As a result of the above adjustments,
on a pro forma basis, the Company would have reported a net loss of $2 million
for the second quarter 1996 and would have broken even for the first six months
of 1996. Actual results show profit of $34 million for the second quarter 1996
and $60 million the first six months of 1996.
18
<PAGE> 19
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net revenues for the second quarter of 1997 increased by 17% ($94 million)
over the comparable period of 1996, with Dialysis Services and Dialysis Products
accounting for most of the increase. Net earnings for the second quarter of
1997 decreased 71% ($24 million) over the comparable period of 1996 as a result
of higher interest expenses and depreciation and amortization expense.
DIALYSIS SERVICES.
Dialysis Services net revenues for the second quarter of 1997 increased by
9% ($41 million) over the comparable period of 1996, which included a favorable
OBRA 93 adjustment ($10 million). The increase is primarily a result of a
15% increase in the number of treatments provided worldwide. This increase was
partially offset by a decline in the domestic ancillary revenue rate ($5
million), and a $1 million decrease in diagnostic services revenues due to a
decrease in the number of primary care tests. Laboratory testing revenues for
the second quarter of 1997 were essentially the same as the similar period of
1996.
Dialysis Services operating earnings for the second quarter of 1997
decreased by 9% ($6 million) over the comparable period of 1996 primarily as a
result of the aforementioned favorable OBRA 93 adjustment in 1996 and decreased
volume of diagnostic services tests. These decreases to operating earnings were
partially offset by increased treatment volume.
DIALYSIS PRODUCTS.
Dialysis Products net revenues for the second quarter of 1997 increased by
110% ($88 million) over the comparable period of 1996 primarily due to $81
million of second quarter revenues of FUSA, which was contributed to FMCH by
Fresenius Medical Care AG effective October 1, 1996. During the second quarter
1997, approximately $7 million of product sales were made between FUSA and the
former Renal Products Division of NMC which have been eliminated for financial
reporting. There were no such eliminations recorded in 1996 as the two
companies were separate reporting entities.
Dialysis Products operating earnings for the second quarter of 1997
increased by 92% ($11 million) over the comparable period of 1996 primarily due
to the second quarter operating earnings of FUSA ($6 million). NMC's Renal
Products Division's operating earnings increased by approximately $5 million
during the quarter, primarily due to a reduction in operating expenses and
distribution costs ($3 million) as well as one-time charges recorded in the
second quarter of 1996 for legal expenses ($2 million).
NMC HOMECARE.
NMC Homecare's net revenues for the second quarter of 1997 decreased by 30%
($23 million) as compared to the second quarter of 1996. This is primarily due
to decreased volume related to changes in Medicare qualification procedures for
IDPN patients ($15 million), decreases in infusion therapy revenues mainly due
to continued price compression from managed care ($6 million), and the effect
of the sale of Home Health business ($3 million). These decreases were
partially offset by increases in respiratory therapy revenues ($1 million).
NMC Homecare's operating earnings for the second quarter of 1997 decreased
by $3 million as compared to the second quarter of 1996, primarily due to
continued pricing pressure resulting from managed care and the decline in the
number of Medicare patients who receive IDPN treatments.
OTHER EXPENSES.
FMCH's other expenses for the second quarter of 1997 increased by 186% ($39
million) over the comparable period of 1996. General corporate expense remained
the same due to reduced legal expenses ($4 million), favorable savings in
foreign exchange ($6 million), and other cost reductions ($5 million). These
decreases to corporate expense were entirely offset by a $15 million increase
to depreciation and amortization expense associated with the revaluation of
intangible assets at the time of the Reorganization. Research and development
expenses for the second quarter of 1997 were virtually the same as they were
for the comparable period of 1996. Interest expense for the second quarter of
1997 increased by $39 million over the comparable period of 1996 mainly due to
the large amount of bank debt incurred to finance the Reorganization and the
interest expense associated with FUSA in the second quarter of 1997 ($2
million).
19
<PAGE> 20
INCOME TAX RATE.
The effective tax rate for the second quarter (59.8%) is significantly
higher than the rate for the comparable period of 1996 (46.0%) due to the large
amount of non-deductible goodwill incurred as a result of the Reorganization.
20
<PAGE> 21
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net revenues for the first six months of 1997 increased by 18% ($190
million) over the comparable period of 1996, with Dialysis Services and Dialysis
Products accounting for more than all of the entire increase. Net earnings for
the first six months of 1997 decreased 72% ($43 million) over the comparable
period of 1996 as a result of higher general corporate and interest expenses.
DIALYSIS SERVICES.
Dialysis Services net revenues for the first six months of 1997 increased
by 10% ($82 million) over the comparable period of 1996, which included a
favorable OBRA 93 adjustment ($10 million), primarily as a result of a 14%
increase in the number of treatments provided worldwide. This increase was
partially offset by a decline in the ancillary revenue rate ($3 million), and a
$5 million decrease in diagnostic services revenues due to a decrease in the
number of primary care tests. Laboratory testing revenues for the first six
months of 1997 decreased by $1 million compared to the similar period of 1996.
This was a result of a slight decrease in external lab testing volume.
Dialysis Services operating earnings for the first six months of 1997
decreased by 5% ($7 million) over the comparable period of 1996 primarily as a
result of the aforementioned favorable OBRA 93 adjustment in 1996 and decreases
in volume of diagnostic services treatments and laboratory testing. These
decreases to operating earnings were partially offset by increased treatment
volume.
DIALYSIS PRODUCTS.
Dialysis Products net revenues for the first six months of 1997 increased
by 104% ($167 million) over the comparable period of 1996, primarily due to $152
million of revenues for FUSA, which was contributed to FMCH by Fresenius Medical
Care AG effective October 1, 1996. During 1997, approximately $17 million of
product sales were made between FUSA and the former Renal Products Division of
NMC which have been eliminated for financial reporting. There were no such
eliminations recorded in 1996 as the two companies were separate reporting
entities.
Dialysis Products operating earnings for the first six months of 1997 increased
by 100% ($21 million) over the comparable period of 1996 primarily due to the
operating earnings of FUSA ($16 million). NMC's Renal Products Division's
operating earnings increased by approximately $5 million during the first six
months primarily due to a reduction in operating expenses and distribution costs
($3 million) as well as one-time charges recorded in the second quarter of 1996
for legal expenses ($2 million).
NMC HOMECARE.
NMC Homecare's net revenues for the first six months of 1997 decreased by
24% ($37 million) as compared to the first six months of 1996. This is
primarily due to decreased volume related to changes in Medicare qualification
procedures for IDPN patients ($25 million), decreases in infusion therapy
revenues mainly due to continued price compression from managed care ($12
million), and the effect of the sale of Home Health business ($2 million).
These decreases were partially offset by increases in respiratory therapy
revenues ($2 million).
NMC Homecare's operating earnings for the first six months of 1997
decreased by $7 million as compared to the first six months of 1996, primarily
due to continued pricing pressure resulting from managed care and the decline
in the number of Medicare patients who receive IDPN treatments.
OTHER EXPENSES.
FMCH's other expenses for the first six months of 1997 increased by 152%
($76 million) over the comparable period of 1996. General corporate expense
increased by 9% ($3 million) primarily due to increased depreciation and
amortization expenses associated with the revaluation of intangible assets at
the time of the Reorganization ($30 million), offset by reduced legal expenses
($9 million), favorable savings in foreign exchange ($10 million), and other
cost reductions ($8 million). Research and development expenses for the first
six months of 1997 were virtually the same as they were for the comparable
period of 1996. Interest expense for the first six months of 1997 increased by
($72 million) over the comparable period of 1996 mainly due to the large amount
of bank debt incurred to finance the reorganization and the interest expense
associated with FUSA in the first six months of 1997 ($4 million).
21
<PAGE> 22
INCOME TAX RATE.
The effective tax rate for the first six months of 1997 (60.5%) is
significantly higher than the rate for the first six months of 1996 (46.3%) due
primarily to the large amount of non-deductible goodwill incurred as a result of
the reorganization.
LIQUIDITY AND CAPITAL RESOURCES
FMCH made acquisitions totaling $278 million and $26 million, during the
first six months of 1997 and 1996, respectively. FMCH made capital expenditures
for internal expansion, improvements, new furnishings and equipment of $80
million and $58 million during the first six months of 1997 and 1996,
respectively. The Company intends to capitalize on the continuing shift in the
U.S. from physician-owned and hospital-based dialysis clinics to multi-center
providers by acquiring existing dialysis centers and the establishment of new or
expanded centers and, accordingly, will require significant capital resources to
pursue its growth strategy in the dialysis marketplace. FMCH may also make other
strategic acquisitions in the future.
FMCH also requires capital resources for working capital purposes. FMCH
used cash to fund increases in accounts receivable of $57 million and $72
million during the first six months of 1997 and 1996, respectively. The
increases in accounts receivable reflect growth in NMC's business operations
and, beginning in 1994, the sharp reduction in IDPN claims approved for payment.
FMCH during the first six months of 1997 funded its acquisitions and
captial expenditures primarily through increased borrowings under its credit
facility ($264 million) and increased borrowings from affiliates ($58 million).
In addition, FMCH received a capital contribution of $34 million from Fresenius
Medical Care, A.G, which was used in connection with an acquisition. FMCH
generated net cash from operations of $43 million and $64 million during the
first six months of 1997 and 1996, respectively. FMCH received net cash
advances from Grace of $61 million during the first six months of 1996.
Effective July 1, 1995, FMCH ceased to recognize the incremental revenue
provided under HCFA's initial instruction under OBRA 93, although it continued
to bill private third-party payors for these amounts through December 31, 1995.
If FMCH's position with respect to the retroactive application of OBRA 93 is not
sustained, it may be required to refund amounts previously collected from
private third-party payors (approximately $190 million through June 30, 1995)
and rebill Medicare for these services, which would result in an estimated net
cash and operating earnings loss of approximately $120 million as of June 30,
1997. FMCH began billing Medicare as the primary payor for the dual eligible
ESRD patients affected by OBRA 93 effective January 1, 1996. If HCFA's revised
instruction under OBRA 93 is permanently enjoined on a prospective basis, or if
such revised instruction is sustained but given an effective date of later than
June 30, 1995, FMCH may be able to rebill such services to third-party payors
and, as a result, FMCH's future results of operations and financial position
would be favorably affected by the incremental revenue that FMCH would
recognize.
NMC entered into a $2.5 billion Credit Agreement on September 27, 1996 with
a group of financial institutions. The Credit Agreement was used to fund a cash
dividend to Grace Chemicals of approximately $2.1 billion, finance existing
letters of credit and for general corporate purposes. In November 1996,
Fresenius Medical Care implemented two financings which raised a total of $731
million, the proceeds of which were invested in FMCH through a $249 million
equity infusion and a total of $482 million of loans to FMCH. The funds were
used to repay certain borrowings under the Credit Agreement. Also in November
1996, Fresenius Medical Care became a guarantor under the NMC Credit Agreement.
The Credit Agreement will be utilized to fund future capital requirements and
acquisitions and, to the extent necessary, general corporate requirements,
including future letters of credit, and any claims on the Company which may
result from adverse settlements with the government on the OIG or other
investigations.
FMCH is party to a $200 million receivables financing arrangement. At June
30, 1997, $156 million was outstanding under this agreement, an increase of $8
million from December 31, 1996.
In July 1997, FMCH signed a letter of intent with NationsBank to establish
a new $200 million receivables financing facility to replace the existing
financing facility with Citicorp. Proceeds from the NationsBank facility will
be used to repay the Citicorp facility.
22
<PAGE> 23
The liquidity of FMCH is contingent upon a number of factors, principally
FMCH's future operating results and the contingencies referred to below. FMCH
believes that its current levels of liquidity, including availability under the
NMC Credit Agreement, are sufficient to meet its foreseeable needs. If existing
sources of funds are not sufficient to provide liquidity, FMCH may need to sell
assets or obtain debt or equity financing from additional external sources.
There can be no assurance that FMCH will be able to do so on satisfactory terms,
if at all.
IMPACT OF INFLATION
A substantial portion of FMCH's net revenue is subject to reimbursement
rates which are regulated by the federal government and do not automatically
adjust for inflation. Non-governmental payors also are exerting 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 FMCH's business and results of
operations, possibly materially.
CONTINGENCIES
FMCH is the subject of investigations by several federal agencies and
authorities, is a plaintiff in litigation against the federal government with
respect to the implementation of OBRA 93 and coverage for IDPN therapy, and is
seeking to change a proposed revision to IDPN coverage policies. An adverse
outcome in any of these matters, beyond the reserves which have established,
could have a material adverse effect on FMCH's business, financial condition and
results of operations.
23
<PAGE> 24
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
INTRADIALYTIC PARENTERAL NUTRITION
NMC administers IDPN therapy to chronic dialysis patients who suffer from
severe gastrointestinal malfunctions. Since late 1993, Medicare claims
processors have sharply reduced the number of IDPN claims approved for payment
as compared to prior periods. NMC believes that the reduction in IDPN claims
currently being paid by Medicare represents an unauthorized policy coverage
change. Accordingly, NMC and other IDPN providers are pursuing various
administrative and legal remedies, including administrative appeals, to address
this reduction. In November 1995, NMC filed a complaint in the U.S. District
Court for the Middle District of Pennsylvania seeking a declaratory judgment and
injunctive relief to prevent the implementation of this policy coverage change.
NMC management believes that its IDPN claims were consistent with published
Medicare coverage guidelines and ultimately will be approved for payment. Such
claims represent substantial accounts receivable of NMC, amounting to
approximately $153 million (net of a reserve of $52,000) and $140,000 (net of a
reserve of $41,000) as of June 30, 1997 and December 31, 1996, respectively and
currently increasing at the rate of approximately $2,000 per month. When the
coverage guidelines were revised effective July 1996, as described below, some
of NMC's claims continued to meet the more stringent coverage criteria
established in the new guidelines and will probably be approved for payment by
Medicare. NMC has reviewed the claims it has submitted for patients who started
on IDPN therapy before July 1996 and continued on therapy after July 1996, but
do not meet the new, more stringent coverage criteria, and believes that these
claims were consistent with published Medicare coverage guidelines. NMC
recognizes, however, that the regulations and coverage guidelines are ambiguous
as to whether these patients' therapy continues to be covered by Medicare after
the effective date of the new coverage criteria. NMC has continued to provide
therapy to these patients and to pursue its appeals of these claims through the
administrative process. If the government determines that continued coverage
for these patients is inappropriate, such claims ultimately will not be paid.
Amounts in receivable for these patients are approximately $12,000. Management
believes it will be successful in the appeal of these claims. If NMC is unable
to collect its IDPN receivable, or if IDPN coverage is reduced or eliminated,
depending on the amount of the receivable that is not collected and/or the
nature of the coverage change, NMC's business, financial position and
results of operations could be materially adversely affected.
In May 1995 the Medicare claims processors circulated a draft coverage
policy which, if implemented in the form proposed, would have limited or
precluded continued coverage of parenteral and enteral nutrition ("PEN")
therapies, including IDPN therapy. In April 1996, NMC received a copy of a
revised final version of the new coverage policy, which became effective for
services billed on and after July 1, 1996. While the new policy permits
continued coverage of IDPN and other PEN therapies, and while the potential
impact of the new policy is subject to further analysis, NMC believes that the
new policy has made it substantially more difficult to qualify patients for
future coverage by, among other things, requiring certain patients to undergo
onerous and/or invasive tests in order to qualify for coverage. NMC, together
with other interested parties, is seeking to effect certain changes in the new
policy and NMC has made changes to its patient qualification procedures in order
to comply with the policy. However, if NMC is unable to achieve changes in the
new policy, if physicians and patients fail to accept the new qualification
procedures and/or if patients fail to qualify under such procedures, the policy
could significantly reduce the number of patients eligible for Medicare coverage
of IDPN and other PEN therapies, which would have a material adverse effect on
NMC's financial position and its results of operations.
OIG INVESTIGATIVE SUBPOENAS
In October 1995, NMC received five investigative subpoenas from the Office
of Inspector General of the U.S. Department of Health and Human Services (the
"OIG"). The subpoenas were issued in connection with an investigation being
conducted by the OIG, the U.S. Attorney for the District of Massachusetts and
others concerning possible violations of federal laws, including the
Anti-kickback Statute and the False Claims Act. The subpoenas call for extensive
document production relating to various aspects of NMC's business. A sixth
subpoena, clarifying the scope of one originally served, was received in May
1996.
24
<PAGE> 25
The five subpoenas cover the following areas: (a) NMC's corporate
management, personnel and employees, organizational structure, financial
information and internal communications; (b) NMC's dialysis services business,
principally medical director contracts and compensation; (c) NMC's treatment of
credit balances resulting from overpayments received under the Medicare end
stage renal disease (ESRD) program, NMC's billing for home dialysis services and
payment of supplemental medical insurance premiums on behalf of indigent
patients; (d) NMC's LifeChem laboratory business ("LifeChem"), including
documents relating to testing procedures, marketing, customers, competition and
certain overpayments totaling approximately $4.9 million that were received by
LifeChem from the Medicare program with respect to laboratory services rendered
between 1989 and 1993; and (e) NMC's Homecare Division and, in particular,
information concerning the intradialytic parenteral nutrition ("IDPN") business
described below, including billing practices related to various services,
equipment and supplies and payments made by third parties as compensation for
administering IDPN therapy.
On July 15, 1997, National Medical Care, Inc. received an investigatory
subpoena duces tecum requesting production of a number of patient records, in
connection with the government's review of billing practices related to various
services, equipment and supplies and payments made by third parties as
compensation for administering IDPN therapy, described above.
Each of the patients whose records were subpoenaed is, or was, a Medicare
beneficiary. The subpoena calls for production of the records by August 15,
1997. The Company has discussed an extended schedule for production with the
government. The result of the government's review of these records, its
duration, and its effect, if any, on NMC cannot be predicted at this time.
In the event that a U.S. government agency believes that any wrongdoing
has occurred, civil and/or criminal proceedings could be instituted, and if any
such proceedings were to be instituted and the outcome were unfavorable, NMC
could be subject to substantial fines, penalties and damages or could become
excluded from government reimbursement programs. Any such result could have a
material adverse effect on NMC's financial position or the results of
operations of the Company.
FMC and NMC have provided the United States government with a joint and
several guarantee of payment of the obligations, if any, arising out of the
investigation by the OIG. In support of this guarantee, NMC has delivered to the
government an irrevocable standby letter of credit in the amount of $150
million.
25
<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) ANNUAL MEETING. FMCH held its annual meeting of shareholders on June 11,
1997 (the "Meeting").
(b) ELECTION OF DIRECTOR. At the Meeting, the shareholders elected Ben J.
Lipps, Ph.D. as a Class II director for a one-year term. Holders of shares
representing 90,000,000 votes voted in favor of the election of Dr. Lipps
to the Board of Directors, and holders of shares representing 127,136 votes
voted against such election. There were no abstentions or broker non-votes.
Dr. Gerd Krick and Udo Werle continued as Class III directors, whose terms
expire in 1998. Geoffrey W. Swett and William F. Grieco continued as Class
I directors, whose terms expire in 1999.
(c) OTHER MATTERS. The following proposals were presented and acted upon at the
Meeting:
<TABLE>
<CAPTION>
Votes Votes Broker
Proposal For Against Abstentions Non-votes
-------- --- ------- ----------- ---------
<S> <C> <C> <C> <C>
(1) To amend FMCH's Certificate of 90,000,008 127,136 0 0
Incorporation to (i) eliminate
classification of the Board of
Directors and (ii) reduce the
required number of directors
to not less than three nor more
than nine.
(2) To amend FMCH's Certificate 90,000,000 127,136 0 0
of Incorporation to change the
name of the company to "Fresenius
Medical Care Holdings, Inc."
(3) To redeem the outstanding shares 128,736 90,000,000 0 0
of the 6% Preferred Stock of FMCH
and the Class A and B Preferred
Stock of FMCH.
</TABLE>
26
<PAGE> 27
ITEM 5. OTHER INFORMATION
On June 12, 1997, the Registrant amended its Certificate of Incorporation to
change Registrant's name to "Fresenius Medical Care Holdings, Inc."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 Certificate of Amendment to Certificate of
Incorporation filed June 12, 1997
Exhibit 3.2 Amended and Restated By-laws of the Registrant
Exhibit 11 Statement re Computation of Per Share Earnings
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter for which this
report is filed.
27
<PAGE> 28
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: August 14, 1997 /S/ Ben J. Lipps
--------------- ----------------
NAME: Ben J. Lipps
TITLE: President (Chief Executive Officer)
Date: August 14, 1997 /S/ Christian Fischer
---------------- ---------------------
NAME: Christian Fischer
TITLE: Principal Financial Officer
28
<PAGE> 1
EXHIBIT 3.1
DOC NO. 970612000596
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION
OF FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC.
UNDER SECTION 805 OF THE BUSINESS
CORPORATION LAW
The undersigned, being the President and the Secretary, respectively, of
Fresenius National Medical Care Holdings, Inc., hereby certify that:
1. The name of the corporation is FRESENIUS NATIONAL MEDICAL CARE HOLDINGS,
INC. (the "Corporation"). The Corporation was formed under the name W. R. Grace
& Co.-New York, subsequently renamed W. R. Grace & Co., and then renamed
Fresenius National Medical Care Holdings, Inc.
2. The Certificate of Incorporation of the Corporation was filed by the
Department of State on the 23rd day of March, 1988.
3. This Certificate of Amendment has been duly authorized, pursuant to
Section 803 of the Business Corporation Law of the State of New York, by a vote
of at least a majority of the members of the Board of Directors of the
Corporation, followed by the vote of the holders of a majority of all
outstanding shares entitled to vote thereon at a meeting of shareholders duly
called for such purpose.
4. (i) The Certificate of Incorporation is amended to change the name of
the Corporation.
5. (i) Article FIRST of the Certificate of Incorporation of the Corporation
is hereby amended to be as follows:
FIRST: The name of the Corporation is
FRESENIUS MEDICAL CARE HOLDINGS, INC.
6. (i) The Certificate of Incorporation is amended to change the number of
directors and eliminate their classification over time.
(ii) Article FIFTH, paragraph (a) of the Certificate of Incorporation
of the Corporation is hereby amended to read as follows:
FIFTH: (a) The number of directors constituting the entire Board of
Directors of the Corporation shall be such number, not less than three nor more
than nine, as may be fixed from time to time by a majority of the entire Board,
except that no such action shall shorten the term of any incumbent director.
(iii) Article FIFTH, paragraph (b) of the Certificate of Incorporation
of the Corporation is hereby amended to read as follows:
<PAGE> 2
(b) The Board of Directors shall be divided into three classes,
designated Class I, Class II and Class III until the 1999 annual meeting, at
which time directors will no longer be referred to or designated by class. Until
such time as classification is eliminated, each class shall consist of
approximately one-third of the entire Board. The initial Class I directors shall
hold office until the 1990 annual meeting of shareholders, the initial Class II
directors shall hold office until the 1991 annual meeting of shareholders, and
the initial Class III directors shall hold office until the 1989 annual meeting
of shareholders, and in each case until their respective successors have been
elected and have qualified. At each succeeding annual meeting of shareholders,
beginning in 1989, successors to the class of directors whose term expires at
that annual meeting shall be elected for a three-year term. Commencing in 1997,
successors to the class or classes of directors whose term or terms expire at
that annual meeting shall be elected for a term that shall commence at such
annual meeting and shall hold office until the next annual meeting of
shareholders and until their successors have been elected and have qualified. At
each succeeding annual meeting of shareholders, beginning in 1999, all directors
shall be elected for a term that shall commence at such annual meeting and shall
hold office until the next annual meeting of shareholders and until their
successors have been elected and have qualified, and directors shall no longer
be referred to or designated by class.
IN WITNESS WHEREOF, we have signed this Certificate of Amendment on
this 12th day of June, 1997 and we affirm, the statements contained therein as
true under penalties of perjury.
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC.
By: ____________________________
Name: Ben J. Lipps
Title: President
By:_____________________________
Name: William F. Grieco
Title: Secretary
<PAGE> 3
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
STATE OF NEW YORK
DEPARTMENT OF STATE
FILED JUNE 12, 1997
TAX $$
BY: ______________________________
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
of
FRESENIUS MEDICAL CARE HOLDINGS, INC.
A New York Corporation
(As Amended, effective June 12, 1997)
ARTICLE I
Meetings of Shareholders
Section 1.1 ANNUAL MEETING. An annual meeting of the shareholders of the
Corporation, for the election of directors and the transaction of other
business, shall be held annually (a) on the tenth day of May, or (b) if such day
be a Saturday, Sunday or a holiday at the place where the meeting is to be held,
on the last business day preceding or on the first business day after such tenth
day of May, as may be fixed by the Board of Directors, or (c) on such other date
as may be fixed by the Board of Directors.
Section 1.2 SPECIAL MEETINGS. Except as otherwise expressly provided by
law, a special meeting of the shareholders may be called only by the Board of
Directors, by the Chairman or by the President at any time for such purpose or
purposes and held on such date as may be specified in the notice thereof.
Section 1.3 PLACE AND HOUR OF MEETING. All meetings of shareholders shall
be held at such place within or without the State of New York and at such hour
as may be fixed by the Board of Directors or the officer calling the meeting.
Section 1.4 NOTICE OF MEETING. Except as otherwise expressly provided by
law, a notice in writing of each meeting of shareholders shall be given by or at
the direction of the Board of Directors or the officer calling the meeting to
each shareholder of record, personally or by first class mail, directed to him
at his address as it appears on the record of shareholders, not fewer than ten
nor more than fifty days before the date of the meeting. Each notice shall state
the place, date and hour of the meeting and, unless it is an annual meeting,
shall indicate that it is being issued by or at the direction of the Board of
Directors or the officer calling the meeting. If such notice relates to an
annual meeting it need not state the purpose or purposes for which such meeting
has been called, and no other business shall be transacted at such special
meeting.
No notice of an adjourned meeting of shareholders need be given unless
otherwise expressly required by law. At any adjourned meeting at which a quorum
is present, any business may be transacted which might have been transacted at
the meeting as originally noticed.
Notice of meeting need not be given to any shareholder who submits a signed
waiver of notice, in person or by proxy, whether before or after the meeting.
The attendance of any
<PAGE> 2
shareholder at a meeting, in person or by proxy, without protesting prior to the
conclusion of the meeting the lack of notice of such meeting, shall constitute a
waiver of notice by him.
Section 1.5. QUORUM. The holders of the shares constituting a majority in
voting power entitled to vote, present in person or by proxy, shall constitute a
quorum at any meeting of shareholders, but no action required by law, by the
Certificate of Incorporation of the Corporation or by these By-laws to be
authorized or taken by the holders of a designated proportion of the voting
power of shares, of the shares of any particular class or series or of each
class or series may be authorized or taken by a lesser proportion.
Whether or not there is a quorum at any meeting of the shareholders, the
shareholders present in person or by proxy entitled to cast a majority of the
votes thereat may adjourn the meeting.
Section 1.6 VOTING. Except as otherwise expressly provided by law, every
shareholder of record present in person or by proxy shall be entitled at every
meeting of shareholders to vote, in accordance with and subject to the
provisions of the Certificate of Incorporation of the Corporation, each and
every share of stock of the Corporation standing in his name on the record of
shareholders at the record date fixed as provided in Section 6.3 of these
By-laws or, if no such record date shall have been fixed, then at the time
provided by law.
Except as otherwise expressly provided by law or by the Certificate of
Incorporation of the Corporation, the vote, at a meeting of the shareholders
duly held and at which a quorum is present, of a majority of the votes cast at
such meeting by the holders of the shares entitled to vote shall be the act of
the shareholders.
Section 1.7 BUSINESS TO BE TRANSACTED AT ANNUAL MEETINGS. No business shall
be transacted at any annual meeting of the shareholders, except as may be (a)
specified in the notice of the meeting given by or at the direction of the Board
of Directors (including, if so specified, any shareholder proposal submitted
pursuant to the rules and regulations of the Securities and Exchange
Commission), (b) otherwise brought before the meeting by or at the direction of
the Board of Directors or (c) otherwise brought before the meeting, in
accordance with the procedure set forth in the following paragraph, by a
shareholder of record of the Corporation entitled to vote at such meeting.
For business to be brought before an annual meeting by a shareholder
pursuant to clause (c) above, the shareholder must have given written notice
thereof to the Secretary of the Corporation, such notice to be delivered or
mailed to, and received at, the principal executive offices of the Corporation
not less than 60 days nor more than 90 days prior to the date of the meeting,
unless the meeting is to take place on a date other than that specified in
clause (a) or (b) of Section 1.1 of these By-laws, in which event such notice
must be received at the principal executive offices of the Corporation not later
than the close of business on the tenth day following the day on which the
Corporation's notice of the date of the meeting is first given or made to the
shareholders or disclosed to the general public (which disclosure may be
effected by means of a publicly viable filing with the Securities and Exchange
Commission). A shareholder's notice to the Secretary shall set forth, as to each
matter the shareholder proposes to bring before the annual meeting, (a) a brief
<PAGE> 3
description of the business proposed to be brought before the annual meeting and
of the reasons for bringing such business before the annual meeting (including,
but not limited to, the reasons why the shareholder deems such business to be
beneficial to the Corporation) and, if such business includes a proposal to
amend either the Certificate of Incorporation of the Corporation or these
By-laws, the text of the proposed amendment; (b) the name and address of the
shareholder proposing such business, of any beneficial owners of shares of stock
of the Corporation which are held of record by such shareholder and of any other
shareholders (including beneficial owners) known by such shareholder to support
such proposal; (c) the number of shares of each class of stock of the
Corporation that are held of record and beneficially owned by the shareholder,
any beneficial owners of its shares and any such other shareholders; (d) a
representation that the shareholder is or will be a holder of record of stock of
the Corporation entitled to vote at such meeting and intends to appear in person
or by proxy at such meeting to propose such business; and (e) any material
interest of the shareholder, any beneficial owner of its shares or any such
other shareholders in such business (other than any interest as shareholder of
the Corporation). No business shall be conducted at any annual meeting of the
shareholders (a) except as specified in this Section 1.7 or (b) unless, pursuant
to the law of the State of New York or any rule or regulation of the Securities
and Exchange Commission, such business may properly be brought before the
meeting.
If it is determined that any business brought before an annual meeting of
the shareholders is not properly brought before the meeting, the presiding
officer at such meeting shall so declare to the meeting, in which event such
business shall be not acted upon.
ARTICLE II
Directors
Section 2.1 MANAGEMENT OF BUSINESS; QUALIFICATIONS. Except as otherwise
provided by law or the Certificate of Incorporation of the Corporation, the
business, property and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors.
Section 2.2 NUMBER, ELECTION AND TERM OF OFFICE. The number of directors
constituting the entire Board of Directors shall be such number, not less than
three nor more than nine, as may be fixed from time to time by a majority of the
entire Board, except that no such action shall shorten the term of any incumbent
director. No person shall be nominated for election as a director if such person
will have attained the age of 70 prior to the expiration of his or her term of
office.
The Board of Directors shall be divided into three classes, designated
Class I, Class II and Class III until the 1999 annual meeting, at which time
directors will no longer be referred to or designated by class. Until such time
as classification is eliminated, each class shall consist of approximately
one-third of the entire Board. The initial Class I directors shall hold office
until the 1990 annual meeting of shareholders, the initial Class II directors
shall hold office until the 1991 annual meeting of shareholders, and the initial
Class III directors shall hold office until the 1989 annual meeting of
shareholders, and in each case until their respective successors have been
elected and have qualified. At each succeeding annual meeting of shareholders,
beginning in 1989, successors to the class of directors whose term expires at
that annual meeting shall be elected for a
<PAGE> 4
three-year term. Commencing in 1997, successors to the class or classes of
directors whose term or terms expire at that annual meeting shall be elected for
a term that shall commence at such annual meeting and shall hold office until
the next annual meeting of shareholders and until their successors have been
elected and have qualified. At each succeeding annual meeting of shareholders,
beginning in 1999, all directors shall be elected for a term that shall commence
at such annual meeting and shall hold office until the next annual meeting of
shareholders and until their successors have been elected and have qualified,
and directors shall no longer be referred to or designated by class.
No person shall be nominated for election as a director, except as may be
(a) approved by the Board of Directors or (b) nominated by a shareholder of
record of the Corporation entitled to vote at the meeting at which such person
is to be nominated in accordance with the procedure set forth in the following
paragraph.
A shareholder may nominate a person or persons for election as directors
only if the shareholder has given written notice of its intent to make such
nomination to the Secretary of the Corporation, such notice to be delivered or
mailed to, and received at, the principal executive offices of the Corporation
(a) with respect to an annual meeting of the shareholders, not less than 60 days
nor more 90 days prior to the date of the meeting, unless the meeting is to take
place on a date other than that specified in clause (a) or (b) of Section 1.1 of
these By-laws, in which event such notice must be received at the principal
executive offices of the Corporation not later than the close of business on the
tenth day following the day on which the Corporation's notice of the date of the
meeting is first given or made to the shareholders or disclosed to the general
public (which disclosure may be effected by means of a publicly available filing
with the Securities and Exchange Commission); or (b) with respect to an election
to be held at a special meeting of the shareholders, not later than the close of
business on the tenth day following the date on which the Corporation's notice
of the date of the meeting is first given or made to the shareholders or
disclosed to the general public (which disclosure may be effected by means of a
publicly available filing with the Securities and Exchange Commission). A
shareholder's notice to the Secretary shall set forth (a) the name and address
of the shareholder who intends to make such nomination, of any beneficial owners
of shares of stock of the Corporation which are held of record by such
shareholder and of any other shareholders (including beneficial owners) known by
such shareholder to support such nomination; (b) the name, age, business and
residence addresses and principal occupation of each person to be nominated, the
class of directorship to which each such person is to be nominated and the
nominee, if any, against whom each such person is to run; (c) the number of
shares of each class of stock of the Corporation that are held of record and
beneficially owned by the shareholder, any beneficial owners of its shares and
any such other shareholders; (d) a representation that the shareholder is or
will be a holder of record of stock of the Corporation entitled to vote with
respect to the election of directors at such meeting and intends to appear in
person or by proxy at such meeting to nominate such proposed nominee(s); (e) a
description of all material arrangements, relationships and understandings
between the shareholder, any beneficial owners of its shares or any such other
shareholders and each proposed nominee and between proposed nominees; (f) such
other information regarding each proposed nominee as the Corporation would be
required to include in a proxy statement filed pursuant to the rules and
regulations of the Securities and Exchange Commission; and (g) the written
consent of each proposed nominee to serve as a director of the Corporation if
elected, together with an undertaking, signed by each proposed nominee, to
<PAGE> 5
furnish to the Corporation any information it may request upon the advice of
counsel for the purpose of determining such proposed nominee's eligibility to
serve as a director. No person may be nominated by a shareholder for election as
a director of the Corporation (a) if, pursuant to applicable law or any
provision of these By-laws, such person would be ineligible to serve as a
director or (b) if the election of such person would violate, or subject the
Corporation to liability under, any applicable law.
If it is determined that the nomination of any person at any meeting of the
shareholders in not in compliance with this Section 2.2, the presiding officer
at such meeting shall so declare to the meeting, in which event such nomination
shall not be acted upon.
Section 2.3 MEETINGS. The Board of Directors shall hold an annual
organization meeting immediately after each annual meeting of shareholders, at
the place where such meeting of shareholders was held (or at such other place as
the Board of Directors shall have designated), for the purpose of electing
officers and for the transaction of such other business as may properly come
before such meeting.
The Board of Directors may provide for the holding of regular meetings and
may fix the time and place of such meetings. Special meetings may be called by
the Chairman, by the President or by a majority of the directors then in office.
Except as hereinabove provided with respect to the annual organization
meeting, the Board of Directors shall hold its meetings at the principal
executive offices of the Corporation or at such other place, within or without
the State of New York, as the Board of Directors from time to time may
determine, or as may be designated by waivers of notice thereof signed by all
the directors.
Section 2.4 NOTICE OF MEETING. Notice need not be given with respect to the
annual organization meeting of the Board of Directors (unless such meeting is to
be held at a place other than where the annual meeting of shareholders is to be
held) or with respect to any adjourned meeting of the Board of Directors. Notice
of any regular meeting of the Board of Directors need not be given unless there
is a change in the time or place of such meeting. Notice of any change in the
place of the annual organization meeting or in the time or place of any regular
meeting, and notice of the time and place of any special meeting of the Board of
Directors (a) shall be sent to each director by first class mail at least three
days before the date on which the meeting is to be held, or (b) shall be sent to
each director by telegram, cablegram, telex or other written form of
telecommunication, or delivered or telephoned to him, at least 24 hours before
the time at which such meeting is to be held. Any notice in writing shall be
addressed to the director at his residence or usual place of business, or at
such other address as he may have designated in a written request filed with the
Secretary. Any notice by telephone shall be communicated to the director or his
representative or answering machine at the telephone number of his residence or
his usual place of business or at such other telephone number as he may have so
designated.
Notice of a meeting of the Board of Directors need not state the purpose
thereof, except as otherwise expressly provided by law.
<PAGE> 6
Notice of meeting need not be given to any director who submits a signed
waiver of notice, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to him.
Section 2.5. QUORUM AND MANNER OF ACTING. A majority of the entire Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, except that one-third of the entire Board of
Directors shall constitute a quorum for the transaction of any business relating
to any recommendation made by, or other action of, the Salary, Incentive
Compensation and Employee Benefits Committee of the Board of Directors or the
Stock Incentive Committee of the Board of Directors or any successor to either
of such Committees. Except as otherwise expressly provided by law or by these
By-laws, the act of the majority of the directors present at the time of a vote,
if a quorum is present at such time, shall be the act of the Board of Directors.
Any one or more members of the Board of Directors may participate in a
meeting of the Board of Directors by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at a meeting.
Whether or not there is a quorum at any meeting, a majority of the
directors who are present may adjourn the meeting to another time or place. At
any such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally called.
On any question, the names of those directors voting each way and those
directors abstaining shall be entered in the minutes if any director shall so
request.
Section 2.6. ACTION IN LIEU OF MEETING. If all the directors consent in
writing to the adoption of a resolution authorizing any action to be taken by
the Corporation, such action shall be a valid corporate action as though it had
been authorized at a meeting of the Board of Directors. Such resolution and the
written consents thereto by the directors shall be filed with the minutes of the
proceedings of the Board of Directors.
Section 2.7. RESIGNATION AND REMOVAL. A director may resign at any time by
giving written notice to the Board of Directors, the Chairman, the President or
the Secretary. Such resignation shall take effect at the time specified therein
or, if no time is specified, immediately upon its receipt by the Corporation.
The acceptance of such resignation shall not be necessary to make it effective
unless otherwise specified therein. A director may be removed as provided in the
Certificate of Incorporation of the Corporation.
Section 2.8. VACANCIES. Any vacancy in the Board of Directors that results
from an increase in the number of directorships may be filled by the vote of
directors constituting a majority of the entire Board of Directors prior to such
increase, and any other vacancy in the Board of Directors may be filled by the
vote of a majority of the directors then in office, even though the number of
directors is less than a quorum, or by the sole remaining director. Any
<PAGE> 7
director elected by the Board of Directors shall hold office until the next
annual meeting of shareholders.
ARTICLE III
Executive Committee and Other Committees
Section 3.1. APPOINTMENT AND POWERS OF COMMITTEE. The Board of Directors,
by resolution adopted by a majority of the entire Board of Directors, may
designate from its members one or more committees, each consisting of three or
more members. Subject to any limitations imposed by law or by the Certificate of
Incorporation of the Corporation, each committee shall have such authority as
the Board of Directors shall confer, which may include all the authority of the
Board of Directors (including, but not limited to, that provided for in the
Certificate of Incorporation of the Corporation or these By-laws); provided,
however, that no committee shall have authority as to (a) the submission to
shareholders of any action that needs shareholders' approval under applicable
law, (b) the filling of vacancies in the Board of Directors or any committee or
the designation of a committee, (c) the fixing of compensation of the directors
for serving on the Board of Directors or any committee, (d) the amendment or
repeal of these By-laws or the adoption of new By-laws or (e) the amendment or
repeal of any resolution of the Board of Directors which by its terms shall not
be so amendable or repealable.
Any reference in these By-laws to action taken or authorized by the Board
of Directors shall include action taken or authorized by a committee duly
designated by the Board of Directors and authorized to act pursuant to such
designation and this Section 3.1.
Section 3.2. COMMITTEE ON OFFICERS' COMPENSATION. Pursuant to Section 3.1
of these By-laws, the Board of Directors shall designate a committee to evaluate
the performance of, and to recommend the appropriate level of compensation for,
officers of the Corporation. Such committee shall have access to an advisor not
otherwise serving the Corporation. Each member of such committee (other than any
person who was a member of the Salary, Incentive Compensation and Employee
Benefits Committee of the Board of Directors on March 7, 1991) shall be an
"independent director", as that term is defined in the following sentence. For
purposes of this Section 3.2, an "independent director" shall mean a person who
(a) has not been employed by the Corporation within the past five years; (b) is
not, and is not affiliated with, a firm that is an advisor or consultant to the
Corporation; (c) is not affiliated with any customer or supplier of the
Corporation whose purchases from and/or sales to the Corporation exceed 3% of
the sales and revenues of such customer or supplier for its most recently
completed fiscal year; (d) has no personal services contract with the
Corporation; (e) is not affiliated with a tax-exempt entity, not otherwise
affiliated with the Corporation, that receives contributions from the
Corporation that exceed 3% of such entity's gross contributions for its most
recently completed fiscal year; and (f) is not a member of the "immediate
family" (as defined in Item 404(a) of Securities and Exchange Commission
Regulation S-K) of any person described in clauses (a) through (e).
Section 3.3. MEETINGS. Except as otherwise provided in these By-laws or by
resolution of the Board of Directors, each committee may adopt its own rules
governing the time and place of
<PAGE> 8
holding and the method of calling its meetings and the conduct of its
proceedings. Unless otherwise provided by such rules or by resolution of the
Board of Directors, notice of the time and place of each meeting of a committee
shall be mailed, sent or given to each member of such committee when, and in the
same manner as, required in Section 2.4 of these By-laws with respect to notices
of meetings of the Board of Directors.
Section 3.4. QUORUM AND MANNER OF ACTING. Except as otherwise specified by
the Board of Directors, a majority of the members of each committee shall
constitute a quorum for the transaction of business at any meeting of such
committee, and the act of a majority of the members present at the time of a
vote, if a quorum is present at such time, shall be the act of such committee.
The members of each committee shall act only as a committee, and the individual
members shall have no power as such.
Any one or more members of a committee may participate in a meeting of such
committee by means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at the same
time. Participation by such means shall constitute presence in person at a
meeting.
If all the members of a committee consent in writing to the adoption of a
resolution authorizing any action to be taken by the Corporation, such action
shall be as valid as though it had been authorized at a meeting of such
committee. Such resolution and the written consents thereto by the members of
such committee shall be filed with the proceedings of such committee.
Section 3.5. TERM OF OFFICE, RESIGNATIONS, REMOVALS AND VACANCIES. The term
of office of a committee member shall be as provided in the resolution of the
Board of Directors designating him but shall not exceed his term as a director.
If prior to the end of his term, a committee member should cease to be a
director, he shall cease to be a committee member. Any member of a committee may
resign at any time by giving written notice to the Board of Directors, the
Chairman, the President or the Secretary. Such resignation shall take effect as
provided in Section 2.7 of these By-laws in the case of resignations by
directors. Any member of a committee may be removed from such committee, either
with or without cause, at any time, by resolution adopted by a majority of the
entire Board of Directors. Any vacancy in a committee shall be filled by the
Board of Directors in the manner prescribed by these By-laws for the original
designation of the members of such committee.
ARTICLE IV
Officers
Section 4.1. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers of
the Corporation shall consist of a Chairman, a Chairman of the Executive
Committee, one or more Vice Chairmen, a President, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a
Secretary, a Treasurer and a Controller. The foregoing officers shall be
elected, and one or more assistant officers may also be elected, by the Board of
Directors at its annual organization meeting. Each of the such officers and
assistant officers shall
<PAGE> 9
hold office until the next annual election and until his successor is elected
and qualified, or until his earlier death, resignation, disqualification or
removal. Assistant officers may also be appointed by the President, the Chairman
of the Executive Committee or any Vice Chairman and shall hold office for such
term, which may be indefinite, as the person appointing them shall determine.
The Chairman and the President shall be chosen from among the Board of
Directors, but the other officers need not be directors. One person may hold and
perform the duties of any two, but not more than two, offices, except that
neither the Chairman nor the President may hold the office of Secretary.
Section 4.2. POWERS AND DUTIES. In addition to any powers and duties
prescribed by other provisions of these By-laws, the officers and assistant
officers shall have such powers and duties as are usually incident to their
respective offices, with such additions and limitations thereto as may from time
to time be prescribed by the Board of Directors or by their respective superior
officers.
Section 4.3. RESIGNATIONS, REMOVALS AND VACANCIES. Any officer or assistant
officer may resign at any time by giving written notice to the Board of
Directors, the Chairman, the President or the Secretary. Such resignation shall
take effect at the time specified therein or, if no time is specified,
immediately upon its receipt by the Corporation. The acceptance of such
resignation shall not be necessary to make it effective unless otherwise
specified therein. Any officer or assistant officer may be removed at any time,
with or without cause, by the Board of Directors or by the person or persons who
appointed him to his office or position, but without prejudice to any applicable
contract rights. A vacancy in any office or position arising from any cause may
be filled for the unexpired portion of the term by the Board of Directors or by
the person or persons authorized to appoint such officer or assistant officer.
Section 4.4. COMPENSATION. Subject to Section 3.2 of these By-laws, the
compensation of officers and, to the extent the Board of Directors shall deem
advisable, the compensation of all other employees, agents and representatives
of the Corporation, shall be determined by the Board of Directors or in
accordance with regulations or procedures adopted by it. Compensation may be
contingent or measured in whole or in part upon the profits of the Corporation
or a segment thereof. Provision may also be made for bonuses and other extra
compensation, for the deferment of compensation in whole or in part and for
pension and other retirement benefits. Subject to Section 3.2 of these By-laws,
the Board of Directors may delegate the authority contained in this Section 4.4
to such officers, employees or agents of the Corporation as the Board of
Directors deems advisable, except that any profit sharing, extra or deferred
compensation, pension and other similar plans or arrangements of general
application shall be approved by the Board of Directors.
Section 4.5. THE CHAIRMAN. The Chairman shall preside at all meetings of
the shareholders and the Board of Directors at which he shall be present.
Section 4.6. THE PRESIDENT. The President shall be the chief executive
officer of the Corporation and shall have general charge and supervision of the
business of the Corporation and over its several officers, subject, however, to
the control of the Board of Directors. In the absence
<PAGE> 10
of the Chairman, the President shall preside at all meetings of the shareholders
and the Board of Directors at which he shall be present.
Section 4.7. THE CHAIRMAN OF THE EXECUTIVE COMMITTEE. The Chairman of the
Executive Committee shall preside at all meetings of the Executive Committee at
which he shall be present and shall perform such other duties as from time to
time may be assigned to him by the President or by the Board of Directors.
Section 4.8. VICE CHAIRMEN. A Vice Chairman shall perform such duties as
from time to time may be assigned to him by the President or by the Board of
Directors.
Section 4.9. VICE PRESIDENTS. An Executive Vice President, Senior Vice
President or Vice President shall perform such duties as from time to time may
be assigned to him by the President or by the Board of Directors.
Section 4.10. THE SECRETARY. The Secretary shall keep or cause to be kept a
record in books provided for that purpose of all the meetings and proceedings of
the Board of Directors and the shareholders. He shall notify the directors and
shareholders of their respective meetings and shall have charge and custody of
the Corporation's seal.
Section 4.11. THE TREASURER. The Treasurer shall have charge and custody
of, and be responsible for, all funds and securities of the Corporation and
shall deposit all such funds in the name of the Corporation in such depositories
as shall be selected in accordance with the provisions of Section 5.1 of these
By-laws. He shall, subject to the direction of the Board of Directors or of a
superior officer, pay out or cause to be paid out, and shall supervise the
disbursement of, moneys of the Corporation.
Section 4.12. THE CONTROLLER. The Controller shall have general control,
charge and supervision of the accounts of the Corporation. He shall see that
proper accounts are maintained and that all accounts are properly audited from
time to time. He shall prepare or cause to be prepared the financial statements
of the Corporation.
ARTICLE V
Deposits, Checks, etc.
Section 5.1. DEPOSITS. Funds of the Corporation may be deposited from time
to time to the credit of the Corporation with such depositories as may be
selected by the Board of Directors or by any officer or officers or agent or
agents of the Corporation to whom such power may be delegated from time to time
by the Board of Directors.
Section 5.2. CHECKS, ETC. All checks and other orders for the payment of
money and promissory notes and other evidences of indebtedness are to be signed
by such officer or officers, employee or employees or agent or agents of the
Corporation, and in such manner, as are authorized by the Board of Directors, or
as are authorized by any officer or officers or employee or
<PAGE> 11
employees of the Corporation to whom such power is delegated from time to time
by the Board of Directors. To the extent authorized by the Board of Directors,
such signature or signatures may be facsimiles.
ARTICLE VI
Stock and Stock Records
Section 6.1. CERTIFICATES REPRESENTING SHARES. Subject to any applicable
law, the shares of the Corporation shall be represented by certificates in such
form as the Board of Directors may from time to time approve, shall be signed by
the Chairman, a Vice Chairman, the President or a Vice President and by the
Secretary or an Assistant Secretary and shall be sealed with the seal or
facsimile seal of the Corporation. Subject to applicable law, the signature of
any of the above-mentioned officers or assistant officers may be a facsimile. If
any officer or assistant officer who has signed or whose facsimile signature has
been placed on any certificate ceases to serve the Corporation in the capacity
as to which his signature was so used before such certificate is issued, the
certificate may nevertheless be issued with the same effect as if he were such
officer or assistant officer at the date of issue.
Section 6.2. LOST CERTIFICATES. Subject to any applicable law, when any
certificate of stock is alleged to have been lost, destroyed or wrongfully
taken, and when the Corporation has received no notice that the certificate has
been acquired by a bona fide purchaser, the Corporation shall issue a new
certificate if the owner so requests and gives the Corporation sufficient
indemnity bond and satisfies any other reasonable requirements imposed by the
Corporation. The Board of Directors may waive the requirement of any such
indemnity bond.
Section 6.3. FIXING RECORD DATE. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or entitled to receive payment of any distribution, or
for any other proper purpose, the Board of Directors may fix, in advance, a date
as the record date for any such determination of shareholders, such date to be
not more than fifty days, and, in case of a meeting of shareholders, not less
than ten days, prior to the action requiring such determination of shareholders.
When a record date is so fixed and except as otherwise expressly provided by
law, such shareholders and only such shareholders as shall be shareholders of
record on the date so fixed shall be entitled to notice of or to vote at such
meeting and any adjournment thereof, or to receive the distribution or otherwise
participate in respect of the action to which the date relates.
ARTICLE VII
Indemnification
Section 7.1. INDEMNIFICATION. The Corporation shall indemnify to the
fullest extent permitted, and in the manner provided, in the indemnification
provisions of the Business
<PAGE> 12
Corporation Law of the State of New York, as the same may be amended from time
to time, such persons as are described therein.
Section 7.2. INSURANCE. The Corporation may procure and maintain insurance
for the indemnification of such persons providing greater indemnification than
that authorized hereinabove.
Section 7.3. NONEXCLUSIVITY. The rights of indemnification under this
Article shall not be exclusive of other rights to which such persons may be
entitled as a matter of law.
ARTICLE VIII
Amendment and Repeal of By-laws
Section 8.1. BY SHAREHOLDERS. These By-laws may be amended or repealed by
the affirmative vote of the holders of a majority of the voting power of shares
entitle to vote in the election of directors.
Section 8.2. BY THE BOARD OF DIRECTORS. These By-laws may be amended or
repealed by (a) the Board of Directors, at any meeting, by a majority of the
directors present at the time of a vote, if a quorum is present at that time, or
(b) the unanimous written consent of the directors.
<PAGE> 1
EXHIBIT 11
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
The weighted average number of shares of
Common Stock were as follows ............... 90,000 97,888 90,000 97,259
====== ====== ====== ======
</TABLE>
Income used in the computation of earnings per share were as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income ............................. $10,534 $33,918 $17,171 $60,363
Dividends paid on preferred stocks ..... (130) (131) (260) (261)
------ ------ ------ ------
Income used in per share computation
of earnings ...................... $10,404 $33,787 $16,911 $60,102
======= ======= ======= =======
Earnings per share ..................... $ 0.12 $ 0.35 $ 0.19 $ 0.62
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-1-1997 APR-1-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 41,937 41,937
<SECURITIES> 0 0
<RECEIVABLES> 549,873 549,873
<ALLOWANCES> 0 0
<INVENTORY> 144,991 144,991
<CURRENT-ASSETS> 961,535 961,535
<PP&E> 694,235 694,235
<DEPRECIATION> 96,621 96,621
<TOTAL-ASSETS> 4,822,642 4,822,642
<CURRENT-LIABILITIES> 567,905 567,905
<BONDS> 1,688,221 1,688,221
0 0
16,318 16,318
<COMMON> 90,000 90,000
<OTHER-SE> 1,701,793 1,701,793
<TOTAL-LIABILITY-AND-EQUITY> 4,822,642 4,822,642
<SALES> 230,355 118,202
<TOTAL-REVENUES> 1,269,918 645,524
<CGS> 165,078 76,137
<TOTAL-COSTS> 790,040 396,387
<OTHER-EXPENSES> 306,825 157,010
<LOSS-PROVISION> 42,432 19,934
<INTEREST-EXPENSE> 87,191 45,977
<INCOME-PRETAX> 43,430 26,216
<INCOME-TAX> 26,259 15,682
<INCOME-CONTINUING> 17,171 10,534
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,171 10,534
<EPS-PRIMARY> 0.19 0.12
<EPS-DILUTED> 0 0
</TABLE>
