<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration Number 333-09461
JOINT PROXY STATEMENT
OF
W. R. GRACE & CO.
AND
FRESENIUS USA, INC.
------------------------
FRESENIUS MEDICAL CARE AG
W. R. GRACE & CO. (TO BE RENAMED FRESENIUS NATIONAL MEDICAL CARE, INC.)
PROSPECTUS
UP TO 210,000,000 AMERICAN DEPOSITARY SHARES, EACH REPRESENTING
ONE-THIRD OF AN ORDINARY SHARE, NOMINAL VALUE DM 5 PER SHARE, OF FRESENIUS
MEDICAL CARE AG
UP TO 100,000,000 SHARES, PAR VALUE $.10 PER SHARE, OF CLASS D PREFERRED STOCK
OF W. R. GRACE & CO. (TO BE RENAMED FRESENIUS NATIONAL MEDICAL CARE, INC.)
------------------------
This Joint Proxy Statement-Prospectus is being furnished to the
shareholders of W. R. Grace & Co., a New York corporation ("Grace"), which will
be renamed "Fresenius National Medical Care, Inc." ("FNMC"), in connection with
the solicitation of proxies by Grace's Board of Directors (the "Grace Board")
from holders of shares of Grace common stock ("Grace Common Stock"), and from
holders of shares of all classes of Grace preferred stock, par value $100 per
share ("Grace Preferred Stock"), for use at a special meeting of shareholders of
Grace to be held on September 16, 1996 and at any adjournments or postponements
thereof (the "Grace Special Meeting").
This Joint Proxy Statement-Prospectus also is being furnished to the
stockholders of Fresenius USA, Inc., a Massachusetts corporation ("Fresenius
USA"), in connection with the solicitation of proxies by Fresenius USA's Board
of Directors (the "Fresenius USA Board") from holders of shares of Fresenius USA
common stock, par value $.01 per share ("Fresenius USA Common Stock"), for use
at a special meeting of stockholders of Fresenius USA to be held on
September 16, 1996 and at any adjournments or postponements thereof (the
"Fresenius USA Special Meeting" and, together with the Grace Special Meeting,
the "Special Meetings").
(Continued on next page)
------------------------
ATTACHED AS ANNEX A TO THE VERSION OF THIS JOINT PROXY STATEMENT-PROSPECTUS
BEING FURNISHED TO GRACE SHAREHOLDERS IS THE NEW GRACE PROSPECTUS. SEE THE NEW
GRACE PROSPECTUS FOR CERTAIN MATTERS RELEVANT TO OWNERSHIP OF NEW GRACE
SECURITIES.
SEE "RISK FACTORS" AT PAGE 21 FOR A DISCUSSION OF CERTAIN RISKS RELATING TO THE
SECURITIES OFFERED HEREBY. SEE "SUMMARY--THE REORGANIZATION" AND
"--CONSIDERATION TO SHAREHOLDERS" AT PAGE 2 FOR A SUMMARY OF THE REORGANIZATION.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT-PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
The date of this Joint Proxy Statement-Prospectus is August 2, 1996.
<PAGE> 2
(Continued from front cover)
This Joint Proxy Statement-Prospectus relates to, among other matters,
proposals that the shareholders of Grace and Fresenius USA adopt and approve the
Agreement and Plan of Reorganization, dated February 4, 1996 and the agreements
that are exhibits thereto (all as supplemented or modified from time to time,
the "Reorganization Agreement"), by and between Grace, Fresenius AG ("Fresenius
AG"), a German corporation and the beneficial owner of approximately 70.6% of
the outstanding Fresenius USA Common Stock, and Fresenius USA, and the
transactions contemplated thereby. This Joint Proxy Statement - Prospectus also
relates to certain related matters, including, in the case of Grace, proposed
amendments to Grace's Certificate of Incorporation (the "Grace Amendment") to
change its name from "W. R. Grace & Co." to "Fresenius National Medical Care,
Inc." and to establish a new class of Grace Preferred Stock (the "New Preferred
Shares"); and, in the case of Fresenius USA, a proposed amendment (the
"Fresenius USA Plan Amendment") to the Fresenius USA 1987 Stock Option Plan (the
"Fresenius USA Plan").
The Reorganization Agreement provides for the combination of the worldwide
dialysis business of Fresenius AG, including Fresenius USA ("Fresenius Worldwide
Dialysis"), and the health care business of Grace conducted by Grace's wholly
owned subsidiary, National Medical Care, Inc., a Delaware corporation ("NMC"),
to form Fresenius Medical Care AG, a German corporation ("Fresenius Medical
Care"). The combination to be effected pursuant to the Reorganization Agreement
and the other transactions contemplated thereby are collectively referred to in
this Joint Proxy Statement-Prospectus as the "Reorganization."
The Reorganization will be effected as follows.
The Contribution of FWD. Pursuant to the Contribution Agreement,
dated February 4, 1996 (the "Contribution Agreement"), among Fresenius AG,
Sterilpharma GmbH, a wholly owned subsidiary of Fresenius AG and the
predecessor of Fresenius Medical Care, and W. R. Grace & Co.-Conn., a
wholly owned subsidiary of Grace ("Grace Chemicals"), Fresenius AG will
contribute its worldwide dialysis business, including its entire direct and
indirect ownership interest in Fresenius USA (the "Contribution"), to
Fresenius Medical Care in consideration of the issuance of approximately
35,210,000 ordinary shares, nominal value DM 5 per share, of Fresenius
Medical Care ("FMC Ordinary Shares").
The Distribution of New Grace. On the date of the Reorganization,
pursuant to the Distribution Agreement, dated February 4, 1996, among
Grace, Grace Chemicals and Fresenius AG (the "Distribution Agreement"),
Grace will spin off Grace Holding, Inc., a Delaware corporation and a
wholly owned subsidiary of Grace ("New Grace"), which will hold all of
Grace's assets and liabilities other than those of NMC (the
"Distribution").
The Recapitalization. Immediately following the Distribution, Grace
will be recapitalized so that each holder of shares of Grace Common Stock
will receive one New Preferred Share for each share of Grace Common Stock
(the "Recapitalization"). Following the Reorganization, all shares of Grace
Preferred Stock, including the New Preferred Shares, will remain
outstanding as shares of FNMC.
The Mergers. On the date of the Reorganization, a wholly owned New
York subsidiary of Fresenius Medical Care ("Grace Merger Sub") will be
merged with and into Grace, with Grace the surviving corporation (the
"Grace Merger"); and a wholly owned Massachusetts subsidiary of Fresenius
Medical Care ("FUSA Merger Sub") will be merged with and into Fresenius
USA, with Fresenius USA the surviving corporation (the "Fresenius USA
Merger" and, collectively with the Grace Merger, the "Mergers"). In the
Grace Merger, all shares of Grace Common Stock outstanding will be
cancelled and the holders of Grace Common Stock (other than any Grace
Common Stock owned by Fresenius AG, Fresenius USA, Grace or their
respective subsidiaries, and other than Grace Common Stock as to which
appraisal rights have been asserted and not withdrawn or otherwise lost)
will receive approximately 1.013 American Depositary Shares ("ADSs")
represented by American Depositary Receipts ("ADRs"), each representing
one-third of an FMC Ordinary Share, for each share of Grace Common Stock
held by them based upon the number of shares of, and options with respect
to, Grace Common Stock outstanding as of July 15, 1996; Grace Preferred
Stock will not be exchanged for FMC Ordinary Shares in the Grace Merger. In
the Fresenius USA Merger, all shares of Fresenius USA Common Stock
outstanding will be cancelled and the holders of Fresenius USA Common Stock
(other than Fresenius USA Common Stock owned by Fresenius AG, Fresenius
USA, Grace or their respective subsidiaries, and other than Fresenius USA
Common Stock as to which appraisal rights have been asserted and not
withdrawn or otherwise lost) will receive approximately 1.112 ADSs,
represented by ADRs, each representing one-third of an FMC Ordinary Share,
per share of Fresenius USA Common Stock held by them.
<PAGE> 3
(Continued from front cover)
The Contribution of Fresenius USA. As promptly as practicable
following the Mergers, Fresenius Medical Care will contribute Fresenius USA
to FNMC.
Grace does not intend to effect the Distribution in the event that the
Reorganization (including the Distribution and the Grace Merger) is not approved
at the Grace Meeting. Following the Reorganization, it is expected that shares
of New Grace Common Stock will be listed on the New York Stock Exchange, Inc.
(the "NYSE"). It is also expected that the ADSs will be listed on the NYSE.
Following the Reorganization, FNMC intends to seek to list the New Preferred
Shares on a national stock exchange. However, no assurance can be given that the
New Preferred Shares will satisfy the listing criteria of any such exchange. The
Reorganization Agreement, the text of the Grace Amendment and the text of the
Fresenius USA Plan, as amended by the proposed Fresenius USA Plan Amendment are
attached to this Joint Proxy Statement-Prospectus as Appendices A, B and E,
respectively.
The following table summarizes what the shareholders of Grace and Fresenius
USA will receive in the Reorganization:
<TABLE>
<S> <C>
one share of: will be entitled to receive:
Grace Common Stock, which had a Approximately 1,013 ADSs, each ADS
closing price on August 1, representing one-third
1996 in NYSE composite of an FMC Ordinary Share
trading of $63 1/4 (based upon the number of
shares of, and options with
respect to, Grace Common Stock
outstanding as of July 15, 1996)
One New Preferred Share
One share of New Grace Common Stock
Fresenius USA Common Stock, which Approximately 1.112 ADSs, each
had a closing price on ADS representing one-third of an
August 1, 1996 in AMEX FMC Ordinary Share
composite trading of $19
</TABLE>
Shares of Grace Preferred Stock will remain outstanding following the
Reorganization.
In connection with approval of the Reorganization by the Grace Board, the
Grace Board received opinions from CS First Boston and Merrill Lynch to the
effect that, in the opinion of such firms, as of February 4, 1996, the terms of
the Distribution Payment and the Grace Merger, taken together, were fair, from a
financial point of view, to the holders of Grace Common Stock. In connection
with these opinions, these firms performed a variety of financial and
comparative analyses which included, among other things, valuation analyses with
respect to Fresenius Medical Care and NMC and made a presentation to the Grace
Board. Such opinions and presentation are based on certain assumptions and are
subject to certain limitations. Such opinions and presentation are described
herein under "BACKGROUND AND REASONS" at pages 37 through 57, and the opinions
of CS First Boston and Merrill Lynch are set forth in full in Appendix C hereto.
In connection with approval of the Reorganization by the Fresenius USA
Board, the Fresenius USA Independent Committee received an opinion from Salomon
Brothers to the effect that, in the opinion of such firm, as of May 8, 1996, the
exchange ratio of 0.37067735 FMC Ordinary Shares to be issued in exchange for
each share of Fresenius USA Common Stock held by the stockholders of Fresenius
USA (other than Fresenius AG and Grace and their respective subsidiaries) was
fair, from a financial point of view, to the holders of Fresenius USA Common
Stock (other than Fresenius AG and Grace and their respective subsidiaries). In
connection with this opinion, Salomon Brothers performed a variety of financial
and comparative analyses which included, among other things, valuation analyses
with respect to Fresenius
<PAGE> 4
Medical Care and Fresenius USA and made a presentation to the Fresenius USA
Independent Committee. Such opinion and presentation are based on certain
assumptions and are subject to certain limitations. Such opinion and
presentation are described herein under "BACKGROUND AND REASONS" at pages 47
through 57, and the opinion of Salomon Brothers is set forth in full in Appendix
D hereto.
See the "INDEX OF DEFINED TERMS" at page 245 for the locations of the
definitions of capitalized terms used in this Joint Proxy Statement-Prospectus.
(End of front cover)
<PAGE> 5
AVAILABLE INFORMATION
Each of Grace and Fresenius USA is (and, following the Reorganization, FNMC
and Fresenius Medical Care will be) subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, each files (and FNMC and Fresenius Medical Care will file)
reports and other information with the Securities and Exchange Commission (the
"Commission"). The reports and other information filed by Grace and Fresenius
USA (and to be filed by FNMC and Fresenius Medical Care) with the Commission can
be inspected and copied at the Commission's public reference room located at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the public
reference facilities in the Commission's regional offices located at: 7 World
Trade Center, 13th Floor, New York, New York 10048; and at Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained at prescribed rates by writing to the Securities
and Exchange Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, reports, proxy statements, and other
information concerning Fresenius USA may be inspected at the offices of the
AMEX, 86 Trinity Place, New York, New York 10005. Reports and other information
concerning Grace prior to the Reorganization (and, following the Reorganization,
Fresenius Medical Care) may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
Registration Statements have been filed pursuant to the Securities Act of
1933, as amended (the "Securities Act"), covering the ADSs representing FMC
Ordinary Shares issuable in the Reorganization and the New Preferred Shares
issuable in the Recapitalization (including exhibits and amendments thereto,
collectively, the "Registration Statement"). This Joint Proxy
Statement-Prospectus constitutes both the Joint Proxy Statement of Grace and
Fresenius USA relating to the solicitation of proxies for use at their
respective Special Meetings and the Prospectus for the ADSs and the New
Preferred Shares filed as part of the Registration Statement. All information in
the Registration Statement regarding Grace and its subsidiaries has been
provided by Grace, all information regarding Fresenius USA has been provided by
Fresenius USA, and all information regarding Fresenius AG or its worldwide
dialysis business other than Fresenius USA has been provided by Fresenius AG.
New Grace has filed with the Commission a registration statement on Form S-1
(including exhibits and amendments thereto, the "New Grace Registration
Statement"), which includes a Prospectus (the "New Grace Prospectus"), pursuant
to the Exchange Act covering the shares of common stock, par value $.01 per
share (the "New Grace Common Stock"), issuable in the Distribution. The New
Grace Prospectus is attached as Annex A to the version of this Joint Proxy
Statement-Prospectus being furnished to Grace shareholders. None of Fresenius
AG, Fresenius USA or Fresenius Medical Care has participated in the preparation
of the New Grace Prospectus, has any independent knowledge of the matters set
forth therein (except to the extent such documents contain excerpts from this
Joint Proxy Statement-Prospectus without material change) or takes any
responsibility for any information contained therein. This Joint Proxy
Statement-Prospectus and the proxies are first being provided to shareholders of
Grace and Fresenius USA on or about August 5, 1996.
This Joint Proxy Statement-Prospectus does not contain all of the
information set forth in the Registration Statements covering the securities
offered hereby which Fresenius Medical Care and Grace have filed with the
Commission, certain portions of which have been omitted pursuant to the rules
and regulations of the Commission, and to which portions reference is hereby
made for further information with respect to Fresenius Medical Care, Grace and
the securities offered hereby, but all material terms of each such document are
described herein. Statements contained herein concerning any documents are not
necessarily complete; in each instance, reference is made to the copies of such
documents filed as exhibits to the Registration Statement, and each such
statement is qualified in its entirety by such reference. This Joint Proxy
Statement-Prospectus also does not contain all of the information regarding New
Grace set forth in the New Grace Registration Statement. See "ADDITIONAL
INFORMATION" in the New Grace Prospectus attached as Annex A to the version of
this Joint Proxy Statement-Prospectus being furnished to Grace shareholders.
FOLLOWING THE REORGANIZATION, FRESENIUS MEDICAL CARE WILL PREPARE ANNUAL
AND QUARTERLY REPORTS WHICH WILL BE DISTRIBUTED TO ITS SHAREHOLDERS. FRESENIUS
MEDICAL CARE'S ANNUAL REPORTS WILL CONTAIN FINANCIAL STATEMENTS EXAMINED AND
REPORTED UPON, WITH OPINIONS EXPRESSED, BY FRESENIUS MEDICAL CARE'S AUDITORS.
THE CONSOLIDATED FINANCIAL STATEMENTS OF FRESENIUS MEDICAL CARE INCLUDED IN SUCH
ANNUAL AND QUARTERLY REPORTS
i
<PAGE> 6
WILL BE PREPARED IN CONFORMITY WITH U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("US GAAP"), AND SUCH OPINIONS OF FRESENIUS MEDICAL CARE'S AUDITORS
WILL BE AS TO PREPARATION IN CONFORMITY WITH US GAAP. See "DESCRIPTION OF THE
POOLING AGREEMENT." Fresenius Medical Care will also file annual reports with
the Commission on Form 20-F, which will be made available to Morgan Guaranty
Trust Company of New York, as depositary (the "Depositary") with respect to the
ADSs and ADRs evidencing such ADSs. The first such report is expected to be
issued with regard to the fiscal year ending December 31, 1996. Fresenius
Medical Care will file its quarterly reports with the Commission under cover of
Form 6-K.
Fresenius Medical Care will also furnish the Depositary with all notices of
shareholder meetings and other reports and communications that are made
generally available to shareholders of Fresenius Medical Care. The Depositary
will, to the extent permitted by law, arrange for the transmittal to the
registered holders of ADRs of all notices, reports and communications provided
by Fresenius Medical Care, and will make such notices, reports and
communications, together with the governing instruments affecting the FMC
Ordinary Shares and amendments thereto, available for inspection by registered
holders of ADRs at the principal office of the Depositary in New York, presently
located at 60 Wall Street, New York, New York 10260.
Following the Reorganization, in addition to Annual Reports on Form 20-F
and quarterly reports, Fresenius Medical Care intends to file with the
Commission materials with respect to its annual meeting of shareholders and any
special meeting of shareholders under cover of Form 6-K. Such materials will
also be made available to the Depositary which will forward such materials with
requests for voting instructions to all registered holders of ADRs in accordance
with the terms of the Deposit Agreement described under "DESCRIPTION OF AMERICAN
DEPOSITARY RECEIPTS." See "DESCRIPTION OF THE POOLING AGREEMENT." Fresenius
Medical Care intends to provide in such materials information generally
comparable to that which would be provided to shareholders of a U.S. corporation
in a proxy statement filed with the Commission, except that certain information
including information relating to Fresenius Medical Care's management, executive
compensation and options, beneficial ownership of Fresenius Medical Care
securities and certain related party transactions will be provided in accordance
with the disclosure requirements applicable to "foreign private issuers," as
defined in the Commission's rules.
Following the completion of the Reorganization, by virtue of the issuance
of the New Preferred Shares pursuant to the Recapitalization, FNMC will continue
to be subject to the informational requirements of the Exchange Act, and, in
accordance therewith, will continue to file reports, proxy statements and other
information with the Commission and any stock exchange on which such shares are
listed or quoted.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION ON BEHALF OF FRESENIUS MEDICAL CARE, FRESENIUS USA, FRESENIUS AG,
GRACE OR NEW GRACE CONCERNING THE FMC ORDINARY SHARES, THE ADSS, THE NEW
PREFERRED SHARES, THE NEW GRACE COMMON STOCK OR ANY OF THE MATTERS BEING
CONSIDERED AT EITHER SPECIAL MEETING IF NOT CONTAINED IN OR APPENDED TO THIS
JOINT PROXY STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT
PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS JOINT PROXY
STATEMENT-PROSPECTUS OR THE NEW GRACE PROSPECTUS WHICH IS ATTACHED AS ANNEX A TO
THE VERSION OF THIS JOINT PROXY STATEMENT-PROSPECTUS BEING FURNISHED TO GRACE
SHAREHOLDERS, OR THE SOLICITATION OF A PROXY, BY ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER, OR SOLICITATION OF AN OFFER, OR PROXY
SOLICITATION.
NOTICE PURSUANT TO NEW HAMPSHIRE LAW: NEITHER THE FACT THAT A REGISTRATION
STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED WITH THE STATE OF NEW
HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS
LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF
STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT
MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS
AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS
PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN
APPROVAL TO, ANY PERSON,
ii
<PAGE> 7
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
THIS JOINT PROXY STATEMENT-PROSPECTUS AND THE NEW GRACE PROSPECTUS
INCORPORATE BY REFERENCE DOCUMENTS NOT INCLUDED HEREIN OR THEREIN OR DELIVERED
HEREWITH OR THEREWITH. DOCUMENTS RELATING TO FRESENIUS USA, EXCLUDING EXHIBITS
UNLESS SPECIFICALLY INCORPORATED HEREIN, ARE AVAILABLE WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE CLERK, FRESENIUS USA, INC., 2637 SHADELANDS DRIVE, WALNUT
CREEK, CALIFORNIA 94598. TELEPHONE REQUESTS MAY BE DIRECTED TO (510) 295-0200.
DOCUMENTS RELATING TO GRACE AND NEW GRACE, EXCLUDING EXHIBITS UNLESS
SPECIFICALLY INCORPORATED HEREIN OR IN THE NEW GRACE PROSPECTUS, ARE AVAILABLE
WITHOUT CHARGE UPON REQUEST IN WRITING TO W. R. GRACE & CO. CORPORATE
COMMUNICATIONS, ONE TOWN CENTER ROAD, BOCA RATON, FLORIDA 33486-1010. TELEPHONE
REQUESTS MAY BE DIRECTED TO (407) 362-2300. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY SEPTEMBER 9, 1996.
The following documents filed with the Commission by Fresenius USA (File
No. 1-8350) are incorporated herein by reference: (a) Fresenius USA's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 and (b)
Fresenius USA's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
The following documents filed with the Commission by Grace (File No.
1-3720) are incorporated herein by reference: (a) Grace's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, (b) Grace's Current Reports on
Form 8-K dated April 15, May 6 and July 11, 1996 and (c) Grace's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
All documents filed by either Fresenius USA or Grace pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the termination of the offering of the securities offered hereby shall
be deemed to be incorporated herein by reference and to be a part hereof from
the date of such filing. Any statement contained herein or in a document
incorporated or deemed to be incorporated herein by reference shall be deemed to
be modified or superseded for purposes hereof to the extent that a statement
contained herein or in any other subsequently filed document which also is, or
is deemed to be, incorporated herein by reference modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part hereof, except as so modified or superseded.
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER THE FEDERAL SECURITIES LAWS
Fresenius Medical Care is a corporation organized under the laws of
Germany. Certain of Fresenius Medical Care's directors and executive officers
and certain of the experts named herein are residents of Germany. A substantial
portion of the assets of Fresenius Medical Care and of such individuals is
located outside the U.S. As a result, it may be difficult or impossible for
investors to effect service of process upon such persons within the U.S. with
respect to matters arising under the U.S. federal securities laws or to enforce
against them in U.S. courts judgments of such courts predicated upon the civil
liability provisions of such federal securities laws. Fresenius Medical Care has
been advised by its German counsel, Norr, Stiefenhofer & Lutz, that there may be
doubt as to the enforceability in Germany, in original actions, of liabilities
predicated on the U.S. federal securities laws and that in Germany both
recognition and enforcement of court judgments with respect to civil liability
provisions of U.S. federal securities laws are solely governed by the provisions
of the German Civil Procedure Code (Zivilprozessordnung or ZPO). In some cases,
especially when according to the German statutory provisions the international
jurisdiction of the U.S. court will not be recognized or the judgment conflicts
with basic principles (e.g., the restriction to compensatory damages and limited
pre-trial discovery) of German law, the U.S. judgment might not be recognized by
a German court. The service of process in U.S. proceedings on persons in Germany
is regulated by a multilateral treaty guaranteeing service of writs and other
legal documents in civil cases if the current address of the defendant is known.
iii
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION................................................................. i
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..................................... iii
ENFORCEABILITY OF CIVIL LIABILITIES UNDER THE FEDERAL SECURITIES LAWS................. iii
SUMMARY............................................................................... 1
The Companies....................................................................... 1
The Reorganization.................................................................. 2
Consideration to Shareholders....................................................... 2
The Special Meetings................................................................ 5
Recommendations of the Boards of Directors.......................................... 6
The Reorganization Agreement........................................................ 8
Certain Federal Income Tax Consequences............................................. 11
Appraisal Rights.................................................................... 11
New Preferred Shares................................................................ 12
Certain Effects of the Reorganization on the Rights of Grace Shareholders and
Fresenius USA Stockholders....................................................... 12
Certain Considerations.............................................................. 12
Markets and Market Prices........................................................... 13
Summary Selected Special-Purpose, Consolidated Financial Information of Grace....... 15
Summary Selected Historical Financial Information of Fresenius Worldwide Dialysis... 16
Summary Selected Historical Financial Information of Fresenius USA.................. 17
Summary Selected Unaudited Pro Forma Financial Information of Fresenius Medical
Care............................................................................. 18
Comparative Per Share Data.......................................................... 19
RISK FACTORS.......................................................................... 21
Risks Relating to the Business of Fresenius Medical Care............................ 21
Risks Relating to Regulatory Matters................................................ 23
Other Risks......................................................................... 28
THE SPECIAL MEETINGS.................................................................. 33
General............................................................................. 33
Date, Place and Time................................................................ 33
Record Dates........................................................................ 33
Votes Required...................................................................... 34
Voting and Revocation of Proxies.................................................... 35
Solicitation of Proxies............................................................. 36
Grace Amendment..................................................................... 36
BACKGROUND AND REASONS................................................................ 37
Background of the Reorganization; Reasons for the Recommendation of the Grace
Board............................................................................ 37
Background of the Reorganization; Reasons for the Recommendation of the Fresenius
USA Board........................................................................ 47
Recommendation of the Fresenius USA Independent Committee and the Board of
Directors........................................................................ 50
THE REORGANIZATION.................................................................... 58
The Reorganization Agreement........................................................ 58
Consideration to Shareholders....................................................... 60
Effective Time...................................................................... 61
Recommendation of the Grace Board; Non-Solicitation................................. 61
Termination Fees.................................................................... 62
Expenses............................................................................ 62
Termination......................................................................... 63
Conduct of Business Prior to Effective Time; Certain Covenants...................... 63
Employee Benefits................................................................... 65
Conditions.......................................................................... 65
Waiver and Amendment................................................................ 67
The Contribution Agreement.......................................................... 67
The Distribution Agreement.......................................................... 68
The Grace Tax Sharing and Indemnification Agreement................................. 68
The Fresenius Tax Indemnification Agreement......................................... 69
Additional Agreements of Fresenius USA.............................................. 69
Continuing Arrangements between Fresenius Medical Care and Fresenius AG............. 70
Accounting Treatment................................................................ 73
Appraisal Rights.................................................................... 73
</TABLE>
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<TABLE>
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PAGE
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<S> <C>
Exchange of Certificates............................................................ 78
BUSINESS OF FRESENIUS MEDICAL CARE.................................................... 80
General.......................................................................... 80
Renal Industry Overview.......................................................... 80
Strategy......................................................................... 83
Business of Fresenius Worldwide Dialysis............................................ 86
Fresenius AG..................................................................... 86
Fresenius Worldwide Dialysis..................................................... 87
Fresenius Worldwide Dialysis Products............................................ 88
Marketing, Distribution and Service.............................................. 91
Manufacturing Operations and Sources of Supply................................... 92
International Development........................................................ 93
Research and Development......................................................... 93
Patents, Trademarks and Licenses................................................. 94
Competition...................................................................... 94
Employees........................................................................ 95
Properties....................................................................... 95
Litigation....................................................................... 96
Business of Fresenius USA........................................................... 96
Fresenius USA.................................................................... 96
History.......................................................................... 97
Fresenius USA Products........................................................... 98
Marketing, Distribution and Service.............................................. 99
Manufacturing Operations and Sources of Supply................................... 100
Research and Development......................................................... 101
Patents, Trademarks and Licenses................................................. 102
Competition...................................................................... 102
Employees........................................................................ 102
Properties....................................................................... 103
Material Contracts between Fresenius AG and Fresenius USA........................ 103
Business of NMC..................................................................... 105
W. R. Grace & Co. ............................................................... 105
Overview......................................................................... 105
DSD Operations................................................................... 106
Medical Products Group........................................................... 111
NMC Homecare..................................................................... 112
Competition...................................................................... 115
Employees........................................................................ 117
Properties....................................................................... 117
Regulatory and Legal Matters........................................................ 118
Regulatory Overview.............................................................. 118
Product Regulation............................................................... 119
Facilities and Operational Regulation............................................ 121
Reimbursement.................................................................... 122
Anti-kickback Statute, False Claims Act, Stark Law and Fraud and Abuse Laws...... 127
Legal and Regulatory Proceedings................................................. 130
Health Care Reform............................................................... 142
Changes in the Health Care Industry.............................................. 142
GRACE SPECIAL-PURPOSE SELECTED FINANCIAL DATA......................................... 144
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-- NMC.............................................................................. 145
Overview......................................................................... 145
Results of Operations............................................................ 146
Liquidity and Capital Resources.................................................. 149
SELECTED FINANCIAL DATA OF FRESENIUS WORLDWIDE DIALYSIS............................... 152
SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND U.S. GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES............................................................... 153
Goodwill and Business Acquisitions............................................... 153
Capitalization of Interest....................................................... 153
Leasing.......................................................................... 153
Recording of Provisions, Reserves, Valuation Adjustments......................... 153
Pensions and Similar Obligations................................................. 154
</TABLE>
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<TABLE>
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<S> <C>
Foreign Currency................................................................. 154
Deferred Taxes................................................................... 154
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-- FRESENIUS WORLDWIDE DIALYSIS..................................................... 155
Overview......................................................................... 155
Results of Operations............................................................ 157
Liquidity and Capital Resources.................................................. 160
SELECTED FINANCIAL DATA OF FRESENIUS USA.............................................. 163
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-- FRESENIUS USA.................................................................... 164
Overview......................................................................... 164
Results of Operations............................................................ 166
Liquidity and Capital Resources.................................................. 168
FRESENIUS MEDICAL CARE AG UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION......................................................................... 170
MANAGEMENT OF FRESENIUS MEDICAL CARE.................................................. 178
General............................................................................. 178
The Supervisory Board............................................................... 178
Members of the FMC Supervisory Board................................................ 178
FMC Supervisory Board Compensation.................................................. 179
FMC Management Board and Certain Other Executive Officers........................... 179
Compensation of the FMC Management Board and Certain Other Executive Officers....... 182
Stock Option Plan................................................................... 183
SECURITY OWNERSHIP.................................................................... 185
Security Ownership of Certain Beneficial Owners and Management of Fresenius Medical
Care............................................................................. 185
Security Ownership of Certain Beneficial Owners and Management of Fresenius AG...... 185
Security Ownership of Certain Beneficial Owners and Management of Fresenius USA..... 186
INTERESTS OF CERTAIN PERSONS.......................................................... 188
Other Interests in the Reorganization............................................... 188
FRESENIUS USA EXECUTIVE COMPENSATION.................................................. 189
Summary Compensation................................................................ 189
Securities Repurchases.............................................................. 191
Compensation Committee Interlocks and Insider Participation......................... 193
Indemnification Agreements.......................................................... 193
FINANCING............................................................................. 194
NMC Credit Agreement................................................................ 194
Other Indebtedness.................................................................. 196
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS TO GRACE AND GRACE
SHAREHOLDERS........................................................................ 197
Consequences of the Distribution.................................................... 197
Consequences of the Recapitalization................................................ 198
Consequences of the Grace Merger.................................................... 199
CERTAIN INCOME TAX CONSEQUENCES OF THE TRANSACTIONS TO HOLDERS OF FRESENIUS USA COMMON
STOCK............................................................................... 201
U.S. Federal Income Tax Consequences of the Merger.................................. 201
U.S. and German Tax Consequences of Holding FMC Ordinary Shares or ADSs............. 201
Other Tax Consequences.............................................................. 204
DESCRIPTION OF NEW PREFERRED SHARES................................................... 206
General............................................................................. 206
Dividends........................................................................... 206
Adjustments......................................................................... 208
Voting Rights....................................................................... 208
Optional Redemption................................................................. 209
Preemptive Rights................................................................... 209
DESCRIPTION OF CAPITAL STOCK OF FRESENIUS MEDICAL CARE................................ 210
General............................................................................. 210
Absence of a Public Market.......................................................... 210
Dividend Rights..................................................................... 210
Liquidation Rights.................................................................. 211
Preemptive Rights................................................................... 211
</TABLE>
vi
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Voting Rights....................................................................... 211
FMC Preferred Shares................................................................ 212
Exchange Controls and Other Limitations............................................. 213
DESCRIPTION OF THE POOLING AGREEMENT.................................................. 214
General............................................................................. 214
Independent Directors............................................................... 214
Extraordinary Transactions.......................................................... 214
Interested Transactions............................................................. 214
Disposition of Voting Shares; Take-along Rights..................................... 214
Listing of American Depositary Shares; SEC Filings.................................. 215
Term................................................................................ 216
Amendment........................................................................... 216
Enforcement; Governing Law.......................................................... 216
Directors and Officers.............................................................. 216
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS........................................... 217
Deposit, Transfer and Withdrawal.................................................... 217
Distributions on Deposited Securities............................................... 218
Disclosure of Interests............................................................. 220
Record Dates........................................................................ 220
Voting of Deposited Securities...................................................... 220
Inspection of Transfer Books........................................................ 221
Reports and Other Communications.................................................... 221
Changes Affecting Deposited Securities.............................................. 221
Amendment and Termination of Deposit Agreement...................................... 222
Charges of Depositary............................................................... 222
Liability of Holders for Taxes...................................................... 223
General Limitations................................................................. 223
Governing Law....................................................................... 224
Morgan Guaranty Trust Company of New York........................................... 224
COMPARISON OF CERTAIN RIGHTS OF SHAREHOLDERS OF GRACE AND FRESENIUS USA............... 225
Duties of Directors................................................................. 225
Size and Classification of the Board of Directors................................... 226
Removal of Directors; Filling Vacancies on the Board of Directors................... 227
Shareholder Nominations............................................................. 228
Action by Written Consent........................................................... 229
Meetings of Shareholders............................................................ 229
Shareholder Proposals............................................................... 230
Required Vote for Authorization of Certain Actions.................................. 230
Amendment of Corporate Charter and By-laws.......................................... 231
Appraisal Rights.................................................................... 231
Fair Price and Anti-Greenmail Provisions............................................ 232
Stock Rights Plan................................................................... 232
State Anti-takeover Statutes........................................................ 233
Limitation on Directors' Liability.................................................. 234
Indemnification of Officers and Directors........................................... 235
Cumulative Voting................................................................... 235
Conflict-of-Interest Transactions................................................... 236
Dividends and Other Distributions................................................... 236
Issuance of Rights or Options to Purchase Shares to Directors, Officers and
Employees........................................................................ 237
Loans to Directors.................................................................. 237
Class Action Suits.................................................................. 238
Shareholder Derivative and Breach of Fiduciary Duty Suits........................... 238
Right to Inspect Corporate Books and Records; Right to Inspect Shareholder Lists.... 239
SEC Reporting....................................................................... 240
AMENDMENT TO THE FRESENIUS USA 1987 STOCK OPTION PLAN................................. 241
The Fresenius USA Plan.............................................................. 241
Terms of the Grant to Dr. Lipps..................................................... 242
Effect of the Amendment............................................................. 242
EXPERTS............................................................................... 243
VALIDITY OF SHARES.................................................................... 243
SUBMISSION OF SHAREHOLDER PROPOSALS................................................... 244
</TABLE>
vii
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<TABLE>
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<S> <C>
INDEX OF DEFINED TERMS................................................................ 245
INDEX OF FINANCIAL STATEMENTS......................................................... F-1
Appendix A - Reorganization Agreement
Appendix B - Form of Certificate of Amendment of the Certificate of Incorporation of W. R.
Grace & Co.
Appendix C - Merrill Lynch and CS First Boston Fairness Opinions
Appendix D - Salomon Brothers Fairness Opinion
Appendix E - Fresenius USA 1987 Stock Option Plan
Appendix F - Sections 910 and 623 of the NYBCL
Appendix G - Sections 85 through 98 of the MBCL
Appendix H - Letter Agreement, dated May 8, 1996, among Fresenius AG, Fresenius USA and
Grace
Appendix I - Agreement, dated May 8, 1996 between Fresenius AG and Fresenius USA
Annex A Grace Holding, Inc. Prospectus (included only with copies of this Joint Proxy
Statement-Prospectus being furnished to shareholders of Grace)
</TABLE>
viii
<PAGE> 13
SUMMARY
The following summary is not intended to be complete and is qualified in
all respects by the more detailed information included in this Joint Proxy
Statement-Prospectus, the Appendices hereto and the documents incorporated
herein by reference. Shareholders are urged to read carefully this Joint Proxy
Statement-Prospectus, including the Appendices hereto and the documents
incorporated herein by reference, in their entirety. In addition, Grace
shareholders are urged to read the New Grace Prospectus attached as Annex A to
the version of this Joint Proxy Statement-Prospectus furnished to Grace
shareholders.
THE COMPANIES
GRACE
Grace, through its subsidiaries, is primarily engaged in the packaging and
specialty chemicals businesses on a worldwide basis and, through NMC, in
specialized health care activities. In the Reorganization, Grace will spin off
New Grace, containing all of its businesses other than NMC. At such time,
Grace's name will be changed to "Fresenius National Medical Care, Inc." and New
Grace's name will be changed to "W. R. Grace & Co."
NMC is primarily engaged in (a) providing kidney dialysis services, (b)
manufacturing and distributing products and equipment for dialysis treatment and
performing clinical laboratory testing and other medical services, and (c)
providing home infusion, home respiratory therapy and home health services. NMC
operates through three principal business units: the Dialysis Services Division
("DSD"), the Medical Products Group ("MPG"), and the NMC Homecare Division ("NMC
Homecare"). NMC's address is Reservoir Place, 1601 Trapelo Road, Waltham,
Massachusetts 02154, and its telephone number is (617) 466-9850.
Grace's address is One Town Center Road, Boca Raton, Florida 33486-1010 and
its telephone number is (407) 362-2000. Following the Reorganization, FNMC's
address and telephone number will become those of NMC listed above.
FRESENIUS AG
Fresenius AG is a German corporation which develops, manufactures and
distributes pharmaceuticals and medical systems products and services on a
global basis. Fresenius AG conducts business in four operating divisions:
Fresenius Worldwide Dialysis, Pharmaceuticals Division, Intensive Care and
Diagnostics Division, and Project Business Division. Fresenius Worldwide
Dialysis develops, manufactures and distributes dialysis systems products for
the treatment of patients suffering from kidney failure, including dialysis
machines, dialyzers, bloodlines, hemodialysis concentrates and peritoneal
dialysis solutions. Fresenius AG's address is Borkenberg 14, 61440 Oberursel,
Germany (near Frankfurt), and its telephone number is 011-49-6171-600.
FRESENIUS USA
Fresenius USA is a manufacturer and the exclusive North American
distributor of Fresenius Worldwide Dialysis' products. Fresenius AG is the
beneficial owner of approximately 70.6% of the outstanding Fresenius USA Common
Stock. See "SECURITY OWNERSHIP." Fresenius USA's address is 2637 Shadelands
Drive, Walnut Creek, California 94598, and its telephone number is (510)
295-0200.
FRESENIUS MEDICAL CARE
Fresenius Medical Care will be the world's largest integrated dialysis
products and services company. Fresenius Medical Care will combine Fresenius
Worldwide Dialysis, a leading international provider of a complete line of
dialysis products with a commitment to technological superiority and innovation,
with NMC, a leading provider of dialysis services which has a commitment to
quality clinical treatment. Following consummation of the Reorganization,
Fresenius Medical Care will have its corporate headquarters at Borkenberg 14,
61440 Oberursel, Germany (near Frankfurt).
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<PAGE> 14
THE REORGANIZATION
The following transactions are to be consummated in connection with the
Reorganization:
- Fresenius AG will contribute Fresenius Worldwide Dialysis including its
shares of Fresenius USA, to Fresenius Medical Care.
- The Reorganization Agreement provides that NMC will enter into the NMC
Credit Agreement and, on the Effective Date, borrow an amount sufficient
to finance the payment to, and the assumption of indebtedness of, Grace
Chemicals such that the Debt of Grace on a consolidated basis, at the
Effective Time, will not exceed $2.263 billion, subject to adjustment as
provided in the Reorganization Agreement.
- Grace Chemicals will then distribute the capital stock of NMC to Grace,
as a result of which Grace Chemicals and NMC will be sister companies.
- Immediately thereafter, Grace will contribute the capital stock of Grace
Chemicals to New Grace and effect the Distribution.
- Immediately following the Distribution, Grace will effect the
Recapitalization, in which each holder of Grace Common Stock will hold
thereafter one share of Grace Common Stock and one New Preferred Share
for each share of Grace Common Stock held.
- Immediately following the Recapitalization, each of Grace and Fresenius
USA will merge with wholly owned subsidiaries of Fresenius Medical Care.
- As promptly as practicable following the Mergers, Fresenius Medical Care
will contribute Fresenius USA to FNMC.
CONSIDERATION TO SHAREHOLDERS
In the Reorganization, Fresenius AG and shareholders of Grace and Fresenius
USA will receive the following consideration:
FRESENIUS AG
- Fresenius Worldwide Dialysis, including all Fresenius USA Common Stock
held by Fresenius AG or its subsidiaries, will be contributed to
Fresenius Medical Care in exchange for FMC Ordinary Shares representing
approximately 50.3% of all FMC Ordinary Shares outstanding, on a fully
diluted basis, immediately following the Reorganization.
GRACE COMMON SHAREHOLDERS
- The closing price of Grace Common Stock in NYSE composite trading on
August 1, 1996 was $63 1/4 per share.
- Each holder of Grace Common Stock issued and outstanding at the time of
Distribution (the "Time of Distribution") will receive one share of New
Grace Common Stock in the Distribution.
- Each holder of Grace Common Stock issued and outstanding after the Time
of Distribution will receive one New Preferred Share.
- Holders of shares of Grace Common Stock issued and outstanding
immediately prior to the Effective Time (other than any shares of Grace
Common Stock owned by Fresenius AG or its subsidiaries, Fresenius USA or
its subsidiaries or any Grace subsidiary, any shares of Grace Common
Stock held in Grace's treasury or any shares of Grace Common Stock
dissenting from the Reorganization), and NMC employees who are holders of
options with respect to Grace Common Stock will be allocated 44.8% of the
FMC Ordinary Shares outstanding on a fully diluted basis. As of July 15,
1996, there were outstanding 92,001,176 shares of Grace Common Stock, and
options with respect to approximately 231,000 shares of Grace Common
Stock held by employees of NMC (none of whom is an officer or
2
<PAGE> 15
director of Grace). On this basis, assuming that there are no Grace
Common Dissenting Shareholders and that each option with respect to Grace
Common Stock is converted to an option with respect to 3.7 ADSs, each
share of Grace Common Stock will be converted in the Grace Merger into
the right to receive 1.013 ADSs, each such ADS representing one-third of
an FMC Ordinary Share.
GRACE PREFERRED SHAREHOLDERS
- Each share of Grace Preferred Stock and each New Preferred Share issued
and outstanding immediately prior to the Effective Time will remain
issued and outstanding as FNMC stock.
FRESENIUS USA COMMON STOCKHOLDERS
- The closing price of Fresenius USA Common Stock in AMEX composite trading
on August 1, 1996 was $19 per share.
- Each share of Fresenius USA Common Stock issued and outstanding
immediately prior to the Effective Time (other than any shares of
Fresenius USA Common Stock owned by Grace or its subsidiaries or by
Fresenius AG or its subsidiaries, any shares of Fresenius USA Common
Stock held in Fresenius USA's treasury or any shares of Fresenius USA
Common Stock dissenting from the Reorganization) will be converted in the
Fresenius USA Merger into the right to receive approximately 1.112 ADSs,
each such ADS representing one-third of an FMC Ordinary Share, and each
holder of options or warrants to purchase Fresenius USA Common Stock
(other than Grace or its subsidiaries or Fresenius AG or its
subsidiaries) will receive options or warrants to purchase approximately
1.112 ADSs for each share of Fresenius USA Common Stock issuable upon
exercise of such options or warrants. As of July 29, 1996, there were
outstanding 26,374,218 shares of Fresenius USA Common Stock and options
or warrants with respect to 2,636,626 shares of Fresenius USA Common
Stock. On this basis, assuming that there are no Fresenius USA Dissenting
Stockholders and that each option with respect to Fresenius USA Common
Stock is converted into an option with respect to FMC Ordinary Shares,
and that Fresenius USA effects certain securities repurchases (see "THE
REORGANIZATION -- Additional Agreements of Fresenius USA"), holders of
shares of (and options and warrants with respect to) Fresenius USA Common
Stock will be allocated approximately 4.9% of the FMC Ordinary Shares.
GENERAL
- In lieu of fractional FMC Ordinary Shares or ADSs, each person who would
otherwise have been entitled to a fraction of an FMC Ordinary Share or
ADS will be paid an amount in cash (without interest) equal to such
holder's proportionate interest in the net proceeds from the sale in the
open market by an exchange agent appointed by Fresenius Medical Care with
the approval of Grace and Fresenius AG (the "Exchange Agent"), on behalf
of all such holders, of the aggregate fractional FMC Ordinary Shares or
ADSs issued.
- Each share of Grace Common Stock owned by Fresenius AG or its
subsidiaries, Fresenius USA or its subsidiaries or any Grace subsidiary,
or held in Grace's treasury, will be cancelled and retired without
payment of any consideration therefor and will cease to exist. Each share
of Fresenius USA Common Stock owned by Grace or its subsidiaries,
Fresenius AG or its subsidiaries, or any Fresenius USA subsidiary, or
held in Fresenius USA's treasury, will be cancelled and retired without
payment of any consideration therefor (except for the consideration set
forth above) and will cease to exist. As of July 15 , 1996, Grace owned
no shares of Fresenius USA Common Stock, and Fresenius USA owned one
share of Grace Common Stock.
3
<PAGE> 16
The following charts represent the corporate organization of the parties to the
Reorganization on both pre-transaction and post-transaction bases:
[CHART]
4
<PAGE> 17
THE SPECIAL MEETINGS
GRACE
The Grace Special Meeting to consider and vote on approval and adoption of
the Reorganization Agreement and the transactions contemplated thereby, as well
as the Grace Amendment, will be held on September 16, 1996 at 10:00 a.m. local
time at Grace's headquarters at One Town Center Road, Boca Raton, Florida. Only
holders of record of Grace Common Stock and Grace Preferred Stock at the close
of business on July 29, 1996 (the "Grace Record Date") will be entitled to
notice of and to vote at the Grace Special Meeting. As of July 15, 1996, the
following shares of the following classes of Grace's capital stock were
outstanding and entitled to the following votes:
<TABLE>
<CAPTION>
SHARES VOTES PER
CLASS OUTSTANDING SHARE
-------------------------------------------------------------- ------------ ---------
<S> <C> <C>
Grace 6% Preferred Stock...................................... 36,460 160
Grace Class A Preferred Stock................................. 16,256 16
Grace Class B Preferred Stock................................. 21,577 16
Grace Common Stock............................................ 92,001,176 1
</TABLE>
Holders of Grace Common Stock and Grace Preferred Stock will vote together
as one class.
Votes Required. Adoption and approval of the Reorganization Agreement and
the transactions contemplated thereby requires the affirmative vote of
two-thirds (and, in the case of the Grace Amendment, a majority) of the total
voting power (or 65,626,736 votes as of July 15, 1996) of Grace's outstanding
capital stock. As a result, failing to vote in person or by proxy on any such
proposal or abstaining on any such proposal has the same effect as voting
against the proposal.
Beneficial Ownership of Management. At June 15, 1996, Grace's directors
and executive officers and their affiliates beneficially owned in the aggregate
Grace Common Stock and Grace Preferred Stock representing less than 1% of the
total voting power of Grace's outstanding capital stock. Each of the directors
and executive officers of Grace is expected to vote in favor of the proposals to
be voted on at the Grace Special Meeting.
FRESENIUS USA
The Fresenius USA Special Meeting to consider and vote on the approval and
adoption of the Reorganization Agreement and the transactions contemplated
thereby, as well as on the Fresenius USA Plan Amendment, will be held on
September 16, 1996 at 10:00 a.m. local time, at the 52nd floor conference
center of O'Melveny & Myers LLP, 153 East 53rd Street, New York NY 10022. Only
holders of record of Fresenius USA Common Stock at the close of business on
July 29, 1996 (the "Fresenius USA Record Date") will be entitled to notice of
and to vote at the Fresenius USA Special Meeting. At July 29, 1996, there were
outstanding and entitled to vote 26,374,218 shares of Fresenius USA Common
Stock. Each share of Fresenius USA Common Stock is entitled to one vote.
The affirmative vote of the holders of record of at least two-thirds of the
outstanding shares of Fresenius USA Common Stock is necessary to approve and
adopt the Reorganization Agreement and the transactions contemplated thereby.
The affirmative vote of the holders of record of a majority of the shares of
Fresenius USA Common Stock is necessary to approve the Fresenius USA Plan
Amendment. As a result, failing to vote by person or proxy on any such proposal
at the Fresenius USA Special Meeting or abstaining on any such proposal has the
same effect as voting against the proposal.
Fresenius AG is currently the beneficial owner of 18,438,545 outstanding
shares of Fresenius USA Common Stock, including 3,129,883 shares of Fresenius
USA Common Stock which were acquired upon conversion of the Fresenius USA Series
F Series Preferred Stock ("Fresenius USA Preferred Stock") previously owned by
Fresenius AG and including 1,515,221 shares which were acquired upon exercise of
5
<PAGE> 18
warrants to purchase Fresenius USA Common Stock. Fresenius AG has informed
Fresenius USA that it has agreed to vote all of its shares of Fresenius USA
Common Stock in favor of the Reorganization and intends to vote all such shares
in favor of the Fresenius USA Plan Amendment. Such 18,438,545 shares represent
approximately 70.3% of the outstanding shares of Fresenius USA Common Stock.
ACCORDINGLY, SUCH AFFIRMATIVE VOTE BY FRESENIUS AG WILL RESULT IN THE APPROVAL
OF THE REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED THEREBY AND THE
FRESENIUS USA PLAN AMENDMENT. In addition, directors and executive officers of
Fresenius USA, who beneficially owned as of July 23, 1996, in the aggregate,
262,166 shares of Fresenius USA Common Stock, or approximately 1% of the
Fresenius USA Common Stock then outstanding, are expected to vote the shares
they own in favor of the Reorganization and the Fresenius USA Plan Amendment.
See "SECURITY OWNERSHIP -- Security Ownership of Certain Beneficial Owners and
Management of Fresenius USA."
Shareholders of Fresenius AG have already approved the Reorganization at an
Extraordinary General Meeting held on April 11, 1996.
For information with respect to certain interests of the directors and
executive officers of Fresenius USA in the Reorganization, see "INTERESTS OF
CERTAIN PERSONS" and "FRESENIUS USA EXECUTIVE COMPENSATION."
For additional information relating to the Special Meetings, see "THE
SPECIAL MEETINGS."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Grace Board has unanimously approved the Reorganization Agreement
and the transactions contemplated thereby. Based in part on the recommendations
of the Grace Financial Advisors summarized under "BACKGROUND AND REASONS
- -- Background of the Reorganization; Reasons for the Recommendation of the
Grace Board," the members of the Grace Board believe that the Reorganization
Agreement and the transactions contemplated thereby are fair to, and in the
best interests of, the Grace shareholders, and recommend a vote FOR approval of
the Reorganization and the Grace Amendment.
The Fresenius USA Board, by unanimous vote, including the votes of all
of the independent directors of Fresenius USA (the "Fresenius USA Independent
Committee"), has approved the Reorganization Agreement and the transactions
contemplated thereby, including without limitation, the Fresenius USA Merger.
Based in part on the recommendations of the Fresenius USA Independent
Committee's financial advisors summarized under "BACKGROUND AND REASONS --
Background of the Reorganization; Reasons for the Recommendation of the
Fresenius USA Board," the members of the Fresenius USA Board unanimously
believe that such transactions are fair to, and in the best interests of, the
stockholders of Fresenius USA. The Fresenius USA Board, by unanimous vote,
including the vote of all of the members of the Fresenius USA Independent
Committee, has also approved the Fresenius USA Plan Amendment. The Fresenius
USA Board, including all of the members of the Fresenius USA Independent
Committee, unanimously recommend a vote FOR approval of the Reorganization and
the Fresenius USA Plan Amendment.
In connection with approval of the Reorganization by the Grace Board, the
Grace Board received opinions from CS First Boston and Merrill Lynch to the
effect that, in the opinion of such firms, as of February 4, 1996, the terms of
the Distribution Payment and the Grace Merger, taken together, were fair, from a
financial point of view, to the holders of Grace Common Stock. In connection
with these opinions, these firms performed a variety of financial and
comparative analyses which included, among other things, valuation analyses with
respect to Fresenius Medical Care and NMC and made a presentation to the Grace
Board. Such opinions and presentation are based on certain assumptions and are
subject to certain limitations. Such opinions and presentation are described
herein under "BACKGROUND AND REASONS" at pages 37 through 57, and the opinions
of CS First Boston and Merrill Lynch are set forth in full in Appendix C hereto.
In connection with approval of the Reorganization by the Fresenius USA
Board, the Fresenius USA Independent Committee received an opinion from Salomon
Brothers to the effect that, in the opinion of such
6
<PAGE> 19
firm, as of May 8, 1996, the exchange ratio of 0.37067735 FMC Ordinary Shares to
be issued in exchange for each share of Fresenius USA Common Stock held by the
stockholders of Fresenius USA (other than Fresenius AG and Grace and their
respective subsidiaries) was fair, from a financial point of view, to the
holders of Fresenius USA Common Stock (other than Fresenius AG and Grace and
their respective subsidiaries). In connection with this opinion, Salomon
Brothers performed a variety of financial and comparative analyses which
included, among other things, valuation analyses with respect to Fresenius
Medical Care and Fresenius USA and made a presentation to the Fresenius USA
Independent Committee. Such opinion and presentation are based on certain
assumptions and are subject to certain limitations. Such opinion and
presentation are described herein under "BACKGROUND AND REASONS" at pages 47
through 57, and the opinion of Salomon Brothers is set forth in full in Appendix
D hereto.
The determinations of the Grace Board and Fresenius USA Board with respect
to the Reorganization are based upon a number of factors. For a discussion of
certain factors considered by the Grace Board and the Fresenius USA Board, see
"BACKGROUND AND REASONS -- Background of the Reorganization; Reasons for the
Recommendation of the Grace Board" and "-- Background of the Reorganization;
Reasons for the Recommendation of the Fresenius USA Board."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendations of the Grace Board and the Fresenius USA
Board with respect to the Reorganization, shareholders of Grace and Fresenius
USA should be aware that Fresenius AG and certain current and former members of
the respective boards of directors of Grace and Fresenius USA have certain
interests in the Reorganization in addition to the interests of shareholders of
Grace and Fresenius USA generally. These interests include certain contractual
relationships relating to the supply of products and the sharing of intellectual
property, among other things, between Fresenius AG and Fresenius Medical Care
(discussed under "THE REORGANIZATION -- Continuing Arrangements Between
Fresenius Medical Care and Fresenius AG"), various employment and consulting
agreements (discussed under "MANAGEMENT OF FRESENIUS MEDICAL
CARE -- Compensation of the FMC Management Board and Certain Other Executive
Officers -- Employment and Consulting Agreements"), indemnification agreements
(discussed under "FRESENIUS USA EXECUTIVE COMPENSATION -- Indemnification
Agreements"), payments in the aggregate amount of $15,035,119 in respect of
shares of, and stock options with respect to, Fresenius USA Common Stock
(discussed under "FRESENIUS USA EXECUTIVE COMPENSATION -- Securities
Repurchases") and supplemental compensation ranging between $50,000 and $75,000
per person to members of the Fresenius USA Independent Committee for services
rendered thereon (discussed under "INTERESTS OF CERTAIN PERSONS -- Other
Interests in the Reorganization"). No Grace insiders will receive any material
benefits as a result of the Reorganization.
OPINIONS OF FINANCIAL ADVISORS
Grace. CS First Boston Corporation ("CS First Boston") and Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), financial advisors to
Grace ("Grace Financial Advisors"), have issued their respective written
opinions to the Grace Board that, as of February 4, 1996, the date of approval
of the Reorganization Agreement by the Grace Board, the terms of the
Distribution Payment and the Grace Merger, taken together, were fair, from a
financial point of view, to the holders of the Grace Common Stock. Such written
opinions are reproduced in their entirety as Appendix C to this Joint Proxy
Statement-Prospectus, and holders of Grace Common Stock are urged to read such
opinions and confirmations carefully in their entirety for a description of the
procedures followed, assumptions and qualifications made, matters considered,
and limitations on the review undertaken by such firms.
Fresenius USA. Salomon Brothers Inc ("Salomon Brothers"), the financial
advisor to the Fresenius USA Independent Committee, has issued its written
opinion to the Fresenius USA Independent Committee that, as of May 8, 1996, the
exchange ratio for the exchange of Fresenius USA Common Stock for FMC Ordinary
Shares by the stockholders of Fresenius USA (other than Fresenius AG and Grace
and their
7
<PAGE> 20
respective subsidiaries) in the Fresenius USA Merger is fair, from a financial
point of view, to such holders. The written opinion of Salomon Brothers is
reproduced in its entirety as Appendix D to this Joint Proxy
Statement-Prospectus, and holders of Fresenius USA Common Stock are urged to
read such opinion carefully in its entirety for a description of the procedures
followed, assumptions and qualifications made, matters considered, and
limitations on the review undertaken by Salomon Brothers.
THE REORGANIZATION AGREEMENT
On February 4, 1996, Fresenius AG and Grace executed and delivered
agreements which provide for the transactions described below.
FORMATION OF FRESENIUS MEDICAL CARE
Fresenius AG has changed the name of Sterilpharma GmbH to "Fresenius
Medical Care GmbH" and will convert it into a German stock corporation, changing
its name to "Fresenius Medical Care AG."
THE CONTRIBUTION
Prior to the Effective Time, Fresenius AG will contribute Fresenius
Worldwide Dialysis to Fresenius Medical Care. However, Fresenius AG will retain
and lease (either directly or through an affiliate) to Fresenius Medical Care
(or an affiliate) certain real property and buildings in Germany, as described
under "THE REORGANIZATION -- Continuing Arrangements between Fresenius Medical
Care and Fresenius AG -- Real Property Lease." Fresenius AG will also retain
and license to Fresenius Medical Care the "Fresenius" name and mark and the "F"
logo as described under "THE REORGANIZATION -- Continuing Arrangements between
Fresenius Medical Care and Fresenius AG -- Trademarks."
THE DISTRIBUTION
Prior to the Effective Time, New Grace will hold all assets of Grace (other
than NMC). Immediately prior to the Recapitalization, Grace will effect the
Distribution whereby Grace will spin off New Grace.
THE DISTRIBUTION PAYMENT
In connection with the Distribution, NMC will borrow and/or will retain or
assume Debt (as defined in the Reorganization Agreement) in an aggregate amount
of approximately $2.263 billion (as adjusted pursuant to the Reorganization
Agreement) and will distribute the net cash proceeds to Grace Chemicals as a
dividend (such assumption and dividend, the "Distribution Payment"). It is
expected that NMC will borrow funds for such Distribution Payment pursuant to
the NMC Credit Agreement, as a result of which, on a pro forma basis, NMC would
have had annual debt service obligation under such Agreement and its other
obligations of approximately $170.0 million in 1995. See Note 2 of Notes to
Unaudited Pro Forma Condensed Combined Financial Information. Grace intends that
a portion of such net cash proceeds will be applied to further reduce Grace
Chemicals' debt and the remaining net cash proceeds received from NMC be used to
purchase shares of New Grace Common Stock and to invest in core businesses.
In connection with the NMC Credit Agreement, Grace Chemicals has agreed to
guarantee Facility 3 (which provides for $500 million of available credit) and
under Facility 2 up to a maximum of $450 million. The NMC Credit Agreement is
expected to provide that these guarantees will be released as to $800 million
upon the occurrence of certain events after 45 days, but within 60 days,
following the Effective Date, including (a) the receipt of an unconditional
joint and several guarantee from Fresenius Medical Care and certain of its
subsidiaries for the full amount of the NMC Credit Facility; or (b) the receipt
of a letter of credit or other acceptable financial accommodation for the
account of Grace Chemicals or Fresenius Medical Care in form and substance
satisfactory to the Lenders; or (c) a prepayment in certain specified amounts
under the NMC Credit Facility guaranteed by Grace Chemicals. If such guarantees
are not released within 60 days following
8
<PAGE> 21
the Effective Date, demand for payment will be made on Grace Chemicals under
such guarantees as to $800 million. It is the intention of Fresenius Medical
Care to provide the unconditional joint and several guarantees referred to in
the preceding sentence in a manner so as to cause the release of Grace
Chemicals' guarantees as to $800 million not before 46 days, but on or prior to
50 days, following the Effective Date. However, no assurance can be given that
such guarantees as to $800 million will be provided or that either or both of
Grace Chemicals' guarantees will be released. In the event that Fresenius
Medical Care does not provide such guarantees or otherwise effect the release of
the Grace Chemicals guarantees as to $800 million, Grace Chemicals would be
required to provide the letters of credit or repay the amounts specified in the
NMC Credit Agreement and, thereafter, be subrogated to the rights of Lenders
with respect to such repaid amounts after the Lenders under the respective
facilities have been repaid in full; and Grace Chemicals has undertaken to the
Lenders to maintain unused available credit in an amount to be determined while
the Grace Chemicals guarantees are outstanding in order to facilitate such
actions. In connection with Grace Chemicals' agreement to extend guarantees
under the NMC Credit Agreement, Fresenius Medical Care and Grace Chemicals
intend to enter into an agreement to induce Fresenius Medical Care to cause such
guarantees to be released as to $800 million not later than the 50th day
following the Effective Date. The balance of the Grace Chemicals guarantees
under Facility 2 will be released upon NMC (or Fresenius Medical Care, if
Fresenius Medical Care guarantees the NMC Credit Facility), on a consolidated
basis, achieving a ratio of senior debt to EBITDA of equal to or less than 3.5.
See "FINANCING -- NMC Credit Agreement."
THE RECAPITALIZATION
Immediately following the Distribution and immediately prior to the
Effective Time, the Recapitalization of Grace will be effected so that each
holder of Grace Common Stock will receive one New Preferred Share for each share
of Grace Common Stock held.
THE MERGERS
At the Effective Time, Grace Merger Sub will merge with and into Grace,
with Grace the surviving corporation, and Grace's name will be changed to
"Fresenius National Medical Care, Inc." and FUSA Merger Sub will merge with and
into Fresenius USA, with Fresenius USA being the surviving corporation; and as
promptly as practicable following the Mergers, Fresenius USA will be contributed
to FNMC. As a result of the Mergers, holders of Grace Common Stock (together
with holders of options to purchase Grace Common Stock who are employees of NMC)
at the Effective Time will be allocated 44.8% of the FMC Ordinary Shares
outstanding immediately thereafter, on a fully diluted basis, and Fresenius AG
will be allocated approximately 50.3% of the FMC Ordinary Shares outstanding
immediately thereafter, on a fully diluted basis. Holders of Fresenius USA
Common Stock (together with holders of options and warrants to purchase
Fresenius USA Common Stock) will be allocated, in the aggregate, approximately
4.9% of the FMC Ordinary Shares outstanding immediately thereafter, on a fully
diluted basis, based on an exchange ratio of approximately 1.112 ADSs for each
share of Fresenius USA Common Stock.
OTHER TERMS OF THE REORGANIZATION AGREEMENT
Effective Time. The Fresenius USA Merger and the Grace Merger will become
effective on the date and time on which articles of merger respecting the
Fresenius USA Merger are filed with the Secretary of State for the Commonwealth
of Massachusetts and the certificate of merger respecting the Grace Merger is
filed by the Department of State for the State of New York (or such later date
and time as may be specified therein (the date thereof the "Effective Date," and
the time thereof, the "Effective Time").
Accounting Treatment. Each of the Grace Merger and the Fresenius USA
Merger will be accounted for as a purchase by Fresenius Medical Care under US
GAAP. See "THE REORGANIZATION -- Accounting Treatment."
9
<PAGE> 22
CONDITIONS
Financing. It is a condition to the consummation of the Reorganization
that Grace and Fresenius AG have obtained the financing necessary to consummate
the Reorganization, including the Distribution Payment, on terms satisfactory to
the parties.
Antitrust. It is a condition to the consummation of the Reorganization
that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules promulgated thereunder (the "HSR Act"), shall
have expired or terminated. On July 25, 1996, the U.S. Federal Trade Commission
(the "FTC") accepted for public comment an Agreement Containing Consent Order
with Fresenius AG and Fresenius USA, and the HSR Act waiting period terminated
on July 26, 1996. Following the public comment period, the FTC may either take
steps to enter a final order or withdraw acceptance of the Agreement Containing
Consent Order. Unless acceptance is withdrawn by the FTC, the Agreement
Containing Consent Order will require the divestiture of Fresenius USA's
dialysate concentrate manufacturing facility in Lewisberry, Pennsylvania. See
"BUSINESS OF FRESENIUS MEDICAL CARE -- Business of Fresenius USA -- Properties"
and "THE REORGANIZATION -- Conditions."
Under Germany's Law Against Restraints of Competition, Fresenius AG and NMC
have filed for pre-merger clearance with the German Federal Cartel Office
("FCO"). The FCO has granted clearance, subject to the divestment prior to the
consummation of the Reorganization of Schiwa GmbH ("Schiwa") and Rena-Med GmbH
and its affiliates ("Rena-Med"), German subsidiaries of Fresenius AG and Grace,
respectively, whose products include dialysate concentrates. Efforts are
underway to divest Schiwa and Rena-Med. Discussions are in progress with the FCO
regarding the conditions and timing of the divestment and clearance. See "THE
REORGANIZATION -- Conditions."
Litigation. It is a condition to the consummation of the Reorganization
that no governmental entity shall have issued any judgment, decree, injunction
or other order which is in effect and prohibits consummation of the
Reorganization.
Other Approvals. It is a condition to the Reorganization that all material
filings, consents, approvals and authorizations required to be made or obtained
in connection with the Reorganization be made or obtained from the applicable
governmental or regulatory authority, agency, court or other entity, domestic or
foreign, prior to the Effective Time. In this regard, it should be noted that
certain regulatory approvals may be required by state and local authorities and
by certain government agencies which regulate the health care business. NMC and
Fresenius Worldwide Dialysis are working toward obtaining all such consents and
approvals and expect that such consents and approvals will be obtained.
Waiver. All conditions to the Reorganization may be waived by the relevant
party, but neither Grace nor Fresenius AG expects to waive any material
conditions.
TERMINATION
The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time prior to the Effective Time under certain circumstances
described in the Reorganization Agreement, including in connection with a Higher
Offer. If the Reorganization Agreement is terminated under certain specified
conditions, $75 million plus actual out-of-pocket expenses will become payable
by Grace to Fresenius AG (although Grace will not be responsible for the
expenses of Fresenius USA). Pursuant to an agreement between Fresenius AG and
Fresenius USA, Fresenius USA is entitled to 34% of any such termination fee. See
"THE REORGANIZATION -- Conditions," "-- Termination Fees" and "-- Termination."
In the event of termination of the Reorganization Agreement, no party to the
Reorganization Agreement will have any liability or future obligation to any
other party, except for liability for any material and willful breach of any
covenant.
10
<PAGE> 23
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TAX CONSEQUENCES TO GRACE AND GRACE SHAREHOLDERS
The obligations of Grace to consummate the Distribution and the
Recapitalization, and the obligations of Grace, Fresenius AG and Fresenius USA
to consummate the Reorganization, are conditioned, among other things, on the
receipt of opinions from special counsel and tax counsel to Grace that: (a) the
Distribution will qualify as a tax-free distribution such that a Grace
shareholder will not recognize any income, gain or loss as a result of the
Distribution; (b) the Recapitalization will be a tax-free transaction to Grace
such that no gain or loss will be recognized by Grace as a result of the
Recapitalization; and (c) the Grace Merger will qualify as a tax-free
transaction to Grace and its shareholders such that Grace will recognize no gain
or loss as a result of the Grace Merger, and no gain or loss will be recognized
by Grace shareholders upon receipt of ADSs representing FMC Ordinary Shares in
exchange for Grace Common Stock pursuant to the Grace Merger, except that
holders of Grace Common Stock who exercise their appraisal rights or who receive
cash in lieu of fractional shares will recognize gain or loss. It is also
expected that the Recapitalization will be tax free to the Grace shareholders.
No ruling from the Internal Revenue Service ("IRS") has or will be sought with
respect to any aspect of the Reorganization. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE TRANSACTIONS TO GRACE AND GRACE SHAREHOLDERS."
TAX CONSEQUENCES TO FRESENIUS USA STOCKHOLDERS AND FRESENIUS MEDICAL CARE
Stockholders of Fresenius USA who exchange their shares of Fresenius USA
Common Stock for FMC Ordinary Shares or ADSs will not be subject to federal
income tax except to the extent cash is received in lieu of fractional shares.
The exchange of shares of Fresenius USA Common Stock entirely for cash by
Fresenius USA Dissenting Stockholders will be a taxable transaction on which
gain or loss will be recognized.
For a more complete summary of the material U.S. federal and German income
tax consequences of exchanging shares of Fresenius USA Common Stock for FMC
Ordinary Shares and of holding the FMC Ordinary Shares, see "CERTAIN INCOME TAX
CONSEQUENCES OF THE TRANSACTIONS TO HOLDERS OF FRESENIUS USA COMMON STOCK."
Fresenius Medical Care will recognize no gain or loss upon receipt of
Fresenius USA Common Stock in exchange for FMC Ordinary Shares or ADSs.
APPRAISAL RIGHTS
Holders of Grace Common Stock have the right to dissent from the approval
and adoption of the Reorganization Agreement and the transactions contemplated
thereby and, subject to strict compliance with Sections 623 and 910 of the New
York Business Corporation Act (the "NYBCL"), as an alternative to receiving the
applicable consideration for their Grace Common Stock, to a judicial
determination of the fair value of their Grace Common Stock. Sections 623 and
910 of the NYBCL are described under "THE REORGANIZATION -- Appraisal Rights"
and are attached as Appendix F to this Joint Proxy Statement-Prospectus.
Holders of Fresenius USA Common Stock have the right to dissent from
approval and adoption of the Reorganization Agreement and the transactions
contemplated thereby, and, subject to strict compliance with certain
requirements of the Massachusetts Business Corporation Law (the "MBCL"), to
receive payment for the "fair value," as defined in the MBCL, of their Fresenius
USA Common Stock. These requirements are described under "THE
REORGANIZATION -- Appraisal Rights" and in the provisions of Sections 85 through
98 of the MBCL, which are attached as Appendix G to this Joint Proxy
Statement-Prospectus.
11
<PAGE> 24
NEW PREFERRED SHARES
Prior to the Effective Time, but following the Distribution, the
Recapitalization of Grace will be effected so that holders of Grace Common Stock
will receive one New Preferred Share for each share of Grace Common Stock held.
The New Preferred Shares will have a liquidation preference of $0.10 per share
(the "Liquidation Preference") and will have no dividend rights and no dividend
preference except with respect to the Special Dividend described below. The New
Preferred Shares will have no class voting rights (except as provided by law or
in the FNMC certificate of incorporation, as described below). The New Preferred
Shares will have one-tenth of a vote per share. The holders of the New Preferred
Shares will be entitled to receive, when and if declared by the board of
directors of FNMC (the "FNMC Board"), the Special Dividend, payable in cash in
annual installments beginning on October 1, 2002 and in each subsequent year
until the dividend is fully paid, in an amount based on adjusted cash flow of
Fresenius Medical Care from January 1, 1997 to December 31, 2001. Under certain
circumstances, FNMC may pay the Special Dividend in shares of Common Stock of
FNMC ("FNMC Common Stock"). If the Special Dividend is payable, but not
declared, or if any installment of the Special Dividend is not paid on October
1, 2002 and, thereafter, on October 1 in each of the following years, if
applicable (each such date, a "Payment Date"), FNMC may not pay any other
dividends on FNMC Common Stock and the holders of the New Preferred Shares will
have a right to vote as a class to elect two directors to the FNMC Board.
However, failure of FNMC to pay dividends on the New Preferred Shares will not
preclude Fresenius Medical Care from paying dividends on FMC Ordinary Shares.
The New Preferred Shares are redeemable after the date of the Public
Announcement (which is required to be made no later than May 1, 2002) for the
greater of the Liquidation Preference or any unpaid Special Dividend Amount. See
"DESCRIPTION OF NEW PREFERRED SHARES" for a more complete description of the New
Preferred Shares as well as hypothetical examples of how the Special Dividend
would be calculated. The text of the Grace Amendment providing the terms of the
New Preferred Shares is set forth in Appendix B hereto.
CERTAIN EFFECTS OF THE REORGANIZATION ON THE RIGHTS OF GRACE
SHAREHOLDERS AND FRESENIUS USA STOCKHOLDERS
Upon consummation of the Mergers, the holders of shares of Grace Common
Stock and of Fresenius USA Common Stock will become holders of ADRs representing
ADSs evidencing FMC Ordinary Shares. Certain differences exist between the
rights of a shareholder of a Massachusetts or New York corporation, on the one
hand, and holders of ADRs representing ADSs evidencing ordinary shares of a
German stock corporation, on the other hand. The internal affairs of Fresenius
Medical Care will be governed by German law and by Fresenius Medical Care's
Articles of Association. The Reorganization will result in certain differences
in the rights of Grace shareholders and Fresenius USA stockholders from the
rights they currently possess. Shareholders of Fresenius Medical Care will have
the benefit of certain provisions pursuant to German law, Fresenius Medical
Care's Articles of Association, and a pooling agreement for the benefit of the
shareholders of Fresenius Medical Care, other than Fresenius AG, as more
particularly described under "DESCRIPTION OF THE POOLING AGREEMENT."
CERTAIN CONSIDERATIONS
In deciding whether to approve and adopt the Reorganization Agreement and
the transactions contemplated thereby, shareholders should carefully evaluate
the matters set forth under "RISK FACTORS" and "BUSINESS OF FRESENIUS MEDICAL
CARE," and, in the case of Grace shareholders, in the New Grace Prospectus
attached as Annex A to the version of this Joint Proxy Statement-Prospectus
being furnished to Grace shareholders, in addition to the other matters
described herein and therein. In addition, see "BUSINESS OF FRESENIUS MEDICAL
CARE -- Regulatory and Legal Matters -- Legal and Regulatory Proceedings --
Shareholder Litigation" for a summary of a purported class action filed in
February 1996 relating to the Reorganization. The plaintiff in such action has
not taken any steps to prosecute such action since it was filed, and the
defendants believe such action is without merit.
12
<PAGE> 25
MARKETS AND MARKET PRICES
Grace Common Stock is listed under the symbol "GRA" on the NYSE. Fresenius
USA Common Stock is listed under the symbol "FRN" on the AMEX. On July 15, 1996,
there were approximately 18,000 holders of record of Grace Common Stock and
approximately 4,200 holders of record of Fresenius USA Common Stock. On February
2, 1996, the last trading date prior to the joint public announcement by Grace
and Fresenius AG of the signing of the Reorganization Agreement, the last
reported sale price on the NYSE Composite Tape was $69.25 per share for Grace
Common Stock and the last reported sale price on the AMEX was $21.50 per share
for Fresenius USA Common Stock. On August 1, 1996, the last reported sale price
on the NYSE Composite Tape was $63 1/4 per share for Grace Common Stock and the
last reported sale price on the AMEX was $19 per share for Fresenius USA
Common Stock.
Application will be made by New Grace to list the New Grace Common Stock on
the NYSE. Application will be made by Fresenius Medical Care to list the FMC
Ordinary Shares on the Frankfurt Stock Exchange and the ADSs on the NYSE.
Following the Reorganization, FNMC intends to seek to list the New Preferred
Shares on a national stock exchange. However, no assurance can be given that the
New Preferred Shares will satisfy the listing criteria of any such exchange.
Unless orderly markets in FMC Ordinary Shares, the ADSs and the New Preferred
Shares develop, the trading prices of such securities may fluctuate
significantly.
The following table sets forth, for the fiscal quarters indicated (ended
March 31, June 30, September 30 and December 31), the range of high and low sale
prices of Grace Common Stock as reported on the NYSE Composite Tape and of
Fresenius USA Common Stock as reported on the AMEX. Grace has paid a quarterly
dividend on Grace Common Stock of $0.125 per share since December 1995. Prior to
that date, Grace paid a quarterly dividend of $0.35 per share. Fresenius USA has
never paid a dividend on Fresenius USA Common Stock.
GRACE
<TABLE>
<CAPTION>
DATE HIGH LOW CLOSE
-------------------------------------------------------- ---- --- -----
<S> <C> <C> <C>
Third Quarter 1996 (through August 1, 1996).............. 73 60 1/2 63 1/4
Second Quarter 1996..................................... 82 3/4 70 7/8 70 7/8
First Quarter 1996...................................... 81 3/4 53 5/8 78 1/4
Fourth Quarter 1995..................................... 66 7/8 53 59 1/8
Third Quarter 1995...................................... 71 5/8 61 66 3/4
Second Quarter 1995..................................... 65 1/4 51 61 3/8
First Quarter 1995...................................... 55 1/4 38 1/4 53 1/4
Fourth Quarter 1994..................................... 41 3/8 35 1/4 38 5/8
Third Quarter 1994...................................... 42 1/2 38 1/8 41 1/2
Second Quarter 1994..................................... 43 1/4 38 3/8 39 7/8
First Quarter 1994...................................... 46 3/4 39 7/8 41 1/4
</TABLE>
13
<PAGE> 26
FRESENIUS USA
<TABLE>
<CAPTION>
DATE HIGH LOW CLOSE
-------------------------------------------------------- ---- --- -----
<S> <C> <C> <C>
Third Quarter 1996 (through August 1, 1996)............. 21 7/8 17 3/4 19
Second Quarter 1996..................................... 24 7/8 19 1/8 21 1/2
First Quarter 1996...................................... 22 5/8 17 1/4 20 3/8
Fourth Quarter 1995..................................... 19 7/8 15 1/8 19 7/8
Third Quarter 1995...................................... 16 1/2 12 15 5/8
Second Quarter 1995..................................... 13 1/8 9 1/2 13 1/8
First Quarter 1995...................................... 11 8 5/8 10 1/2
Fourth Quarter 1994..................................... 8 7/8 7 8 3/8
Third Quarter 1994...................................... 9 5 7/8 8 5/8
Second Quarter 1994..................................... 7 1/2 5 3/8 6 1/4
First Quarter 1994...................................... 8 1/4 6 5/8 6 7/8
</TABLE>
SHAREHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR GRACE
COMMON STOCK AND FRESENIUS USA COMMON STOCK.
14
<PAGE> 27
SUMMARY SELECTED SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL INFORMATION OF GRACE
The following Summary Special-Purpose, Consolidated Financial Information
of Grace includes only the assets, liabilities, revenues and expenses of the
Grace health care business operated by NMC prior to the Reorganization. However,
certain health care-related assets owned or investments held in part by Grace
Chemicals and in part by NMC, and previously under the oversight of NMC, are
being retained by Grace Chemicals in the Reorganization and are excluded from
this Summary Special-Purpose, Consolidated Financial Information. The following
Summary Special-Purpose, Consolidated Financial Information of Grace should be
read in conjunction with the Special-Purpose, Consolidated Financial Statements
of Grace and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- NMC" included elsewhere in this Joint Proxy
Statement-Prospectus, as well as Grace's 1995 Annual Report on Form 10-K
incorporated herein by reference. The following Summary Special-Purpose,
Consolidated Financial Information for the years ended December 31, 1993, 1994
and 1995 has been derived from Special-Purpose, Consolidated Financial
Statements audited by Price Waterhouse LLP, independent accountants, except for
Balance Sheet Data at December 31, 1993. Special-Purpose, Consolidated Balance
Sheets at December 31, 1994 and 1995 and the related Special-Purpose,
Consolidated Statements of Earnings and of Cash Flows for the three years ended
December 31, 1995 and notes thereto appear elsewhere herein. The report of Price
Waterhouse LLP which also appears elsewhere herein contains an explanatory
paragraph relating to the basis of presentation described in Note 1 to such
Special-Purpose, Consolidated Financial Statements. The Summary Special-Purpose,
Consolidated Financial Information for the three months ended March 31, 1995 and
1996, and the years ended December 31, 1991 and 1992 and the Balance Sheet Data
at December 31, 1993 has been derived from Grace's Unaudited Special-Purpose,
Consolidated Financial Statements. For additional information, see "GRACE
SPECIAL-PURPOSE SELECTED FINANCIAL DATA."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING DATA:
Net revenues....................... $1,010 $1,214 $1,456 $1,818 $2,033 $ 478 $ 528
Earnings before income taxes....... 114 140 191 214 206 48 49
Net earnings....................... 63 80 104 102 97 26 26
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets....................... $ 853 $ 900 $1,245 $1,644 $1,998 $2,059
Total long-term debt and
capitalized lease obligations... 7 6 14 17 35 28
Total liabilities.................. 253 367 365 485 635 601
Total equity....................... 600 533 880 1,159 1,363 1,458
</TABLE>
15
<PAGE> 28
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION OF FRESENIUS WORLDWIDE
DIALYSIS
The following summary combined financial information of Fresenius Worldwide
Dialysis should be read in conjunction with the combined financial statements of
Fresenius Worldwide Dialysis and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FRESENIUS WORLDWIDE DIALYSIS"
included elsewhere in this Joint Proxy Statement-Prospectus. The summary
financial information prepared in accordance with US GAAP as of and for the
years ended December 31, 1994 and 1995 has been derived from combined financial
statements of Fresenius Worldwide Dialysis prepared in accordance with US GAAP
and audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, independent accountants. The selected combined
financial data as of and for the three months ended March 31, 1995 and 1996 have
been derived from the Fresenius Worldwide Dialysis unaudited interim combined
financial statements prepared in accordance with US GAAP, and, in the opinion of
management of Fresenius AG have been prepared on a basis substantially
consistent with that of the audited US GAAP combined financial statements of
Fresenius Worldwide Dialysis as of and for each of the years ended December 31,
1994 and 1995. The German GAAP summary combined financial data as of and for
each of the years in the five-year period ended December 31, 1995 have been
derived from Fresenius Worldwide Dialysis' unaudited combined financial
statements, prepared in accordance with German generally accepted accounting
principles ("German GAAP"), and, in the opinion of management of Fresenius AG,
have been prepared on a basis substantially consistent with that of the audited
German GAAP consolidated financial statements of Fresenius AG as of and for such
periods. US GAAP information for Fresenius Worldwide Dialysis as of and for the
years ended December 31, 1991, 1992 and 1993 is not available. For additional
information, see "SELECTED FINANCIAL DATA OF FRESENIUS WORLDWIDE DIALYSIS."
The reporting currency of Fresenius Worldwide Dialysis is the U.S. dollar.
In accordance with US GAAP, the assets and liabilities of Fresenius Worldwide
Dialysis subsidiaries whose "functional" currency is other than the U.S. dollar
are translated at the year end rate of exchange. Income and expense and cash
flow items are translated at the average exchange rate for the year.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------------------------ -----------
1991 1992 1993 1994 1995 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
GERMAN GAAP U.S. GAAP
--------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING DATA:
Net sales......................... $377 $519 $611 $719 $895 $720 $897 $208 $235
Operating income.................. 28 34 73 84 121 88 122 35 38
Net income........................ 7 11 41 51 72 52 70 19 22
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets...................... $284 $356 $452 $481 $568 $543 $644 $679
Total long-term debt and
capitalized lease
obligations.................... 21 20 51 33 35 37 40 22
Net assets........................ 88 133 200 231 267 261 306 340
</TABLE>
German GAAP differs in certain significant respects from US GAAP. For a
discussion of certain significant differences between German GAAP and US GAAP,
see "SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND U.S.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES."
16
<PAGE> 29
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION OF FRESENIUS USA
The following summary combined and consolidated financial information of
Fresenius USA should be read in conjunction with the consolidated financial
statements of Fresenius USA and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FRESENIUS USA" included
elsewhere in this Joint Proxy Statement-Prospectus. The summary financial
information has been prepared from consolidated financial statements as of and
for each of the years in the five-year period ended December 31, 1995 audited by
KPMG Peat Marwick LLP, independent accountants, and from the unaudited interim
consolidated financial statements as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996. For additional information, see "SELECTED
FINANCIAL DATA OF FRESENIUS USA."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ----- ----- ----- ----- ----- -----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING DATA:
Net sales.................................. $ 101 $ 129 $ 206 $ 254 $ 305 $ 68 $ 81
Operating income (loss).................... (1) 3 9 12 18 4 7
Net income (loss).......................... (3) 1 4 7 16 3 5
Net income (loss) per common and common
equivalent share:
Primary.................................. $(0.16) $0.03 $0.18 $0.32 $0.61 $ .13 $ .19
Fully diluted............................ $(0.16) $0.03 $0.18 $0.31 $0.59 $ .13 $ .19
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................... $ 78 $ 89 $ 159 $ 185 $ 225 $ $ 227
Total debt and capital lease obligations... 29 22 68 66 75 72
Total stockholders' equity................. 23 31 37 61 79 85
</TABLE>
17
<PAGE> 30
SUMMARY SELECTED UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF FRESENIUS MEDICAL CARE
The following summary selected unaudited pro forma financial data
illustrate the pro forma effects of the Reorganization. The pro forma income
statement data are based on the income statements of Grace and Fresenius
Worldwide Dialysis, including Fresenius USA, for the year ended December 31,
1995, and the three month period ended March 31, 1996 and assume that the
Reorganization occurred as of January 1 of each respective period. The pro forma
balance sheet data are based on the balance sheets of Grace and Fresenius
Worldwide Dialysis, including Fresenius USA, as of March 31, 1996, and assume
that the Reorganization occurred as of March 31, 1996. The selected unaudited
pro forma financial data should be read in conjunction with the Fresenius
Medical Care Pro Forma Financial Statements, together with the historical annual
and interim financial statements and other financial information of Grace,
Fresenius USA and Fresenius Worldwide Dialysis included elsewhere in this Joint
Proxy Statement-Prospectus. The Pro Forma Condensed Combined Financial
Statements from which the following selections are taken have been prepared in
accordance with US GAAP under which the Reorganization has been accounted for as
a purchase of Grace by Fresenius Medical Care. THE PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS FROM WHICH THE INFORMATION HAS BEEN TAKEN DO NOT PURPORT TO
REPRESENT WHAT THE FINANCIAL POSITION OR RESULTS OF OPERATIONS OF FRESENIUS
MEDICAL CARE, GRACE, FRESENIUS WORLDWIDE DIALYSIS OR FRESENIUS USA WOULD
ACTUALLY HAVE BEEN IF THE REORGANIZATION HAD IN FACT OCCURRED AS OF JANUARY 1,
1995 OR JANUARY 1, 1996, OR TO PROJECT THE FINANCIAL POSITION OR RESULTS OF
OPERATIONS FOR ANY FUTURE DATE OR PERIOD.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
-------------------- ------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
SUMMARY OF PRO FORMA OPERATING INFORMATION:
Net revenues..................................... $2,847 $ 743
Earnings before income taxes..................... 144 33
Net earnings..................................... 58 14
Earnings per share............................... $ .83 $ .20
PRO FORMA BALANCE SHEET INFORMATION:
Total assets..................................... $4,641
Total borrowings(1).............................. 2,224
Total liabilities................................ 2,946
Total stockholders' equity....................... 1,695
</TABLE>
- ---------------
1. Excludes $200 million for the off-balance sheet financing arrangement of
Grace. See "FINANCING."
Fresenius Medical Care pro forma revenues for the year ended December 31,
1995 and the three-month period ended March 31, 1996 were $2,847 million and
$743 million, respectively. Of such amounts, prior to intercompany elimination
entries, $2,020 million and $525 million, respectively, was generated by Grace
and $865 million and $228 million, respectively, was generated by Fresenius
Worldwide Dialysis. Included in total Fresenius Worldwide Dialysis revenues
(prior to intercompany elimination entries) are Fresenius USA revenues for the
year ended December 31, 1995 and three-month period ended March 31, 1996 of $305
million and $81 million, respectively.
Fresenius Medical Care pro forma net earnings for the year ended December
31, 1995 and the three-month period ended March 31, 1996 were $58 million and
$14 million. Of such amounts, prior to intercompany elimination entries, $2
million and $(7) million, respectively, was generated by Grace and $64 million
and $23 million, respectively, was generated by Fresenius Worldwide Dialysis.
Included in total Fresenius Worldwide Dialysis net earnings (prior to
intercompany elimination entries) are Fresenius USA net earnings for the year
ended December 31, 1995 and three-month period ended March 31, 1996 of $16
million and $5 million, respectively.
18
<PAGE> 31
Immediately subsequent to consummation of the Reorganization, the
outstanding ordinary shares of Fresenius Medical Care will be owned
approximately 44.8% by the former shareholders of Grace, approximately 50.3% by
Fresenius AG and approximately 4.9% by the former holders of Fresenius USA
common stock other than Grace or its subsidiaries and Fresenius AG or its
subsidiaries.
COMPARATIVE PER SHARE DATA
HISTORICAL NET EARNINGS, BOOK VALUE AND DIVIDENDS PER SHARE
Set forth below are historical net earnings from continuing operations, net
earnings, book value and dividends per share of New Grace, Grace, and Fresenius
USA. The information set forth below should be read in conjunction with the
historical consolidated financial statements of W. R. Grace & Co., incorporated
herein by reference and the special-purpose, consolidated financial statements
of Grace and the consolidated financial statements of Fresenius USA appearing
elsewhere in this Joint Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 THREE MONTHS ENDED MARCH 31, 1996
----------------------------------- -----------------------------------
FRESENIUS FRESENIUS
NEW GRACE(1) GRACE(2) USA NEW GRACE(1) GRACE(2) USA
------------ -------- --------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net (loss)/earnings from continuing
operations........................... $(2.05) $ 1.01 $0.61 $ 0.42 $ 0.27 $0.19
Net (loss)/earnings.................... (3.40) 1.01 0.61 0.65 0.27 0.19
Book value............................. 12.57 13.92 3.65 13.44 14.73 3.92
Dividends.............................. 1.18 -- -- 0.13 -- --
</TABLE>
PRO FORMA NET EARNINGS, BOOK VALUE AND DIVIDENDS PER SHARE
Set forth below are pro forma net earnings from continuing operations, book
value and dividends per share for Fresenius Medical Care and New Grace. The
information set forth below should be read in conjunction with the Fresenius
Medical Care AG Pro Forma Condensed Combined Financial Information appearing
elsewhere in this Joint Proxy Statement-Prospectus and, for Grace shareholders,
the New Grace Pro Forma Financial Information contained in the New Grace
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH
1995 31, 1996
------------------------ ------------------------
FRESENIUS FRESENIUS
NEW GRACE MEDICAL CARE NEW GRACE MEDICAL CARE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Net earnings/(loss) from continuing operations.......... $ (2.05) $ 0.83 $ 0.39 $ 0.20
Book value.............................................. 17.02 24.21
Dividends............................................... -- -- -- --
</TABLE>
- ---------------
(1) Represents per share data derived from the historical financial statements
of W. R. Grace & Co. as filed on Form 10-K and 10-Q. These financial
statements include the packaging and specialty chemical businesses as
continuing operations and NMC and certain other businesses as discontinued
operations.
(2) Represents per share data derived from the special-purpose consolidated
financial statements of W. R. Grace & Co. restated to reflect NMC as the
only continuing operation and excluding all other businesses of W. R. Grace
& Co.
19
<PAGE> 32
PRO FORMA EQUIVALENT NET EARNINGS, BOOK VALUE AND DIVIDENDS PER SHARE
Set forth below are equivalent pro forma net earnings from continuing
operations, book value and dividends per share for W. R. Grace & Co. and
Fresenius USA. The equivalent pro forma data for W. R. Grace & Co. are based
upon the exchange of one share of Grace Common Stock for one share of New Grace
Common Stock and 1.013 ADSs. The equivalent pro forma data for Fresenius USA are
based upon the exchange of one share of Fresenius USA Common Stock for 1.112
ADSs and the assumption that there will be 9,253,331 Fresenius USA Common Share
Equivalents on the Effective Date. Each ADS represents one-third of an FMC
Ordinary Share.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
---------------------- ----------------------
W. R. W. R.
GRACE FRESENIUS GRACE FRESENIUS
& CO. USA & CO. USA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net earnings/(loss) from continuing operations
Fresenius Medical Care............................... $ 0.28 $ 0.31 $ 0.07 $ 0.07
New Grace............................................ (2.05) -- 0.39 --
---------- --------- ---------- ---------
Totals....................................... $(1.77) $ 0.31 $ 0.46 0.07
---------- --------- ---------- ---------
Book value
Fresenius Medical Care............................... $ 8.17 $ 8.97
New Grace............................................ 17.02 --
---------- ---------
Totals....................................... 25.19 $ 8.97
---------- ---------
Dividends
Fresenius Medical Care............................... $ 0.40 -- $ 0.04 --
New Grace............................................ 1.18 -- 0.13 --
---------- --------- ---------- ---------
Totals....................................... $ 1.58 -- $ 0.17 --
---------- --------- ---------- ---------
</TABLE>
20
<PAGE> 33
RISK FACTORS
The following risk factors, in addition to the other information contained
in this Joint Proxy Statement-Prospectus, should be carefully considered. Grace
shareholders should also consider the information in the New Grace Prospectus
attached as Annex A to the version of this Joint Proxy Statement-Prospectus
furnished to Grace shareholders. As used herein, the name "Fresenius Medical
Care" refers to the health care businesses conducted by Fresenius Worldwide
Dialysis and NMC prior to the Effective Time, and to be conducted by Fresenius
Medical Care following the Effective Time.
RISKS RELATING TO THE BUSINESS OF FRESENIUS MEDICAL CARE
COST PRESSURES AND OPERATING MARGINS
Fresenius Medical Care's costs are subject to increases as a result of
rising labor and supply costs. At the same time, reimbursement rates (both
governmental and non-governmental) for dialysis treatments and other services
offered by Fresenius Medical Care are generally fixed and may remain at current
levels or be reduced. See "-- Risks Relating to Regulatory Matters -- Dependence
on Government Reimbursement" and "-- Health Care Reform." Although Fresenius
Medical Care will seek to maintain or improve operating margins through cost
efficiencies, there can be no assurance that Fresenius Medical Care's operating
margins will not decline in the future. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -- FRESENIUS USA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- FRESENIUS WORLDWIDE DIALYSIS."
COMPETITION
Fresenius Medical Care faces and is likely to face numerous competitors,
some of which may possess substantial financial, marketing or research and
development resources. There can be no assurance that such competition will not
materially adversely affect the future pricing or sale of Fresenius Medical
Care's products and/or services. In particular, technological innovation has
historically been a significant competitive factor in the dialysis products
business. There can be no assurance that the introduction of new products by
competitors will not render one or more of Fresenius Medical Care's products
obsolete.
Fresenius Medical Care will be a vertically integrated company which will
compete in the provider business with many of the customers of its products
business. As a result, independent dialysis centers and those operated by other
chains that are presently customers of Fresenius Worldwide Dialysis may elect to
limit or terminate their purchases of Fresenius Medical Care dialysis products
so as to avoid purchasing products manufactured by a competitor. Fresenius
Medical Care will continue to compete vigorously for the business of such
customers. However, there can be no assurance that any such possible purchase
reductions will not have a material adverse effect on Fresenius Medical Care's
business, financial position or results of operations.
PRODUCTS LIABILITY AND OTHER CLAIMS
Health care companies are subject to claims alleging negligence, products
liability, breach of warranty, malpractice and other legal theories that may
involve large claims and significant defense costs whether or not such liability
is imposed. Products manufactured by such companies may also be subject to
recall. Although such claims and recalls have not had a material adverse effect
on the businesses of Fresenius Medical Care in the past, there can be no
assurance that Fresenius Medical Care will not suffer one or more significant
claims or product recalls in the future, which could materially adversely affect
its business, financial position or results of operations.
While NMC, Fresenius USA and Fresenius AG have been able to obtain
liability insurance in the past, it is possible that such insurance may not be
available in the future on terms acceptable to Fresenius Medical Care, if at
all. A successful claim in excess of the limits of Fresenius Medical Care's
insurance coverage could have a material adverse effect on Fresenius Medical
Care's results of operations or financial condition. Such
21
<PAGE> 34
claims, regardless of their merit or eventual outcome, also may have a material
adverse effect on Fresenius Medical Care's business and reputation. See
"BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and
Regulatory Proceedings."
DEPENDENCE ON ACQUISITIONS
NMC's growth in revenues and operating earnings in prior years has
resulted, in significant part, from its ability to consummate acquisitions of
health care businesses, particularly dialysis centers, on reasonable terms. The
health care industry has experienced significant consolidation in recent years,
particularly in the dialysis and homecare service sectors in which Fresenius
Medical Care will compete, resulting, in some cases, in increased costs of
acquisitions in these sectors. Moreover, because of this ongoing consolidation,
the availability of acquisition candidates has decreased in dialysis and
homecare services. Fresenius Medical Care's ability to make acquisitions also
will depend, in part, on Fresenius Medical Care's available financial resources
and the limitations imposed under the NMC Credit Agreement. See "-- Other
Risks-- Effects of Indebtedness" and "FINANCING." Fresenius Medical Care's
ability to continue to effect acquisitions may also depend on its ability to use
its capital stock as consideration in such transactions, which ability may be
limited. See "DESCRIPTION OF CAPITAL STOCK OF FRESENIUS MEDICAL
CARE -- General." The inability of Fresenius Medical Care to continue to be able
to effect acquisitions on reasonable terms could have a material adverse impact
on growth of its business and its future financial position and results of
operations.
Fresenius Medical Care believes that its committed credit lines, combined
with internally generated funds, will be sufficient to finance its acquisition
and expansion plans. In addition, Fresenius Medical Care may use a new class of
non-voting preferred shares with common stock-like features to effect
acquisitions or other transactions in the future. See "DESCRIPTION OF CAPITAL
STOCK OF FRESENIUS MEDICAL CARE -- FMC Preferred Shares."
DEPENDENCE ON PHYSICIAN AND OTHER REFERRALS
The provider business of Fresenius Medical Care will be dependent upon
referrals of dialysis patients by physicians specializing in nephrology who
practice in the communities served by Fresenius Medical Care's dialysis centers.
At most centers, a few physicians account for all or a significant portion of
the patient referral base, and such physicians may move their patients to
competing centers at any time, including centers established by such physicians.
The loss of a significant number of referring physicians at Fresenius Medical
Care's centers could have a material adverse effect on the operations of those
centers and could materially adversely affect Fresenius Medical Care's overall
operations. Fresenius Medical Care's operations are also affected by referrals
from hospitals, managed care plans and other sources. Financial arrangements
with physicians and other referral sources in the U.S. and many other countries,
and decisions with respect to purchases of supplies, are highly regulated. NMC
is the subject of a government investigation with respect to these matters in
the U.S. See "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Investigation." The decision
to purchase Fresenius Medical Care or competing dialysis products will be made
by medical directors ("Medical Directors") and other referring physicians at
Fresenius Medical Care centers and by the managing medical personnel and
referring physicians at other centers. A decline in physician recommendations
and/or purchases of Fresenius Medical Care products could materially adversely
affect the business and operations of Fresenius Medical Care. See "BUSINESS OF
FRESENIUS MEDICAL CARE -- Business of NMC -- DSD Operations" and
"-- Competition."
INTERNATIONAL OPERATIONS
Fresenius Medical Care intends to expand its international presence. As a
result, Fresenius Medical Care expects that revenues from countries other than
the U.S. and Germany will account for an increasing portion of future revenues.
22
<PAGE> 35
Revenues from international operations are subject to a number of risks,
including the following: fluctuations in exchange rates could adversely affect
profitability; agreements may be difficult to enforce and accounts receivable
difficult to collect under certain countries' legal systems; local regulations
may restrict Fresenius Medical Care's ability to obtain a direct ownership
interest in dialysis centers or other operations; lack of governmental funding
may limit the demand for Fresenius Medical Care's services and products; certain
customers and governments may have longer payment cycles; and some countries
could impose additional withholding taxes or otherwise tax Fresenius Medical
Care's income, impose tariffs or adopt other restrictions on foreign trade
affecting Fresenius Medical Care products. There can be no assurance that these
factors will not have a material adverse effect on Fresenius Medical Care's
business, financial position and results of operations. See "BUSINESS OF
FRESENIUS MEDICAL CARE -- Strategy" and "-- Business of NMC -- DSD
Operations -- International Dialysis Services."
RISKS RELATING TO REGULATORY MATTERS
PENDING INVESTIGATIONS
In October 1995, NMC received five investigatory subpoenas from the Office
of the Inspector General ("OIG") of the Department of Health and Human Services
("HHS"). The subpoenas call for the production of extensive documents and were
issued in conjunction 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 relating to health care payments and reimbursements
(the "OIG Investigation"). NMC is cooperating with the OIG Investigation and has
made and expects to continue to make extensive document production in response
to the subpoenas. The results of the OIG Investigation and its impact, if any,
cannot be predicted at this time. However, the costs of responding to the
government's requests are substantial and the pendency of, and any adverse
resolution of, the OIG Investigation could have an adverse effect on Fresenius
Medical Care's reputation, including, among other things, its relationships in
the medical community. In the event that a U.S. government agency or a state
agency believes that any wrongdoing has occurred, civil and/or criminal
proceedings could be instituted and if such proceedings were to be instituted
and the outcome were to be unfavorable, NMC or one or more of its subsidiaries
could be excluded from government reimbursement programs or have their payments
suspended. Such result would have a material adverse effect on the business,
financial position and results of operations of NMC and Fresenius Medical Care.
In addition, in the event that a U.S. government or state agency attempts to
recover a significant amount of revenues of NMC for prior periods which such
agency believes were improperly received, Fresenius Medical Care could suffer a
material adverse effect on its business, financial condition and results of
operations. In this regard, it should be noted that applicable laws authorize
the imposition of penalties of significant magnitude even if the underlying
claim is for a relatively immaterial amount. Further, any restrictions on NMC's
future operations resulting from the resolution of the OIG Investigation could
adversely affect Fresenius Medical Care's profitability in future periods. In
addition, any or all of the subjects of the OIG Investigation could be the
subject of civil claims by private parties, such as patients or insurers or
other private payors, seeking to recoup payments made to NMC, or seeking other
remedies, including, without limitation, suspension or exclusion from
reimbursement programs and punitive damages. Such claims, if adversely
determined, could have a material adverse effect on Fresenius Medical Care's
business, financial position and results of operations. This matter is discussed
further under "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Investigation" and that
section should be carefully reviewed. See "BUSINESS OF FRESENIUS MEDICAL
CARE -- Regulatory and Legal Matters -- Legal and Regulatory Proceedings -- OIG
Agreements" for information regarding agreements relating to the OIG
investigation among NMC, Grace Chemicals, Fresenius Medical Care and the United
States entered into relative to the Reorganization.
In December 1994, a subsidiary of NMC received a subpoena from a federal
grand jury in the Eastern District of Virginia investigating the contractual
relationships between subsidiaries of NMC that provide dialysis services and
third parties that provide medical directorship and related services to those
subsidiaries. The outcome of these investigations and their effect, if any, on
NMC cannot be predicted at this time. See
23
<PAGE> 36
"BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and
Regulatory Proceedings -- Eastern District of Virginia."
On September 22, 1995, June 7, 1996, and June 21, 1996, NMC's LifeChem
laboratory subsidiary ("LifeChem") voluntarily disclosed certain billing
problems, which NMC believes have been corrected. The matters disclosed in
LifeChem's voluntary disclosure of September 22, 1995 are also a subject of the
OIG Investigation. For a further discussion of this matter, see "BUSINESS OF
FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and Regulatory
Proceedings -- OIG Investigation."
NMC has received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating a number of issues. On February 12, 1996,
NMC received a letter from the U.S. Attorney for the District of New Jersey
indicating that it is the target of a federal grand jury investigation into
possible violations of criminal law in connection with its efforts to persuade
the U.S. Food and Drug Administration (the "FDA") to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland manufacturing facility. 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 hold. The
letter added that NMC remains a subject of a federal grand jury's investigation
into other matters. The outcome of this investigation and its impact, if any, on
NMC's business or results of operations cannot be predicted at this time. See
"BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and
Regulatory Proceedings -- District of New Jersey Investigation."
HEALTH CARE REFORM
Proposals to modify the current health care system in the U.S. to improve
access and control costs are being considered by the federal and certain state
governments. Fresenius Medical Care anticipates that the U.S. Congress and state
legislatures will continue to review and assess alternative health care reforms,
and Fresenius Medical Care cannot predict whether any such reform proposals will
be adopted, when they may be adopted or what impact they may have on Fresenius
Medical Care. Such legislation could, among other things, restrict Fresenius
Medical Care's ability to establish prices and to contract independently with
health care providers in the U.S., thereby having a material adverse effect on
the business and operations of Fresenius Medical Care.
In the U.S., Medicare reimbursement is currently available for dialysis
equipment and/or treatment for most end-stage renal disease ("ESRD") patients at
approximately the same dollars per treatment level that prevailed in 1983
(representing a significant decrease in real dollars per treatment). Health care
reform proposals are intended, among other things, to reduce Medicare spending
growth significantly as part of an effort to reduce the federal budget deficit.
Because the demand for Fresenius Medical Care's products and the profitability
of its services are affected by the availability and level of Medicare
reimbursement, any spending decreases or other significant changes in the
Medicare program could have a material adverse effect on the business and
operations of Fresenius Medical Care.
Other countries, especially those in Western Europe, have also considered
health care reform proposals and could materially alter their
government-sponsored health care programs by reducing reimbursement payments.
Such reductions could affect the pricing of the products of Fresenius Medical
Care and the profitability of its services, and therefore could have a material
adverse effect on the business, financial position and results of operations of
Fresenius Medical Care. See "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory
and Legal Matters -- Reimbursement -- Non-U.S."
OPERATIONS SUBJECT TO AND POTENTIAL EFFECTS OF GOVERNMENTAL REGULATION
The operations of Fresenius Medical Care will be subject to extensive
governmental regulation in virtually every nation in which it operates. The
applicable regulations, which differ from country to country, relate in general
to the safety and efficacy of medical products and supplies, the operation of
manufacturing facilities, laboratories and dialysis centers, and the rate of,
and accurate reporting and billing for, government and third-party
reimbursement.
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<PAGE> 37
Any inability to obtain material required licenses, certifications, or
other approvals, or significant delays in obtaining such items, loss of any
significant licenses and certifications required to operate, or termination of
Fresenius Medical Care's authorization to participate in the Medicare or
Medicaid programs under the laws of any other governmental authority from which
a substantial portion of its revenues is derived, would have a material adverse
effect on the business, financial position and results of operations of
Fresenius Medical Care. See "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory
and Legal Matters."
RISKS RELATING TO FDA MATTERS
The FDA is the U.S. agency that regulates the testing, manufacturing and
marketing of medical products and supplies. From 1991 through 1993, the FDA
issued warning letters concerning four of NMC's six renal products division
("RPD") facilities in the U.S., as well as import alerts concerning hemodialysis
bloodlines manufactured at NMC's Reynosa, Mexico facility and Focus(R) brand
hemodialyzers manufactured at NMC's Dublin, Ireland facility. Under the import
alerts, NMC was prohibited from importing the products covered by the alerts
into the U.S. until the FDA confirmed compliance with Good Manufacturing
Practices ("GMP") at the facilities where such products were manufactured. In
January 1994, NMC and certain members of its senior management entered into a
consent decree providing, among other things, for the terms upon which such
import prohibition would be lifted (the "Consent Decree"). As a result of the
warning letters and the Consent Decree, NMC's U.S. facilities were required to
undertake significant GMP improvements, but production continued at all U.S.
facilities. Violation of the Consent Decree could result in civil enforcement
actions, such as seizure and injunctive actions; administrative proceedings,
such as civil penalties and mandatory recalls; and/or criminal contempt
proceedings, any of which could have a material adverse effect on Fresenius
Medical Care's business, financial position and results of operations. See
"BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and
Regulatory Proceedings."
DEPENDENCE ON GOVERNMENT REIMBURSEMENT
A significant portion of Fresenius Medical Care's revenues will be derived
directly or indirectly from reimbursement payments received under the Medicare
and Medicaid programs. For example, in 1995 approximately 62% of NMC's total net
revenues, including approximately 62% of the revenues of DSD, approximately 78%
of the revenues of LifeChem, and approximately 50% of the revenues of NMC
Homecare, resulted from Medicare and Medicaid reimbursement. In addition, a
significant portion of the net revenues of Fresenius USA and RPD are derived
from Medicare, either indirectly by selling renal products to dialysis centers,
which in turn seek Medicare reimbursement, or by furnishing products to patients
receiving treatment at home and directly seeking Medicare reimbursement.
Reimbursement under the Medicare program for chronic dialysis services
provided to ESRD patients at NMC's dialysis centers is paid in accordance with a
payment methodology commonly referred to as the composite rate method (the
"Composite Rate"). All Medicare reimbursement rates, including the Composite
Rate, Medicare rates for other dialysis-related services such as the
administration of Erythropoietin ("EPO"), and Medicare rates for other services
provided by Fresenius Medical Care, as well as the scope of Medicare coverage,
are subject to legislative change as a result of deficit reduction and other
measures. Deficit reduction measures have resulted in reimbursement rate
reductions in the past and may result in further rate reductions in the future.
Congress is actively considering proposals to reduce materially the amounts
spent under the Medicare and Medicaid programs. Medicare has also recently
proposed a new policy restricting coverage for clinical laboratory tests
furnished to dialysis patients. A change in Medicare rates or other terms and
conditions of Medicare and Medicaid reimbursement could have a material adverse
effect on the business, financial position and results of operations of
Fresenius Medical Care as would the result of a regulatory proceeding or
investigation excluding NMC or one or more of its subsidiaries from
participating in the Medicare reimbursement program. See "BUSINESS OF FRESENIUS
MEDICAL CARE -- Regulatory and Legal Matters -- Reimbursement."
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POTENTIAL LOSS OF IDPN REIMBURSEMENT
As discussed under "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and
Legal Matters -- Reimbursement -- U.S. -- IDPN," the number of claims by NMC
Homecare for reimbursement relating to the administration of Intradialytic
Parenteral Nutrition ("IDPN") that have been approved by Medicare has been
sharply reduced since late 1993. Under the Medicare Parenteral and Enteral
Nutrition ("PEN") program NMC believes that the reduction in IDPN claims paid by
Medicare represents an unauthorized coverage policy change. Accordingly, NMC is
pursuing various administrative and legal avenues, including legal action for
injunctive and declaratory relief and administrative appeals, to address this
problem. No assurance can be given that NMC will prevail in pursuing such
remedies or that the claims on appeal will be approved for payment.
Medicare claims are processed by private companies under contract with the
federal government. In April 1996, the Medicare claims processors issued a new
coverage policy, which is effective for services billed on and after July 1,
1996. While the new policy permits continued coverage of PEN therapies,
including IDPN therapy, and while the potential impact of the new policy is
subject to further analysis, NMC believes that the new policy will make 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. The new policy also eliminates all
reimbursement for infusion pumps used to administer IDPN therapy. NMC, together
with other interested parties, may seek to effect certain changes in the new
policy, other than with respect to the elimination of reimbursement for infusion
pumps, and NMC has developed changes to its patient qualification procedures in
order to comply with the policy. However, if NMC is unable to effect changes in
the new policy, or, if NMC is unable to change its operating procedures to
conform to 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 results of operations.
IDPN claims represent substantial accounts receivable of NMC Homecare
(approximately $103 million as of March 31, 1996, with the receivables
increasing at a rate of approximately $6 million per month) and substantially
all of NMC Homecare's operating income in recent quarters. The new policy
eliminates reimbursement for infusion pumps, which may adversely impact revenue
by approximately $11 million on an annualized basis. For purposes of financial
and operational planning, NMC estimates that as much as 50% of NMC's current
patient level may no longer qualify for continued IDPN coverage under the new
policy, which would adversely impact revenues by up to $42 million annually.
If NMC is unable to collect its IDPN accounts receivable, or if IDPN/PEN
coverage is reduced or eliminated, Fresenius Medical Care's business, financial
position and results of operations could be materially adversely affected. The
use of IDPN by NMC and certain of its billing practices related to IDPN are also
a subject of the OIG Investigation. See "BUSINESS OF FRESENIUS MEDICAL
CARE -- Regulatory and Legal Matters -- Reimbursement" and "-- Legal and
Regulatory Proceedings," and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- NMC."
RISKS RELATING TO OBRA 93 DISPUTE
The Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") amended the
statutory ESRD Medicare Secondary Payor ("MSP") provisions affecting the
coordination of benefits between Medicare and employer health plans in the case
of ESRD patients age 65 and over who are eligible for Medicare and also covered
by an employer health plan ("dual eligible ESRD patients"). The vast majority of
NMC's patients affected by this amendment were retirees eligible for Medicare on
the basis of age who subsequently became eligible for Medicare on the basis of
ESRD and whose employer group health plan had been the supplemental payor to
Medicare. The original implementation of this provision of OBRA 93 by the Health
Care Financing Administration ("HCFA") of HHS, which administers the Medicare
and Medicaid programs, required all employer health plans to recognize a new
18-month coordination of benefits period during which such
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employer health plans would be the primary payors for dialysis treatment for
such dual eligible ESRD patients. Under that interpretation, primary Medicare
coverage begins only after the 18-month coordination of benefits period, even if
Medicare was the primary payor for an affected retiree before ESRD entitlement
arose. Upon implementation of these OBRA 93 provisions with respect to dual
eligible ESRD patients, NMC adopted a procedure for rebilling private payors for
certain amounts previously billed to Medicare and crediting Medicare with an
overpayment. NMC's treatment of the overpayments relating to implementation of
OBRA 93 is a subject of the OIG Investigation. See "BUSINESS OF FRESENIUS
MEDICAL CARE -- Regulatory and Legal Matters -- Legal and Regulatory
Proceedings."
On April 24, 1995, HCFA reversed its original interpretation of the OBRA 93
provisions by taking the new position that primary Medicare coverage begins
immediately (rather than after an 18-month coordination of benefits period) in
the case of individuals who are already age eligible for Medicare when ESRD
entitlement arises. HCFA proposed that the reversal be effective retroactively
for services provided after August 10, 1993, the effective date of OBRA 93. On
May 5, 1995, NMC filed a complaint in the U.S. District Court for the District
of Columbia seeking to preclude HCFA from enforcing its new policy. NMC moved
for a preliminary injunction to preclude HCFA from enforcing its new policy
retroactively (i.e., to billings for services provided between August 10, 1993
and April 23, 1995), which injunction was granted on June 6, 1995. The
litigation is continuing with respect to NMC's request to enjoin HCFA's new
policy, both retroactively and prospectively, on a permanent basis. Pending the
outcome of the litigation, HCFA's new policy remains effective for services
provided after April 23, 1995. See "BUSINESS OF FRESENIUS MEDICAL
CARE -- Regulatory and Legal Matters -- Legal and Regulatory Proceedings."
HCFA's initial interpretation of the MSP provisions of OBRA 93 had a
positive impact on DSD's revenues because during the 18-month coordination of
benefits period, the employer health plan was responsible for payment at its
negotiated rate or, in the absence of such a rate, at NMC's usual and customary
rate (which is generally in excess of the Medicare rate). If HCFA's retroactive
implementation of its revised interpretation of OBRA 93 is upheld, NMC may be
required to refund the payments received from employer health plans for services
provided after August 10, 1993 under HCFA's original implementation and to
rebill Medicare for the same services, which would result in a net loss to NMC
of approximately $120 million as of December 31, 1995. As of July 1, 1995, NMC
ceased to recognize the incremental revenue realized under the original
implementation, but continued to bill employer health plans as primary payors
until December 31, 1995. If HCFA's revised interpretation is upheld, NMC's and
Fresenius Medical Care's business, financial position and results of operations
would be materially adversely affected, particularly if the revised
interpretation is applied retroactively. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC" and "BUSINESS
OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters."
RISKS RELATING TO NON-GOVERNMENTAL PAYORS
Fresenius Medical Care derives a significant portion of its revenues from
reimbursement provided by non-governmental third-party payors in the U.S. A
substantial portion of third-party health insurance is now furnished through
some form of managed care, including health maintenance organizations ("HMOs").
Managed care plans are increasing their market share, and this trend may
accelerate as a result of the consolidation in the health care industry as well
as the interest of members of Congress and the executive branch in ways to
increase the number of Medicare and Medicaid beneficiaries served through
managed care plans.
Reimbursement by non-governmental payors is generally at higher rates than
reimbursement by governmental payors such as Medicare. However, managed care
plans are becoming more aggressive in selectively contracting with a smaller
number of health care providers willing to furnish services for lower rates and
subject themselves to a variety of service restrictions. For example, managed
care plans and traditional indemnity third-party payors are increasingly
demanding alternative fee structures, such as capitation, pursuant to which a
health care provider receives a fixed payment per month per enrollee and bears
the risk of loss if the costs of treating such enrollee exceed the capitation
payment. These market-driven changes are
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creating significant downward pressure on the reimbursement NMC receives for
services and products, particularly at NMC Homecare.
As managed care programs increase market share and gain greater bargaining
power vis-a-vis health care providers, there will be increasing pressure to
reduce the amounts paid for services and products furnished by Fresenius Medical
Care. These trends will be accelerated if future changes to the Medicare ESRD
program require private payors to assume a greater percentage of the total cost
of care given to dialysis patients over the term of their illness. Although
Fresenius Medical Care intends to seek to increase the portion of its revenues
attributable to non-governmental private payors, the historically higher rates
of reimbursement paid by non-governmental payors may not be maintained at such
levels. For example, with respect to homecare services, managed care programs
are currently providing levels of reimbursement below those of Medicare. If
substantially more patients of Fresenius Medical Care join managed care plans or
such plans reduce reimbursements, Fresenius Medical Care's business, financial
position and results of operations could be materially adversely affected. See
"BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and
Regulatory Proceedings" and "-- Changes in the Health Care Industry," and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- NMC."
OTHER RISKS
EFFECTS OF INDEBTEDNESS
After the Reorganization and as a result of the incurrence of debt under a
new credit agreement to be entered into by NMC (the "NMC Credit Agreement") and
the making of the Distribution Payment, NMC (and, therefore, Fresenius Medical
Care, on a consolidated basis) will have substantial debt. Assuming the
Reorganization had been consummated as of March 31, 1996, on a pro forma basis,
Fresenius Medical Care would have had consolidated total debt of approximately
$2.224 billion and consolidated total shareholders' equity of $1.695 billion as
of such date, resulting in a consolidated ratio of total debt to equity of
approximately 1.31 to 1. On a pro forma basis, assuming the Reorganization had
been consummated as of January 1, 1995, Fresenius Medical Care would have had
coverage ratios of earnings before interest, taxes, depreciation and
amortization ("EBITDA") to interest expense of approximately 2.98 to 1 for the
year ended December 31, 1995 and 3.17 to 1 for the three months ended March 31,
1996. Included are $41,693 and $10,268, respectively, of depreciation and
amortization classified as cost of sales and selling, general and administrative
expenses in the Fresenius Worldwide Dialysis Combined Financial Statements. See
"FRESENIUS MEDICAL CARE AG UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION."
NMC will have significant interest expense and principal repayment
obligations under the NMC Credit Agreement. While management of Fresenius
Medical Care believes that such obligations will be paid as they become due, if
NMC's operating cash flow is not sufficient to satisfy its cash requirements,
including debt service, Fresenius Medical Care may be required to supplement
NMC's operating cash flow, or Fresenius Medical Care and/or NMC may be required
to effect capital spending reductions or limit or defer acquisition and
expansion plans. There can be no assurance that Fresenius Medical Care would
supplement NMC's cash flow or would do so in an amount sufficient to satisfy the
cash requirements of NMC.
The NMC Credit Agreement is expected to include certain covenants which,
among other things, may restrict or have the effect of restricting the ability
of NMC and its subsidiaries to dispose of assets, incur debt, pay dividends,
create liens or make capital expenditures, investments or acquisitions, and
which may otherwise limit activities of NMC and its subsidiaries. The NMC Credit
Agreement also is expected to include certain covenants that will require NMC to
maintain certain financial ratios. The breach of any of the covenants could
result in a default under the NMC Credit Agreement. See "FINANCING." As
described under "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Agreements", NMC has agreed
to deliver to the United States a letter of credit in the principal amount of
$150 million in connection with the OIG investigation.
In connection with the NMC Credit Agreement, Grace Chemicals has agreed to
guarantee Facility 3 (which provides for a maximum of $500 million of available
credit) and Facility 2 up to a maximum of
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$450 million. The NMC Credit Agreement is expected to provide that these
guarantees will be released as to $800 million upon the occurrence of certain
events after 45 days, but within 60 days, following the Effective Date,
including (a) the receipt of an unconditional joint and several guarantee from
Fresenius Medical Care and certain of its subsidiaries for the full amount of
the NMC Credit Facility; or (b) the receipt of a letter of credit or other
acceptable financial accommodation for the account of Grace Chemicals or
Fresenius Medical Care in form and substance satisfactory to the Lenders; or (c)
a prepayment in certain specified amounts under the NMC Credit Facility. If such
guarantees are not released within 60 days following the Effective Date, demand
for payment will be made on Grace Chemicals under such guarantees as to $800
million. It is the intention of Fresenius Medical Care to provide the
unconditional joint and several guarantees referred to in the preceding sentence
in a manner so as to cause the release of Grace Chemicals' guarantees as to $800
million not before 46 days, but on or prior to 50 days, following the Effective
Date. However, no assurance can be given that such guarantees will be provided
or that either or both of Grace Chemicals' guarantees will be released. In the
event that Fresenius Medical Care does not provide such guarantees or otherwise
effect the release of the Grace Chemicals guarantees as to $800 million, Grace
Chemicals would be required to provide the letters of credit or repay the
amounts specified in the NMC Credit Agreement and, thereafter, be subrogated to
the rights of Lenders with respect to such repaid amounts after the Lenders
under the respective facilities have been repaid in full; and Grace Chemicals
has undertaken to the Lenders to maintain unused available credit in an amount
to be determined while the Grace Chemicals guarantees are outstanding in order
to facilitate such actions. In connection with Grace Chemicals' agreement to
extend guarantees under the NMC Credit Agreement, Fresenius Medical Care and
Grace Chemicals intend to enter into an agreement to induce Fresenius Medical
Care to cause such guarantees to be released as to $800 million not later than
the 50th day following the Effective Date. The balance of the Grace Chemicals
guarantees under Facility 2 will be released upon NMC (or Fresenius Medical
Care, if Fresenius Medical Care guarantees the NMC Credit Facility), on a
consolidated basis, achieving a ratio of senior debt to EBITDA of equal to or
less than 3.5. See "FINANCING -- NMC Credit Agreement."
CERTAIN U.S. TAX CONSIDERATIONS RELATED TO THE DISTRIBUTION
Prior to the Distribution, the stock of NMC will be distributed by Grace
Chemicals to Grace (the "NMC Distribution"). If the NMC Distribution were not to
qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code of
1986, as amended (the "Code"), Grace Chemicals would recognize taxable gain upon
consummation of the Distribution in an amount equal to the excess of the fair
market value of the NMC stock over Grace Chemicals' tax basis in such stock
immediately prior to the NMC Distribution. This tax would be payable by Grace
Chemicals. If the Distribution were not to qualify as a tax-free spin-off under
Section 355 of the Code, then, in general, Grace would recognize taxable gain in
an amount equal to the excess of the fair market value of the New Grace Common
Stock over Grace's tax basis in the New Grace Common Stock immediately prior to
the Distribution. This tax would be payable by FNMC. Although, pursuant to the
Grace Tax Sharing and Indemnification Agreement to be entered into upon the
closing of the Reorganization, Grace Chemicals will, under certain
circumstances, indemnify FNMC for such tax liability, there can be no assurance
that Grace Chemicals' indemnification obligation will be applicable or that
Grace Chemicals will be able to satisfy any such obligation. See "THE
REORGANIZATION -- The Grace Tax Sharing and Indemnification Agreement."
Additionally, if the Distribution were not to qualify as a tax-free
spin-off, each holder of Grace Common Stock as of the Time of Distribution would
be treated as having received a taxable dividend equal to the fair market value
of the New Grace Common Stock received, if and to the extent that Grace (as
expected) has sufficient current and accumulated earnings and profits as of the
end of the taxable year in which the Distribution takes place. If and to the
extent that the fair market value of the New Grace Common Stock exceeds Grace's
earnings and profits as so determined, each such shareholder would first reduce
such shareholder's tax basis in such shareholder's Grace Common Stock (but not
below zero) to the extent that the value of the New Grace Common Stock received
exceeds such shareholder's pro rata share of such earnings and profits, and then
recognize gain from the Distribution to the extent that the value of the New
Grace Common Stock received exceeds both such shareholder's pro rata share of
earnings and profits and tax basis in such shareholder's Grace Common Stock. See
"CERTAIN FEDERAL INCOME TAX CONSE-
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QUENCES OF THE TRANSACTIONS TO GRACE AND GRACE SHAREHOLDERS -- Consequences of
the Distribution."
CERTAIN LIABILITIES FOR OBLIGATIONS OF GRACE CHEMICALS
As of March 31, 1996, Grace was the guarantor of approximately $2 billion
of indebtedness of Grace Chemicals. Although Grace Chemicals has agreed to seek
releases from such guarantees, such releases may not be obtained and the receipt
of such releases is not a condition to the consummation of the Reorganization.
In addition, Grace Chemicals has had, and is expected to continue to have,
significant liabilities arising out of asbestos-related litigation and other
claims. If Grace Chemicals were unable to (or otherwise did not) satisfy such
liabilities, an unpaid claimant of Grace Chemicals might seek to assert such
liabilities against Fresenius Medical Care, FNMC and/or NMC. Although Grace
Chemicals has agreed to indemnify Fresenius Medical Care, FNMC and NMC against
such guarantees and asbestos claims, there can be no assurance that Grace
Chemicals will be able to fulfill its indemnity obligation.
FRAUDULENT TRANSFER AND RELATED CONSIDERATIONS
It is a condition to the Grace Merger that the NMC Distribution shall have
occurred. Under applicable law, the NMC Distribution would constitute a
"fraudulent transfer" if (a) New Grace or Grace Chemicals is insolvent, (b) the
effect of the NMC Distribution would render New Grace or Grace Chemicals
insolvent, (c) the NMC Distribution would leave New Grace or Grace Chemicals
engaged in a business or transaction for which its remaining assets constituted
unreasonably small capital, or (d) New Grace or Grace Chemicals intended to
incur, or believed it would incur, debts beyond its ability to pay as such debts
mature. Generally, an entity is considered insolvent if it is unable to pay its
debts as they come due or if the fair value of its assets is less than the
amount of its actual and expected liabilities. In addition, the NMC Distribution
may be made only out of surplus (net assets minus capital) and not out of
capital.
Grace believes that, based on the factors considered in connection with the
NMC Distribution, the NMC Distribution will not be a fraudulent transfer and
will be made out of surplus in accordance with applicable law. There is no
certainty, however, that a court would reach the same conclusions in determining
that New Grace and Grace Chemicals have satisfied the applicable standards. In
this regard, it should be noted that Grace Chemicals has had, and is expected to
continue to have, significant liabilities arising out of asbestos-related
litigation and claims. For more information regarding such liabilities, see Item
3 of Grace's 1995 Annual Report on Form 10-K and note 2 to the consolidated
financial statements included in such Report. See also "BACKGROUND AND
REASONS -- Background of the Reorganization; Reasons for the Recommendation of
the Grace Board."
If, in a lawsuit filed by an unpaid creditor or a representative of unpaid
creditors or a trustee in bankruptcy, a court were to find that, at the time the
NMC Distribution was consummated or after giving effect thereto, either New
Grace or Grace Chemicals, as the case may be, (a) was insolvent, (b) was
rendered insolvent by reason of the NMC Distribution, (c) was engaged in a
business or transaction for which its remaining assets constituted unreasonably
small capital, or (d) intended to incur, or believed it would incur, debts
beyond its ability to pay as such debts matured, then such court might require
FNMC or NMC to fund certain liabilities of New Grace or Grace Chemicals, as the
case may be, for the benefit of New Grace's or Grace Chemicals' creditors. The
same consequences would also apply were a court to find that the NMC
Distribution was not made out of the surplus of Grace Chemicals.
It is a condition to the Reorganization that the Distribution and the
Distribution Payment shall have occurred. Under applicable law, the Distribution
and the Distribution Payment could be challenged if either were a fraudulent
conveyance or were not made out of surplus. Grace believes that, based on the
factors considered in connection with the Reorganization, each of the
Distribution and the Distribution Payment will not be a fraudulent transfer and
will be made out of surplus in accordance with applicable law. There is no
certainty, however, that a court would reach the same conclusions in determining
that Grace or NMC have satisfied the applicable standards. In this regard, it
should be noted that Grace or NMC may have significant liabilities relating to
regulatory matters. For more information regarding such potential liabilities,
see
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"BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and
Regulatory Proceedings."
Under the OIG Agreements, the United States has granted certain releases
with respect to possible fraudulent transfer claims to Grace Chemicals, NMC,
Fresenius Medical Care and others. See "BUSINESS OF FRESENIUS MEDICAL
CARE -- Regulatory and Legal Matters -- Legal and Regulatory Proceedings -- OIG
Agreements."
CONTROL BY FRESENIUS AG; ANTI-TAKEOVER EFFECT
Fresenius AG will hold at least 50.3% of Fresenius Medical Care's voting
securities immediately following the Reorganization. Accordingly, Fresenius AG
will possess the ability, through its voting power and its power to elect the
members of the Supervisory Board (Aufsichtsrat) of Fresenius Medical Care (the
"FMC Supervisory Board"), to control many of the actions of Fresenius Medical
Care and to approve many actions requiring the vote of Fresenius Medical Care's
shareholders. This controlling ownership has the effect of, among other things,
preventing a change in control of, or the declaration or payment of dividends
by, Fresenius Medical Care without the agreement of Fresenius AG. In addition,
ultimate control of Fresenius Medical Care would pass upon a change of control
of Fresenius AG without the requirement of a vote of, or a premium for,
Fresenius Medical Care shareholders. See "SECURITY OWNERSHIP -- Security
Ownership of Certain Beneficial Owners and Management of Fresenius AG" with
regard to control of Fresenius AG.
Fresenius AG has agreed that one-third of the members of the FMC
Supervisory Board (but not less than two such members) will be persons who do
not have any substantial business or professional relationship with Fresenius AG
or Fresenius Medical Care, or any of their affiliates. Fresenius AG has agreed
to cause Fresenius Medical Care to provide certain protections for minority
shareholders in certain provisions of Fresenius Medical Care's Articles of
Association and in the Pooling Agreement. These protections include FMC
Supervisory Board approval for certain transactions between Fresenius AG and
Fresenius Medical Care, standstill protections for a period of three years
following the Reorganization and other restrictions on the disposition of FMC
Ordinary Shares by Fresenius AG. The Pooling Agreement provides that it will be
enforceable in the state and federal courts in New York. See "DESCRIPTION OF THE
POOLING AGREEMENT." However, there can be no assurance that these protections
will be adequate or that German courts, applying German conflicts of law rules,
will enforce these provisions or New York judgments obtained with respect to
these provisions. See "DESCRIPTION OF THE POOLING AGREEMENT" and "COMPARISON OF
CERTAIN RIGHTS OF SHAREHOLDERS OF GRACE AND FRESENIUS USA."
NO CURRENT MARKET
There is currently no public market for the ADSs, the FMC Ordinary Shares
or the New Preferred Shares. While Fresenius Medical Care will apply to list the
ADSs on the NYSE and the FMC Ordinary Shares on the Frankfurt Stock Exchange
and, after the Reorganization, FNMC intends to seek to list the New Preferred
Shares on a national stock exchange, there can be no assurance that applicable
listing criteria will be satisfied, as to the volume of trading and liquidity
that will develop or as to the prices at which the FMC Ordinary Shares, the ADSs
or the New Preferred Shares will trade after the Reorganization. Moreover, until
the ADSs, FMC Ordinary Shares and the New Preferred Shares are fully distributed
and orderly markets develop, the prices at which trading in such securities
occurs may fluctuate significantly.
SPECIAL DIVIDEND
The New Preferred Shares are not entitled to receive any dividend payments
from FNMC other than the Special Dividend, the accrual of which will be
contingent upon the aggregate amount of adjusted cash flow generated by
Fresenius Medical Care during the period from January 1, 1997 to December 31,
2001. See "DESCRIPTION OF NEW PREFERRED SHARES" for a discussion of such
requirements. FNMC also
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must have adequate surplus in order for the payment of the Special Dividend to
be lawful under New York corporate law. Fresenius Medical Care's ability to
generate cash flow is subject to many factors, including the risk factors set
forth herein. There can be no assurance that Fresenius Medical Care will
generate sufficient cash flow to require accrual of the Special Dividend on the
New Preferred Shares or that FNMC will have adequate surplus for the payment of
the Special Dividend. The terms of the New Preferred Shares do not obligate
Fresenius Medical Care to make a capital contribution to FNMC in order to
provide FNMC with adequate surplus to make such payments. The failure or
inability of FNMC to pay the Special Dividend does not prevent Fresenius Medical
Care from paying dividends on FMC Ordinary Shares. However, if the Special
Dividend is payable but not declared by the FNMC Board, or if any installment of
the Special Dividend is not paid on the applicable Payment Date, FNMC may not
pay dividends on FNMC Common Stock, which, in turn, might limit Fresenius
Medical Care's ability to pay dividends on the FMC Ordinary Shares. The amount
of the Special Dividend would be reduced by certain amounts payable in
connection with the matters underlying the OIG Investigation. In addition, the
Special Dividend will only begin to accrue after payment of interest on amounts
outstanding under the NMC Credit Agreement and other indebtedness and will be
subject to limitation by covenants regarding restricted payments contained in
such debt. Therefore, such indebtedness will have a negative impact on the
likelihood and size of any payment of the Special Dividend. See "DESCRIPTION OF
NEW PREFERRED SHARES."
VALUE OF NEW PREFERRED SHARES
The New Preferred Shares are not entitled to receive any dividend payments
other than the Special Dividend, the accrual of which will be dependent on
Fresenius Medical Care having an adjusted operating performance from January 1,
1997 through December 31, 2001 in excess of an established target amount for
such period. In addition, certain expenses incurred in connection with
regulatory investigations are included in determining such operating performance
levels. Aside from the Special Dividend, the New Preferred Shares have only a
nominal liquidation preference. Therefore, the Special Dividend may never be
paid and the New Preferred Shares may have minimal or no value. In addition, the
market price of the New Preferred Shares can be expected to fluctuate with
changes in the market and economic conditions, the financial condition and
prospects of FNMC and Fresenius Medical Care and other factors that generally
affect the market prices of securities.
ORGANIZATION UNDER GERMAN LAW
Fresenius Medical Care will be organized under German law. The preferences,
rights and privileges of shareholders under German law, as well as the rights of
minority shareholders and other substantive provisions, differ materially from
those that shareholders of Grace and Fresenius USA currently possess under New
York and Massachusetts law, respectively. See "COMPARISON OF CERTAIN RIGHTS OF
SHAREHOLDERS OF GRACE AND FRESENIUS USA."
Fresenius Medical Care will be a "foreign private issuer," as defined in
the Commission's rules, and consequently will not be subject to certain
disclosure requirements applicable to domestic issuers. Fresenius Medical Care
will not be subject to the Commission's proxy rules or the Commission's rules
requiring the filing of quarterly reports, and annual reports filed by Fresenius
Medical Care with the Commission will contain less detailed disclosure than
reports of domestic issuers regarding such matters as management, executive
compensation and outstanding options, beneficial ownership of Fresenius Medical
Care's securities and certain related party transactions. Also, officers,
directors and 10% beneficial owners of Fresenius Medical Care's equity
securities will not be subject to the reporting requirements and short-swing
profit recovery provisions of Section 16 of the Exchange Act. However, Fresenius
Medical Care has agreed that as long as the Pooling Agreement is in effect,
Fresenius Medical Care will file quarterly reports under cover of Form 6-K, will
prepare its annual and quarterly financial statements in accordance with US GAAP
and will file with the Commission and provide to shareholders (including holders
of ADRs) certain materials with respect to its annual and special meetings of
shareholders. See "DESCRIPTION OF THE POOLING AGREEMENT -- Listing of American
Depository Shares; SEC Filings" and "-- Term."
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THE SPECIAL MEETINGS
GENERAL
This Joint Proxy Statement-Prospectus is being furnished to holders of
Grace Common Stock and Grace Preferred Stock in connection with the solicitation
of proxies by the Grace Board for use at the Grace Special Meeting, to be held
on September 16, 1996. The purposes of the Grace Special Meeting are to consider
and vote upon a proposal to approve and adopt the Reorganization Agreement and
the transactions contemplated thereby (including the Grace Merger and the
Distribution), to approve and adopt the Grace Amendment and to transact such
other business as may properly come before the Grace Special Meeting.
This Joint Proxy Statement-Prospectus is being furnished to holders of
Fresenius USA Common Stock in connection with the solicitation of proxies by the
Fresenius USA Board for use at the Fresenius USA Special Meeting to be held on
September 16, 1996. The purposes of the Fresenius USA Special Meeting are to
consider and vote upon a proposal to approve and adopt the Reorganization
Agreement and the transactions contemplated thereby, including, without
limitation, the Fresenius USA Merger, to approve and adopt the Fresenius USA
Plan Amendment and to transact such other business as may properly come before
the Fresenius USA Special Meeting.
Each copy of this Joint Proxy Statement-Prospectus mailed to shareholders
of Grace is accompanied by a form of proxy for use at the Grace Special Meeting,
and has attached as Annex A the New Grace Prospectus. Each copy of this Joint
Proxy Statement-Prospectus mailed to stockholders of Fresenius USA is
accompanied by a form of proxy for use at the Fresenius USA Special Meeting.
This Joint Proxy Statement-Prospectus is also being furnished to holders of
Grace Common Stock and Fresenius USA Common Stock as a Prospectus of Fresenius
Medical Care in connection with the issuance of FMC Ordinary Shares represented
by ADSs in connection with the Reorganization and to holders of Grace Common
Stock as a Prospectus of Grace in connection with the issuance of the shares of
the New Preferred Shares by Grace in connection with the Recapitalization. See
"AVAILABLE INFORMATION."
DATE, PLACE AND TIME
The Grace Special Meeting will be held at Grace's headquarters at One Town
Center Road, Boca Baton, Florida, on September 16, 1996, at 10:00 a.m. local
time.
The Fresenius USA Special Meeting will be held at the 52nd floor conference
center of O'Melveny & Myers LLP, 153 East 53rd Street, New York, New York,
10022, on September 16, 1996, at 10:00 a.m. local time.
RECORD DATES
GRACE
The Grace Board has fixed the close of business on July 29, 1996 as the
Grace Record Date for the determination of the holders of Grace Common Stock and
Grace Preferred Stock entitled to receive notice of and to vote at the Grace
Special Meeting.
FRESENIUS USA
The Fresenius USA Board has fixed the close of business on July 29, 1996 as
the Fresenius USA Record Date for the determination of the holders of Fresenius
USA Common Stock entitled to receive notice of and to vote at the Fresenius USA
Special Meeting.
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<PAGE> 46
VOTES REQUIRED
GRACE
As of July 15, 1996, the following shares of the following classes of
Grace's capital stock were outstanding and entitled to the following votes:
<TABLE>
<CAPTION>
SHARES VOTES PER
CLASS OUTSTANDING SHARE
-------------------------------------------------------------- ------------ ---------
<S> <C> <C>
Grace 6% Preferred Stock...................................... 36,460 160
Grace Class A Preferred Stock................................. 16,256 16
Grace Class B Preferred Stock................................. 21,577 16
Grace Common Stock............................................ 92,001,176 1
</TABLE>
In addition to the classes of stock listed above, Grace has authorized
Class C Preferred Stock. There currently are no shares of Grace Class C
Preferred Stock outstanding.
Votes Required. Holders of Grace Common Stock and Grace Preferred Stock
will vote together as one class. Approval of the Reorganization Agreement and
the transactions contemplated thereby requires the affirmative vote of
two-thirds (and, in the case of the Grace Amendment, a majority) of the total
voting power of Grace's outstanding capital stock. As a result, failing to vote
or abstaining on any such proposal has the same effect as voting against the
proposal.
Beneficial Ownership of Management. At June 15, 1996, Grace's directors
and executive officers and their affiliates beneficially owned in the aggregate
Grace Common Stock and Grace Preferred Stock representing less than 1% of the
total voting power of all of Grace's stock entitled to vote at the Grace Special
Meeting. Each of the directors and executive officers of Grace is expected to
vote in favor of the proposals to be voted at the Grace Special Meeting.
The presence in person or by proxy at the Grace Special Meeting of the
holders of a majority of the total voting power of Grace's outstanding capital
stock is necessary to constitute a quorum for the transaction of business. Under
the rules of the NYSE, brokers who hold shares in street name for customers will
not have the authority to vote on the Reorganization unless they receive
specific instructions from beneficial owners. Under the NYBCL, such a broker
non-vote will not be counted as present for purposes of a quorum and will
otherwise have the same effect as a vote against the Reorganization.
At July 23, 1996, the directors and executive officers of Fresenius USA
beneficially owned 360 shares of Grace Common Stock and no shares of Grace
Preferred Stock.
FRESENIUS USA
At the Fresenius USA Record Date, there were 26,374,218 shares of Fresenius
USA Common Stock outstanding. Each share of Fresenius USA Common Stock
outstanding on the Fresenius USA Record Date is entitled to one vote upon each
matter properly submitted at the Fresenius USA Special Meeting.
The affirmative vote of the holders of record of at least two-thirds of the
outstanding shares of Fresenius USA Common Stock entitled to vote at the
Fresenius USA Special Meeting is necessary to approve the Reorganization
Agreement and the transactions contemplated thereby. The affirmative vote of the
holders of record of a majority of the shares of Fresenius USA Common Stock
entitled to vote at the Fresenius USA Special Meeting is necessary to approve
the Fresenius USA Plan Amendment.
The presence in person or by proxy at the Fresenius USA Special Meeting of
holders of a majority of the outstanding shares of Fresenius USA Common Stock is
necessary to constitute a quorum for the transaction of business. Abstentions
will be counted as present for the purposes of determining whether a quorum is
present. Since the Reorganization requires the approval of two-thirds of the
outstanding shares of Fresenius USA Common Stock, and the Fresenius USA Plan
Amendment requires the approval of a majority of the outstanding shares of
Fresenius USA Common Stock, abstentions will have the same effect as negative
votes. Under the rules of the AMEX, brokers who hold shares in street name for
customers will not have the
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<PAGE> 47
authority to vote on the Reorganization or the Fresenius USA Plan Amendment
unless they receive specific instructions from beneficial owners. Such non-votes
will have the same effect as negative votes.
Fresenius AG is currently the beneficial owner of 18,438,545 shares of
Fresenius USA Common Stock including 3,129,883 shares of Fresenius USA Common
Stock acquired upon conversion of the Fresenius USA Series F Preferred Stock and
1,515,221 shares of Fresenius USA Common Stock acquired upon the exercise of
certain warrants to purchase Fresenius USA Common Stock. Fresenius AG has
informed Fresenius USA of its intention to vote all of its 18,438,545 shares of
Fresenius USA Common Stock in favor of the Reorganization Agreement and the
transactions contemplated thereby and the Fresenius USA Plan Amendment. Such
shares represent approximately 70.3% of the total shares entitled to vote on
such matters at the Fresenius USA Special Meeting. Accordingly, such affirmative
vote by Fresenius AG will result in the approval of the Reorganization and the
Fresenius USA Plan Amendment. In addition, directors and executive officers of
Fresenius USA who beneficially owned a total of 262,166 shares of Fresenius USA
Common Stock at July 23, 1996 (excluding shares which may be acquired upon
exercise of employee or director stock options), or approximately 1% of the
Fresenius USA Common Stock then outstanding, are expected to vote such shares in
favor of the Reorganization and the Fresenius USA Plan Amendment. See "SECURITY
OWNERSHIP -- Security Ownership of Certain Beneficial Owners and Management of
Fresenius USA."
At July 15, 1996, the directors and executive officers of Grace owned no
shares of Fresenius USA Common Stock.
VOTING AND REVOCATION OF PROXIES
Shares of Grace Common Stock, Grace Preferred Stock and Fresenius USA
Common Stock represented by a proxy properly signed and received at or prior to
the appropriate Special Meeting, unless subsequently revoked, will be voted in
accordance with the instructions thereon. IF A PROXY IS SIGNED AND RETURNED
WITHOUT INDICATING ANY VOTING INSTRUCTIONS, SHARES OF GRACE COMMON STOCK AND
GRACE PREFERRED STOCK REPRESENTED BY THE PROXY WILL BE VOTED FOR THE PROPOSAL TO
ADOPT AND APPROVE THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, AND FOR THE PROPOSAL TO APPROVE AND ADOPT THE GRACE AMENDMENT, AND
SHARES OF FRESENIUS USA COMMON STOCK REPRESENTED BY THE PROXY WILL BE VOTED FOR
THE PROPOSAL TO APPROVE AND ADOPT THE REORGANIZATION AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, AND FOR THE PROPOSAL TO APPROVE AND ADOPT THE
FRESENIUS USA PLAN AMENDMENT. Both Grace and Fresenius USA proxy holders may, in
their discretion, vote shares to adjourn the Grace Special Meeting or the
Fresenius USA Special Meeting, respectively, to solicit additional proxies in
favor of such proposals. However, shares of Grace Common Stock, Grace Preferred
Stock and Fresenius USA Common Stock with respect to which a proxy is signed and
returned indicating a vote against any proposal will not be so voted to adjourn.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted by the filing of an instrument
revoking it or of a duly executed proxy bearing a later date with the Secretary
of Grace, for Grace shareholders, or with the Clerk of Fresenius USA, for
Fresenius USA stockholders, prior to or at the appropriate Special Meeting, or
by voting in person at the appropriate Special Meeting. All written notices of
revocation and other communications with respect to revocation of Grace proxies
should be addressed to W. R. Grace & Co., One Town Center Road, Boca Raton,
Florida 33486-1010, Attention: Secretary. All written notices of revocation and
other communications with respect to revocation of Fresenius USA proxies should
be addressed to Fresenius USA, Inc., 2637 Shadelands Drive, Walnut Creek,
California 94598, Attention: Clerk. Attendance at a Special Meeting will not in
and of itself constitute a revocation of a proxy.
The Grace Board and the Fresenius USA Board are not currently aware of any
business to be acted upon at the Special Meeting of their respective
shareholders other than as described herein. If, however, other matters are
properly brought before either Special Meeting, the persons appointed as proxies
will have discretion to vote or act thereon according to their best judgment.
Neither shareholders of Grace nor stockholders of Fresenius USA will be
entitled to present any matters for consideration at either Special Meeting.
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<PAGE> 48
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Grace and Fresenius USA, who will not be specifically compensated for such
services, may solicit proxies from the shareholders of Grace and Fresenius USA,
respectively, personally or by telephone, telecopy or telegram or other forms of
communication. Brokers, nominees, fiduciaries and other custodians will be
requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy materials to
beneficial owners.
In addition, Grace has retained D. F. King & Co. to assist in the
solicitation of proxies. The fees to be paid to such firm for such services by
Grace are not expected to exceed $15,000, plus reasonable out-of-pocket costs
and expenses. Services also will be provided to Fresenius USA by American Stock
Transfer and Trust Company in soliciting banks and brokers holding stock in
their names or in custody or in the names of nominees for others. Fresenius USA
does not anticipate paying any additional fee for such services. Grace and
Fresenius USA each will bear its own expenses in connection with the
solicitation of proxies for its Special Meeting, except that, if the
Reorganization is consummated, Fresenius Medical Care will pay the costs
incurred in printing this Joint Proxy Statement-Prospectus.
GRACE AMENDMENT
At the Grace Meeting, Grace shareholders will consider and vote upon a
proposal (proposal 2 in the Grace Notice of Special Meeting of Shareholders
mailed herewith) to adopt the Grace Amendment which will establish authority for
the issuance of the New Preferred Shares and will change the legal name of Grace
to "Fresenius National Medical Care, Inc." Approval of such Grace Amendment is
being sought to establish the New Preferred Shares, and, therefore, indirectly,
to consummate the Recapitalization, and to permit Grace's historical name to
continue to be used by Grace's chemicals businesses. However, in the event that
the Grace Amendment is not approved at the Grace Meeting, the sequence of the
transactions comprising the Reorganization and/or certain immaterial terms of
the New Preferred Shares may be changed so that the Reorganization may be
consummated without effecting the Grace Amendment. For information with respect
to the New Preferred Shares, see "DESCRIPTION OF NEW PREFERRED SHARES." The
Grace Amendment is set forth in Appendix B hereto.
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<PAGE> 49
BACKGROUND AND REASONS
BACKGROUND OF THE REORGANIZATION; REASONS FOR THE RECOMMENDATION OF THE GRACE
BOARD
On May 4, 1995, Mr. Albert J. Costello, the President and Chief Executive
Officer of Grace, was advised by Dr. Constantine L. Hampers, the Chief Executive
Officer of NMC, that, in order to solve certain management issues (such as the
desire for greater independence by NMC management, and NMC management's concern
that, as part of a diversified conglomerate, NMC's abilities to achieve its
potential could be constrained) at NMC, Grace should undertake a 100% spin-off
or sale of NMC and offered that NMC management would be willing to buy NMC for
$3.5 billion if a sale were to be considered. Grace management, together with
its financial and legal advisors, evaluated Dr. Hampers' proposals in light of
other alternatives available with respect to NMC.
On June 14, 1995, the Grace Board met to consider Grace's options regarding
NMC. Following presentations by Grace's management and its financial and legal
advisors, the Grace Board authorized management to proceed with a plan pursuant
to which Grace would spin off NMC to Grace shareholders on a
one-share-for-one-share basis. In connection with its review and determination
that the spin-off of NMC was the best alternative for Grace and its
shareholders, the Grace Board considered, among other things, a proposal by
Vivra Incorporated ("Vivra") that NMC be merged with Vivra in a stock-for-stock
transaction in connection with a proposed NMC spin-off. Vivra proposed that such
merger would offer an unspecified premium to Vivra shareholders over the current
market price and would result in certain operational synergies. The Grace Board
had reservations about the achievability of the operational synergies Vivra
suggested, given Vivra's relatively small size. Moreover, the Grace Board felt
that the proposal contained contingencies and uncertainties not present in a
pure spin-off, and considered that Vivra itself had recognized that the bulk of
the value created through the Vivra proposal would be through the spin-off, and
not through the merger with Vivra. Since the Vivra proposal would add, at best,
a marginal benefit to the spin-off transaction, the Grace Board felt that it
would not be prudent to jeopardize the spin-off to pursue that possible marginal
benefit. In addition, the Grace Board considered that NMC would not be precluded
from pursuing any synergistic transactions, such as a merger with Vivra, after
the spin-off. The Grace Board took into account that Grace's financial advisors
had made discrete solicitations of interest in NMC and that, despite such
solicitations and the publicized nature of the transaction, no third party other
than Vivra had made a proposal for NMC.
During the summer and early fall of 1995, Grace management, together with
Grace's financial and legal advisors, took steps toward the consummation of the
spin-off. On October 17, 1995, NMC received five subpoenas from the OIG, the
United States Attorney's Office for the District of Massachusetts and others, as
discussed herein under "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and
Legal Matters -- Legal and Regulatory Proceedings -- OIG Investigation." On
October 18, 1995, Grace announced that, in light of the subpoenas, completion of
the previously announced spin-off of NMC was expected to occur in the first
quarter of 1996, rather than in the fourth quarter of 1995.
In the fall of 1995, representatives of Fresenius AG notified
representatives of Grace that Fresenius AG was interested in pursuing a
transaction in which NMC would be combined with Fresenius Worldwide Dialysis and
were advised by Grace representatives that, as a result of the delay in the
proposed spin-off, Grace might be receptive to alternatives to the previously
announced spin-off. On October 20, 1995, Grace and Fresenius AG entered into a
confidentiality agreement (which included standstill provisions) and began to
exchange certain information in connection with their evaluation of a
transaction. More advanced discussions respecting a possible transaction began
in late November 1995. At the onset of such discussions, Grace informed
Fresenius AG that its primary objective was to maximize the value of NMC for the
benefit of the Grace shareholders, and that it also had a strong preference for
a transaction structure in which (i) Grace could separate its non-health care
businesses from NMC in a tax-free spin-off, simultaneously combining NMC with
another dialysis business through a merger, (ii) there would be a substantial
tax-free distribution of cash (or assumption of debt) for the benefit of Grace
Chemicals and (iii) NMC would be responsible for all of its liabilities,
including any regulatory liabilities, Grace Chemicals would be responsible only
for non-health care liabilities, and each party would indemnify the other with
respect to its respective liabilities. Fresenius AG indicated that, subject to
its completion of due diligence, it was willing to pursue a transaction
structured in this manner. Discussions with Fresenius AG continued through the
remainder of 1995 and January 1996.
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<PAGE> 50
By mid-January 1996, Fresenius AG informed Grace that its preliminary due
diligence investigation had been completed and asked that both parties focus
their efforts in an attempt to reach closure with respect to open issues. Grace
management determined that discussions with respect to a transaction with
Fresenius AG had significantly advanced and could likely be reduced to
definitive agreements. Therefore, on January 13, 1996, Grace and Fresenius AG
agreed that, until February 4, 1996, Grace would negotiate exclusively with
Fresenius AG with a view toward entering into definitive agreements respecting a
transaction along the lines of Grace's preferred structure, provided that if any
third party submitted a proposal to Grace, Grace would be free to consider and
evaluate such proposal (including by way of discussions with such third party
and its representatives). If Grace management believed that such proposal would
reasonably be expected to be more attractive to Grace and its shareholders,
Grace agreed to offer Fresenius AG the opportunity to improve its proposal
reasonably promptly to be satisfactory to Grace; and, if Grace management
determined that Fresenius AG had not sufficiently improved its proposal, it
would so advise Fresenius AG and Grace could then negotiate with such third
party. However, Fresenius AG agreed that Grace would not be precluded in any way
from making (or not making) any recommendation to the Grace Board or from
accepting any proposal for NMC that it considered to be in the best interest of
Grace and its shareholders. Negotiations between Grace and Fresenius AG
proceeded intensively thereafter on the basis of this agreement. Dr. Hampers
played virtually no role in Grace's negotiations with Fresenius AG. Such
negotiations involved a structure in which, following the Reorganization, New
Grace would retain its interests in GN Holdings, Inc. and the Amicon filtration
business, which historically were managed, but only partly owned, by NMC, with
the remainder owned by Grace Chemicals. Although such businesses had a reporting
relationship to NMC, the revenues of such businesses were immaterial to NMC, and
NMC believes that such assets are not integral to its business. The decision to
exclude such assets was made by Grace and Fresenius AG as part of the
negotiation of the debt and equity levels, and the Distribution Payment,
resulting from the Reorganization.
On January 31, 1996, Baxter International, Inc. ("Baxter") sent Grace a
proposal involving a spin-off of NMC and a subsequent merger with a Baxter
subsidiary that Baxter valued at $3.8 billion. Baxter had indicated interest in
NMC on a sporadic basis during the fall and winter of 1995-96, had met with
Grace management and its advisors on several occasions and had made various
proposals to Grace for investments in NMC coupled with supply arrangements.
Baxter had been unwilling to sign a confidentiality agreement with Grace
containing terms similar to those agreed to by Fresenius AG and, therefore, was
not provided with confidential information regarding NMC. Under Baxter's January
31 proposal, NMC would borrow $1.275 billion and dividend such amount, together
with a $300 million pay-in-kind note (the payment of which would be due in full
on completion of the subsequent merger) to Grace; Baxter would guarantee $450
million of such borrowing if the subsequent merger occurred or, otherwise,
commit to purchase $450 million of NMC stock; NMC would enter into a long-term
supply agreement with Baxter; and Grace would spin off NMC to Grace's
shareholders. Following 35 days of public trading in NMC stock after the
spin-off, NMC shareholders would vote on a merger of NMC with a Baxter
subsidiary in which NMC shareholders would receive $1.8 billion of Baxter stock.
Following such merger, Grace would be responsible for all governmental and
regulatory liabilities or undisclosed liabilities of NMC in excess of $100
million. Baxter's proposal stated that it was subject to the negotiation of
definitive agreements and due diligence. Baxter's proposal also stated that
consummation of the merger would be subject to certain conditions and that
Baxter would be entitled to a termination fee of 3% of the total transaction
value (which Baxter had stated was $3.8 billion) in the event that the
transaction was not consummated.
Grace management, together with its legal and financial advisors, evaluated
Baxter's January 31 proposal and concluded that the proposal was less attractive
to Grace and its shareholders than the Fresenius AG proposal in several
respects: (a) the total transaction value was lower than the estimated Fresenius
AG proposal; (b) Grace Chemicals would be responsible for any regulatory and
other liabilities of NMC in excess of $100 million following the spin-off, which
could create uncertainty over the valuation of Grace Chemicals and frustrate the
separation of the businesses on an ongoing basis; (c) the proposal presented a
risk that the long-term supply agreement (which, together with the 3%
termination fee, might deter other buyers of NMC) and the spin-off might be
consummated without certainty that the subsequent merger would be consummated,
thereby depriving the Grace shareholders of the opportunity to achieve maximum
value; and (d) the structure outlined in the proposal was more novel from a tax
perspective than the "Morris Trust" structure
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<PAGE> 51
contemplated by the Fresenius AG proposal. In addition, the Fresenius AG
proposal under discussion (a) was close to final agreement and (b) was on terms
which did not preclude termination to enter into a more favorable transaction
with another party.
On February 2, 1996, Baxter publicly announced that it had made the January
31 proposal.
In December 1995, representatives of Vivra informed representatives of
Grace that Vivra was still interested in a transaction substantially the same as
the transaction proposed in June 1995. In addition, Grace was aware that at this
time other dialysis companies even smaller than Vivra were willing to pursue
such a transaction. However, no such transactions were pursued because Grace
believed, and was advised by its financial advisors, that greater value would be
available from a transaction with Fresenius AG or Baxter.
At a meeting of the Grace Board held on February 4, 1996, the Grace Board
considered the Reorganization and the proposed agreements relating thereto as
well as the January 31 Baxter proposal. At the meeting, Grace's management and
its legal and financial advisors made detailed presentations concerning the
proposed transaction. The Grace Board concluded that a transaction with a third
party was preferable at the time to the previously proposed spin-off of NMC,
which involved execution risks in light of the difficulties in obtaining
financing during the pendency of the OIG Investigation. As noted above, the
Grace Board was advised that the most likely third-party candidates for a
transaction were Baxter and Fresenius AG. The Grace Board concluded that the
Fresenius AG proposal (which, as described in detail under "-- Presentation by
Grace Financial Advisors -- Comparison of Baxter Proposal," the Grace Financial
Advisors estimated provided between approximately $3.675 billion and
approximately $3.975 billion of value to Grace on a tax-free basis plus entitled
Grace to retain certain cash flows of NMC prior to the Reorganization and
provided for the issuance of the New Preferred Shares) was preferable to the
January 31 Baxter proposal (which Baxter had stated was valued at $3.8 billion)
for the reasons described in the third preceding paragraph. After such
presentations, and taking into account the alternatives available the Grace
Board unanimously determined that the Reorganization and the proposed agreements
relating thereto were fair to and in the best interests of Grace and its
shareholders, authorized Grace to enter into the agreements and to consummate
the transactions contemplated thereby, and resolved to recommend that Grace
shareholders approve such agreements and the transactions contemplated thereby.
In connection with its approval and recommendation, the Grace Board
considered, among other things, the following factors:
(a) the terms of the proposed transactions and the proposed agreements
relating thereto, including, among other things, the requirement for Grace
shareholder approval and the other conditions to consummation, the
circumstances under which the agreements could be terminated and the
termination fees payable in connection therewith;
(b) the "Morris Trust" structure and the tax treatment of the
transaction;
(c) other available alternatives, including the Baxter proposal, and
the ability to enter into an agreement respecting a higher offer under
certain circumstances under the Fresenius AG transaction;
(d) the presentation by representatives of CS First Boston and Merrill
Lynch which included, among other things, valuation analyses with respect
to Fresenius Medical Care and NMC and each such firm's opinion that the
Distribution Payment and the Grace Merger, taken together, were fair, from
a financial point of view, to holders of Grace Common Stock, such opinion
and presentations being based on certain assumptions and subject to certain
limitations (see "-- Financial Advisors to Grace");
(e) the business rationales for the transaction, including that the
combination of NMC and Fresenius Worldwide Dialysis had the potential to
enhance shareholder value through operating synergies as an integrated
dialysis products and services company, although there can be no assurance
that synergies will be achieved or as to the amount thereof, and that
Fresenius Medical Care could take advantage of unique marketplace strengths
in the U.S. and other markets, notwithstanding the competitive and other
risks associated with combining a products company and a services company;
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<PAGE> 52
(f) the operating and financial strength of the combined entity,
although the Grace Board did consider the substantial goodwill charges
which would be associated with the Reorganization;
(g) the impact of the transaction on Grace's remaining specialty
chemicals businesses, including that the transaction would result in the
payment of a significant amount of cash to Grace Chemicals and enable Grace
Chemicals (or New Grace) to use such cash to reduce debt, repurchase stock
and/or invest in core specialty chemical operations;
(h) the retention by NMC of all health care liabilities, including any
regulatory liability relating to the governmental investigations, the
indemnity to be provided to Grace's specialty chemicals businesses with
respect to such liabilities and the concern that such liabilities would
impact the valuation of Fresenius Medical Care which might affect the
trading market for FMC Ordinary Shares; and
(i) the arrangements which had been made with respect to corporate
governance of Fresenius Medical Care and related issues; and
(j) the unfamiliarity of Fresenius Worldwide Dialysis to U.S.
investors.
The foregoing discussion of the information and factors considered and
given weight by the Grace Board is not intended to be exhaustive but includes
all material factors considered by the Grace Board. In addition, in reaching the
determination to approve and recommend the Reorganization, the Grace Board did
not assign any relative or specific weights to the foregoing factors.
THE GRACE BOARD RECOMMENDS THAT GRACE SHAREHOLDERS VOTE FOR APPROVAL OF THE
REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
FINANCIAL ADVISORS TO GRACE
CS First Boston and Merrill Lynch were retained to act as the Grace
Financial Advisors in connection with Grace's exploration of strategic
alternatives for NMC. CS First Boston and Merrill Lynch were selected by Grace
because of their familiarity with Grace and NMC and their respective businesses
and their qualifications and expertise in providing advice to companies in the
businesses in which Grace and NMC are engaged, as well as their reputations as
internationally recognized investment banking firms. Each of CS First Boston and
Merrill Lynch has consented to the reprinting of its fairness opinion and the
summary of such firm's activities included herein.
Opinions of Grace Financial Advisors. At the request of the Grace Board,
on February 4, 1996, each of CS First Boston and Merrill Lynch delivered a
written opinion to the Grace Board that, based upon and subject to the matters
set forth in its written opinion, as of such date, the terms of the Distribution
Payment and the Grace Merger, taken together, were fair, from a financial point
of view, to the holders of Grace Common Stock. In preparing these opinions,
these firms performed a variety of financial and comparative analyses and made a
detailed presentation to the Grace Board with respect to, among other things,
the valuations of Fresenius Medical Care and NMC. The Grace Board, in accepting
the opinions of the Grace Financial Advisors, was aware that the Grace Financial
Advisors relied upon certain financial information, projections and other
information provided by Grace management and that the opinions of such firms
relied, in part, on certain assumptions and are subject to certain limitations.
While the Grace Board did not perform an independent review of the financial
information, projections and other information provided to the Grace Financial
Advisors, the Grace Financial Advisors and management did review certain
financial information and projections with the Grace Board. The Grace Board
relied on the Grace Financial Advisors, whom it considered to be experts in such
matters, to select the appropriate methodologies to determine fairness. No
updates of such opinions have been requested because such opinions were provided
solely in connection with the decisions of the Grace Board taken on February 4,
1996. While the pro forma financial information included herein was not
available on February 4, 1996, Grace believes that such pro forma financial
information is not materially different from the information available on
February 4, 1996 so as to impact on fairness.
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<PAGE> 53
THE FULL TEXTS OF THE WRITTEN OPINIONS OF CS FIRST BOSTON AND MERRILL LYNCH
ARE SET FORTH IN APPENDIX C TO THIS JOINT PROXY STATEMENT-PROSPECTUS AND
DESCRIBE THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN. THE OPINIONS OF CS FIRST BOSTON AND MERRILL LYNCH WERE FURNISHED FOR
THE INFORMATION OF THE GRACE BOARD IN CONNECTION WITH ITS CONSIDERATION OF THE
REORGANIZATION, AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY GRACE SHAREHOLDER
AS TO HOW SUCH SHAREHOLDER SHOULD VOTE ON THE REORGANIZATION. GRACE SHAREHOLDERS
ARE URGED TO READ THE OPINIONS IN THEIR ENTIRETY.
Opinion of CS First Boston. In connection with its opinion, CS First
Boston reviewed certain publicly available business and financial information
relating to Grace, NMC and Fresenius Worldwide Dialysis, as well as the
Reorganization Agreement, the Contribution Agreement and the Distribution
Agreement (collectively, the "Transaction Agreements"). CS First Boston also
reviewed certain other information, including financial forecasts and certain
information with respect to potential synergies which may result from the
Reorganization, provided to CS First Boston by Grace and Fresenius AG, and met
with the managements of Grace, Fresenius AG and Fresenius USA to discuss the
business and prospects of NMC, Fresenius Worldwide Dialysis and Fresenius USA.
CS First Boston also considered certain financial data of NMC, Fresenius
Worldwide Dialysis and Fresenius USA and compared that data with similar data
for other publicly held companies in businesses similar to those of NMC,
Fresenius Worldwide Dialysis and Fresenius USA and considered the financial
terms of certain other business combinations and other transactions. CS First
Boston also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which it deemed
relevant.
In connection with its review, CS First Boston did not assume any
responsibility for independent verification of any of the foregoing information
and relied on its being complete and accurate in all material respects. With
respect to the financial forecasts, CS First Boston assumed that such forecasts
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of Grace's and Fresenius AG's managements as to the
future financial performance of NMC and Fresenius Worldwide Dialysis. CS First
Boston also relied upon the views of Grace's and Fresenius AG's managements
concerning the business, operational and strategic benefits and implications of
the Reorganization, including financial forecasts provided to CS First Boston by
Grace and Fresenius AG relating to synergistic benefits to Fresenius Worldwide
Dialysis and NMC. CS First Boston did not make an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of NMC or
Fresenius Worldwide Dialysis, nor was CS First Boston furnished with any such
evaluations or appraisals. CS First Boston's opinion was necessarily based upon
financial, economic, market and other conditions as they existed and could be
evaluated on the date of its opinion. CS First Boston did not express any
opinion as to what the value of the ADSs actually would be when issued to
holders of Grace Common Stock or the prices at which the ADSs would trade
subsequent to the Reorganization. In addition, CS First Boston understood that
NMC was the target of certain governmental and regulatory investigations
relating to the conduct of its business, which could result in substantial
liabilities and obligations being incurred by NMC in the future, the amount of
which the management of Grace was unable to predict. CS First Boston also
understood that the financial statements, pro forma financial statements and
registration statement of Fresenius Medical Care had not yet been prepared.
CS First Boston assumed, with Grace's consent, that the transactions
contemplated by the Transaction Agreements would comply with applicable U.S.,
foreign, federal and state laws, including, without limitation, laws relating to
the payment of dividends, bankruptcy, insolvency, reorganization, fraudulent
conveyance, fraudulent transfer or other similar laws affecting creditors'
rights generally. CS First Boston assumed, with Grace's consent, that receipt of
the ADSs would be tax-free for federal income tax purposes to holders of Grace
Common Stock and that none of Grace, NMC, Fresenius Worldwide Dialysis,
Fresenius USA and Fresenius Medical Care would recognize income, gain or loss as
a result of the transactions contemplated by the Transaction Agreements. In
addition, CS First Boston assumed, with Grace's consent, that Grace Chemicals
and Fresenius AG would perform their respective indemnification obligations
which may arise under the Distribution Agreement and the Contribution Agreement
in accordance with their respective terms.
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Based upon and subject to the foregoing, CS First Boston rendered its
opinion that, as of the date of such opinion, the terms of the Distribution
Payment and the Grace Merger, taken together, were fair, from a financial point
of view, to the holders of Grace Common Stock.
Opinion of Merrill Lynch. In connection with its opinion, Merrill Lynch
reviewed Grace's Annual Reports, Forms 10-K and related financial information
for the five fiscal years ended December 31, 1994 and its Forms 10-Q and the
related unaudited financial information for the quarterly periods ending March
31, 1995, June 30, 1995 and September 30, 1995; reviewed certain historical
financial information with respect to NMC furnished to Merrill Lynch by Grace
and reviewed NMC's Form 10 filed with the Commission on September 25, 1995 which
included audited financial information for the three fiscal years ended December
31, 1994 and unaudited financial information for the six month periods ending
June 30, 1995 and June 30, 1994; reviewed certain historical financial
information with respect to Fresenius AG and Fresenius Worldwide Dialysis
furnished to Merrill Lynch by Fresenius AG and reviewed Fresenius USA's Annual
Reports, Forms 10-K and related financial information for the five fiscal years
ended December 31, 1994 and its Forms 10-Q and the related unaudited financial
information for the quarterly periods ending March 31, 1995, June 30, 1995 and
September 30, 1995; reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets and prospects of NMC,
Fresenius Worldwide Dialysis and Fresenius USA, furnished to Merrill Lynch by
Grace, Fresenius AG and Fresenius USA, including certain information with
respect to potential synergies which may result from the Reorganization;
conducted discussions with members of senior management of Grace and NMC, and
with Fresenius AG and Fresenius USA, with respect to the businesses, operations
and prospects of NMC, Fresenius Worldwide Dialysis and Fresenius USA,
respectively; compared the results of operations of NMC and Fresenius Worldwide
Dialysis with those of certain other companies which Merrill Lynch deemed to be
reasonably similar to NMC and Fresenius Worldwide Dialysis; considered certain
terms of the documents which govern the rights of stockholders of Fresenius
Medical Care, including certain governance provisions applicable to Fresenius AG
and Fresenius Medical Care; compared the proposed financial terms of the
Reorganization with the financial terms of certain other mergers and
acquisitions which Merrill Lynch deemed relevant; reviewed the financial terms
and conditions of the proposed forms of the Transaction Agreements; reviewed the
terms of the letter from Baxter to Grace dated January 31, 1996, setting forth a
proposal for the acquisition by Baxter of NMC; and reviewed such other financial
studies and analyses and performed such other investigations and took into
account such other matters as Merrill Lynch deemed necessary.
In preparing its opinion, Merrill Lynch relied on the accuracy and
completeness of all information supplied or otherwise made available to it by
Grace and Fresenius AG, and did not independently verify such information or
undertake an independent appraisal of the assets of Grace or Fresenius Worldwide
Dialysis. With respect to the financial forecasts furnished by Grace and
Fresenius AG, Merrill Lynch assumed that such forecasts were reasonably prepared
and reflected the best currently available estimates and judgments of the
managements of Grace and NMC or Fresenius AG as to the expected future financial
performance of Grace, NMC or Fresenius Worldwide Dialysis, as the case may be.
Merrill Lynch also relied upon the views of Grace's and Fresenius AG's
managements concerning the business, operational and strategic benefits and
implications of the Reorganization, including financial forecasts provided to
Merrill Lynch by Grace and Fresenius AG relating to synergistic benefits to
Fresenius Worldwide Dialysis and NMC. Merrill Lynch's opinion was necessarily
based upon financial, economic, market and other conditions as they existed and
could be evaluated on the date of such opinion. Merrill Lynch did not express
any opinion as to what the value of the ADSs actually would be when issued to
Grace shareholders pursuant to the Reorganization or the prices at which the
ADSs would trade subsequent to the Reorganization. In addition, Merrill Lynch
understood that NMC was the target of certain governmental and regulatory
investigations relating to the conduct of its business, which could result in
substantial liabilities and obligations being incurred by NMC in the future, the
amount of which management of Grace was unable to predict. Merrill Lynch also
understood that the financial statements, pro forma financial statements and
registration statement of Fresenius Medical Care had not yet been prepared.
Merrill Lynch assumed, with Grace's consent, that the transactions
contemplated by the Transaction Agreements would comply with applicable U.S.,
foreign, federal and state laws, including, without limitation,
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laws relating to the payment of dividends, bankruptcy, insolvency,
reorganization, fraudulent conveyance, fraudulent transfer or other similar laws
affecting creditors' rights generally. Merrill Lynch assumed, with Grace's
consent, that receipt of the ADSs would be tax-free for federal income tax
purposes to the shareholders of Grace and that none of Grace, NMC, Fresenius
Worldwide Dialysis, Fresenius USA and Fresenius Medical Care would recognize
income, gain or loss as a result of the transactions contemplated by the
Transaction Agreements. In addition, Merrill Lynch assumed, with Grace's
consent, that Grace Chemicals and Fresenius AG would perform their respective
indemnification obligations which may arise under the Distribution Agreement and
the Contribution Agreement in accordance with their respective terms.
Based upon and subject to the foregoing, Merrill Lynch rendered its opinion
that, as of the date of such opinion, the terms of the Distribution Payment and
the Grace Merger, taken together, were fair, from a financial point of view, to
the holders of Grace Common Stock.
In preparing their opinions to the Grace Board, the Grace Financial
Advisors performed a variety of financial and comparative analyses, including
those described under "-- Presentation by Grace Financial Advisors." The summary
of the Grace Financial Advisors' analyses set forth below does not purport to be
a complete description of the analyses underlying the Grace Financial Advisors'
opinions, but includes a summary of all material valuation methodologies
performed by the Grace Financial Advisors. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. In arriving at their opinions,
the Grace Financial Advisors made qualitative judgments as to the significance
and relevance of each analysis and factor considered by it. Accordingly, the
Grace Financial Advisors believe that their analyses must be considered as a
whole and that selecting portions of their analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and their opinions. In their
analyses, the Grace Financial Advisors made numerous assumptions with respect to
Grace, NMC, Fresenius Worldwide Dialysis, Fresenius USA and Fresenius Medical
Care, industry performance, regulatory, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Grace, NMC, Fresenius Worldwide Dialysis, Fresenius USA and Fresenius Medical
Care. No company, transaction or business used in such analyses as a comparison
is identical to Grace, NMC, Fresenius Worldwide Dialysis, Fresenius USA and
Fresenius Medical Care or the Reorganization, nor is an evaluation of the
results of such analyses entirely mathematical; rather, it involves complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions being analyzed. The
estimates contained in such analyses and the ranges of valuations resulting from
any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, because such estimates are inherently subject to substantial
uncertainty, none of Grace, NMC, Fresenius AG, Fresenius Worldwide Dialysis,
Fresenius USA, Fresenius Medical Care, the Grace Financial Advisors or any other
person assumes responsibility for their accuracy.
PRESENTATION BY GRACE FINANCIAL ADVISORS
At the meeting of the Grace Board on February 4, 1996, the Grace Financial
Advisors made a presentation to the Grace Board of their analyses as of such
date delivered in connection with their opinions, a summary of which appears
below.
The following quantitative information, to the extent it is based on market
data, is based on market data as it existed at February 4, 1996, and is not
necessarily indicative of current market conditions.
Historical and Pro Forma Financial Data. The Grace Financial Advisors
reviewed historical revenues, EBITDA and earnings before interest and taxes
("EBIT") of each of NMC and Fresenius Worldwide Dialysis and analyzed pro forma
revenues, EBITDA, EBIT and net income of Fresenius Medical Care based on certain
forecasted financial information and certain information with regard to possible
synergies resulting
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from the Reorganization provided by management of Grace, NMC, Fresenius USA and
Fresenius Worldwide Dialysis. Assuming that the closing of the Reorganization
occurred on January 1, 1996, such analysis indicated that, on a pro forma basis,
for the year ending December 31, 1996, Fresenius Medical Care would have
revenues of approximately $3.415 billion, EBITDA of approximately $794.1
million, EBIT of approximately $525.6 million and net income of approximately
$156.3 million.
The Grace Financial Advisors also analyzed certain pro forma credit
statistics for Fresenius Medical Care giving effect to the Reorganization, based
upon certain forecasted financial information and certain information with
regard to possible synergies resulting from the Reorganization provided by
management of Grace, NMC, Fresenius USA and Fresenius Worldwide Dialysis. These
credit statistics consisted of ratio of EBIT to net interest expense, ratio of
EBITDA to net interest expense, total debt as a percentage of capitalization,
ratio of total debt to EBITDA, total debt, shareholders' equity and total
capitalization. Assuming that the closing of the Reorganization occurred on
January 1, 1996, such analysis indicated that, on a pro forma basis, as of and
for the year ending December 31, 1996, such credit statistics for Fresenius
Medical Care would be as follows: ratio of EBIT to net interest expense, 2.8x;
ratio of EBITDA to net interest expense, 4.2x; total debt as a percentage of
capitalization, 52.7%; ratio of total debt to EBITDA, 3.1x; total debt,
approximately $2.425 billion; shareholders' equity, approximately $2.173
billion; and total capitalization, approximately $4.598 billion.
Comparable Company Analysis. The Grace Financial Advisors analyzed the
ratio of stock price to estimated 1996 earnings for six renal care companies,
consisting of Fresenius USA, Fresenius AG, Gambro AB, Vivra, Total Renal Care
Inc. and Renal Treatment Centers Inc. (the "Comparable Companies"). The
price/estimated 1996 earnings ratios for the Comparable Companies were 20.5x,
25.4x, 19.5x, 18.5x, 35.0x and 28.1x, respectively. The Grace Financial Advisors
estimated that the FMC Ordinary Shares would trade at a price/estimated 1996
earnings ratio ranging from 19.0x to 23.0x.
Valuation of Distribution Payment and Grace Merger. The Grace Financial
Advisors analyzed the value to Grace shareholders of the Grace Merger assuming
estimated pro forma 1996 net income of Fresenius Medical Care of $156.3 million
and a stock price to estimated 1996 earnings ratio for Fresenius Medical Care of
19.0x to 23.0x. Based upon the foregoing assumptions, the Grace Financial
Advisors estimated that the total equity trading value of Fresenius Medical Care
would range from approximately $2.97 billion to approximately $3.595 billion (of
which Grace shareholders' ownership interest would be 44.8% or between
approximately $1.331 billion and approximately $1.611 billion). In addition, the
Grace Financial Advisors noted that NMC would retain or assume approximately
$2.263 billion of indebtedness, resulting in an aggregate value to Grace
shareholders of between approximately $3.594 billion and $3.874 billion.
Further, the Grace Financial Advisors noted that NMC would distribute to New
Grace its Amicon Bioseparations Division ("Amicon") and other assets, with an
estimated value of between $75 million and $100 million, and that Grace
Chemicals would be entitled to retain certain cash flows of NMC prior to the
Reorganization, which Grace management estimated would range from approximately
$150 million to approximately $200 million. Accordingly, the Grace Financial
Advisors estimated that the aggregate value to be received in connection with
the Distribution Payment and the Grace Merger ranged from approximately $3.819
billion to approximately $4.174 billion. The Grace Financial Advisors also noted
that holders of Grace Common Stock would also receive the New Preferred Shares
in the Recapitalization which would remain outstanding following the Grace
Merger and that, under certain circumstances, the holders of the New Preferred
Shares could receive certain special dividend payments in the future. See
"DESCRIPTION OF NEW PREFERRED SHARES."
Discounted Cash Flow Analysis of Fresenius Medical Care. The Grace
Financial Advisors analyzed the discounted cash flow value of the equity of
Fresenius Medical Care using discount rates ranging from 12.5% to 13.5% and
terminal EBITDA multiples ranging from 7.5x to 8.5x. Based upon the foregoing,
the Grace Financial Advisors estimated that the discounted cash flow value of
the equity of Fresenius Medical Care ranged from approximately $3.742 billion to
approximately $4.792 billion (as compared with the trading valuation of the
equity of Fresenius Medical Care of between approximately $2.97 billion and
approximately $3.595 billion described under "-- Valuation of Distribution
Payment and Grace Merger").
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NMC Stand-Alone Valuation. The Grace Financial Advisors performed analyses
of the enterprise value of NMC on a stand-alone basis (excluding the value of
Amicon and other assets to be transferred to or retained by New Grace) based
upon the trading values of the Comparable Companies, comparable acquisition
transactions and discounted cash flow (using discount rates ranging from 12.5%
to 13.5% and terminal EBITDA multiples ranging from 7.0x to 8.0x). Such analyses
resulted in the following ranges of enterprise value for NMC on a stand-alone
basis: comparable company analysis -- between approximately $3.175 billion and
approximately $3.5 billion; comparable acquisitions analysis -- between
approximately $3.35 billion and approximately $4.0 billion; and discounted cash
flow analysis -- between approximately $3.15 billion and approximately $3.725
billion (as compared with the estimated total value of the Grace shareholders'
interest in the equity of Fresenius Medical Care and the Distribution Payment of
between approximately $3.594 billion and approximately $3.875 billion described
under "-- Valuation of Distribution Payment and Grace Merger").
Comparison of Baxter Proposal. The Grace Financial Advisors compared the
terms of the Distribution Payment and the Grace Merger with the proposal letter
received by Grace from Baxter on January 31, 1996. The Grace Financial Advisors
noted that the Fresenius AG transaction was a fully negotiated transaction with
limited conditions to closing which provided, in their opinion, between
approximately $3.675 billion and approximately $3.975 billion of value to Grace
on a tax-free basis, that Grace Chemicals would be entitled to retain certain
cash flows of NMC prior to the Reorganization, estimated by Grace management to
be between approximately $150 million and approximately $200 million, that
holders of Grace Common Stock would also receive the New Preferred Shares, and
that financing commitments for the Fresenius AG transaction had been received.
Furthermore, NMC would retain all liabilities, if any, arising out of the OIG
Investigation. See "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Investigation."
The Grace Financial Advisors noted that the Baxter proposal stated that it
provided $3.8 billion of value on a tax-free basis (although the Grace Financial
Advisors understood, based upon the advice of counsel to Grace, that some of
such consideration could potentially be deemed taxable consideration unless
Baxter were to accept the "Morris Trust" structure agreed to by Fresenius AG or
otherwise modify the form of its proposed transaction). The Grace Financial
Advisors also noted that, under the terms of its proposal, Baxter would assume
undisclosed liabilities, including any liability related to the OIG
Investigation only up to $100 million. Moreover, the Baxter proposal was subject
to negotiation, due diligence and documentation.
New Preferred Shares. In the Reorganization, holders of Grace Common Stock
will receive the New Preferred Shares, which shares will remain outstanding
following the Grace Merger. As described under "DESCRIPTION OF NEW PREFERRED
SHARES," holders of the New Preferred Shares may receive certain Special
Dividend payments beginning in 2002, based upon the adjusted cash flow of
Fresenius Medical Care for the five-year period from January 1, 1997 to December
31, 2001. Apart from such Special Dividend rights, the New Preferred Shares have
no dividend rights, and such shares have a Liquidation Preference of $.10 per
share. Because there is substantial uncertainty whether any Special Dividend
payments will become payable on the New Preferred Shares, the Grace Financial
Advisors valued the New Preferred Shares at zero for the purpose of their
analyses. Accordingly, any amounts ultimately realized by holders of Grace
Common Stock in respect of the New Preferred Shares held by them would represent
additional value above the value taken into account by the Grace Financial
Advisors in rendering their opinions as to the fairness of the Distribution
Payment and the Grace Merger.
OIG Investigation. As described under "BUSINESS OF FRESENIUS MEDICAL
CARE -- Regulatory and Legal Matters -- Legal and Regulatory Proceedings -- OIG
Investigation," NMC is the target of certain governmental and regulatory
investigations relating to the conduct of its business, which could result in
substantial liabilities and obligations being incurred by NMC in the future. The
Grace Financial Advisors took into account the uncertainty regarding such
investigations in their estimate of the range of price/earnings ratios for the
FMC Ordinary Shares described under "-- Comparable Company Analysis" and
"-- Valuation of Distribution Payment and Grace Merger." In their analyses
described under "-- Discounted Cash Flow Analysis of Fresenius Medical Care" and
"-- NMC Stand-Alone Valuation," the Grace Financial Advisors took into account,
solely for the purpose of their analyses, payments to the federal government in
connection
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with previous settlements of regulatory investigations of companies in the
health care industry. This did not, and was not intended to, reflect a judgment
as to the potential outcome of the investigations, the comparability of the NMC
investigations to said previous investigations or the merits of any aspect of
such investigations. The Grace Financial Advisors were advised by management of
Grace and NMC that management was unable to predict the amount of liabilities
and obligations which may be incurred by NMC arising out of the foregoing
investigations. The Grace Financial Advisors noted that, depending upon the
actual amount of liabilities and obligations incurred by NMC, the resolution of
these issues could have a material adverse impact on NMC in the future
(although, by reason of the Reorganization, only 44.8% of such impact would be
borne by Grace shareholders).
The foregoing is a summary of the material terms of the presentation by the
Grace Financial Advisors to the Grace Board on February 4, 1996, and does not
purport to be a complete description of such presentation. The analyses by the
Grace Financial Advisors in connection with such presentation do not purport to
be appraisals or necessarily reflect the prices at which businesses or
securities actually may be sold. As described above, the opinions of the Grace
Financial Advisors and their presentation to the Grace Board were one of a
number of factors considered by the Grace Board in connection with its approval
of the Reorganization.
FINANCIAL ADVISORY FEES
For their financial advisory services in connection with the
Reorganization, each of CS First Boston and Merrill Lynch will receive a fee
equal to 0.225% of the Aggregate Consideration in connection with the
Reorganization. For this purpose, "Aggregate Consideration" means the total fair
market value (at the time of closing) of all consideration (including cash,
securities, property, all debt for borrowed money remaining on NMC's financial
statements at closing and any other form of consideration) paid or payable, or
otherwise to be distributed, directly or indirectly, to Grace, NMC or Grace's
shareholders in connection with the Reorganization. In addition, since September
1, 1995, each of CS First Boston and Merrill Lynch has been receiving a
financial advisory fee of $500,000, payable on a quarterly basis in arrears,
which will be fully creditable against the fee described above. Grace has also
agreed to reimburse each of CS First Boston and Merrill Lynch for its reasonable
out-of-pocket expenses, including the fees and expenses of legal counsel and any
other advisors retained by them, and to indemnify each of CS First Boston and
Merrill Lynch and certain of their related persons against certain liabilities
in connection with their engagement, including certain liabilities under the
federal securities laws. Based upon the aggregate value to be received in
connection with the Distribution Payment and the Grace Merger (between
approximately $3.819 billion and approximately $4.174 billion, as estimated by
the Grace Financial Advisors as of February 4, 1996 and described under
"-- Valuation of Distribution Payment and Grace Merger"), the "Aggregate
Consideration" for purposes of calculating the fee payable to each of the Grace
Financial Advisors would be between approximately $3.819 billion and
approximately $4.174 billion and the fee payable to each of the Grace Financial
Advisors would be between approximately $8,592,750 and approximately $9,391,500,
against which the quarterly financial advisory fees of $500,000 received by each
of the Grace Financial Advisors beginning September 1, 1995 would be credited.
The foregoing is provided solely as an illustration and does not constitute an
estimate with respect to either the actual value to be received by Grace or the
holders of Grace Common Stock in connection with the Distribution Payment and
the Merger or the actual amount of the fees payable to the Grace Financial
Advisors. The actual amount of the Aggregate Consideration can only be
calculated by reference to the actual date of consummation of the Reorganization
and will be based upon, among other things, closing market prices for the FMC
Ordinary Shares over a 20-trading day period beginning with the commencement of
regular-way trading. In addition, there may be material changes with respect to
Fresenius Medical Care and NMC and financial market, industry and general
economic conditions between February 4, 1996 and the date of the Reorganization.
For these reasons, the actual amount of the Aggregate Consideration and the fees
payable to the Grace Financial Advisors may be materially greater or less than
the amounts described in the foregoing illustration.
In the ordinary course of their respective businesses, CS First Boston and
Merrill Lynch may actively trade in the debt and equity securities of Grace,
Fresenius AG and Fresenius USA (and, after the Reorganization, Fresenius Medical
Care) for their own account or for the accounts of their customers and,
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accordingly, may at any time hold long or short positions in such securities. In
addition, CS First Boston is currently in discussions with Fresenius Medical
Care to act as an underwriter of securities of Fresenius Medical Care, the
proceeds of which may be used to refinance a portion of NMC's bank debt
following consummation of the Reorganization. See "FINANCING -- Refinancing."
BACKGROUND OF THE REORGANIZATION; REASONS FOR THE RECOMMENDATION OF THE
FRESENIUS USA BOARD
The following discussion regarding the reasons for the recommendation of
the Fresenius USA Board reflects the initial proposed capitalization for
Fresenius Medical Care of 217,170,000 FMC Ordinary Shares (with each ADS
evidencing one FMC Ordinary Share) and has not been adjusted to reflect the
final capitalization of 70,000,000 FMC Ordinary Shares (or the fact that three
ADSs represent one FMC Ordinary Share).
The Fresenius USA Board has unanimously approved the Reorganization and the
transactions contemplated thereby, including the Fresenius USA Merger and the
Fresenius USA Plan Amendment, and has determined that such transactions are fair
to, and in the best interests of, the stockholders of Fresenius USA. The
Fresenius USA Board unanimously recommends that Fresenius USA stockholders vote
for approval of the Reorganization Agreement including the Fresenius USA Merger,
and the Fresenius USA Plan Amendment.
At a meeting of the Fresenius USA Board on January 25, 1996, Fresenius AG
informed the Fresenius USA Board of the proposed Reorganization. After a
discussion concerning the structure of the proposed Reorganization, the
Fresenius USA Board voted unanimously to establish the Fresenius USA Independent
Committee comprised of the three Fresenius USA independent directors, Robert S.
Ehrlich, James F. Marten and Francis E. Baker, and delegated to the Fresenius
USA Independent Committee the authority to consider, negotiate, and authorize
the economic terms of the participation of the public stockholders of Fresenius
USA, other than Fresenius AG, Grace and their respective subsidiaries (the
"Fresenius USA Public Stockholders") in the proposed Reorganization. The
Fresenius USA Board further authorized the Fresenius USA Independent Committee
to retain, at Fresenius USA's expense, necessary advisors, including an
investment banking firm and legal counsel.
The Fresenius USA Independent Committee met later that day by telephone to
discuss the selection of financial and legal advisors. The Fresenius USA
Independent Committee discussed the importance of retaining a financial advisor
with the experience and expertise appropriate to review whether the proposed
Reorganization was fair to the public stockholders of Fresenius USA from a
financial viewpoint, and also agreed that experience in the health care industry
was a significant consideration. The Fresenius USA Independent Committee decided
to retain Ropes & Gray as its legal advisor because of its experience
representing Fresenius USA and in particular its experience representing
Fresenius USA's public minority in previous arm's-length negotiations between
Fresenius USA and Fresenius AG. Ropes & Gray informed the Fresenius USA
Independent Committee that, in connection with its role as counsel to Fresenius
USA, Ropes & Gray has, from time to time, rendered advice to directors and
officers of Fresenius USA regarding how to structure certain personal
transactions involving securities of Fresenius USA. The Fresenius USA
Independent Committee met again several times during the ensuing week, during
which time it elected Mr. Ehrlich Chairman and conferred with, and received
legal advice from, Ropes & Gray.
After the execution of the Reorganization Agreement by Fresenius AG and
Grace on February 4, 1996, Fresenius AG orally conveyed a proposal to the
Fresenius USA Independent Committee to exchange 3.8% of the equity of Fresenius
Medical Care, or .77 of an FMC Ordinary Share per share of Fresenius USA Common
Stock, on a fully diluted basis, as the consideration to the Fresenius USA
Public Stockholders in the proposed Fresenius USA Merger (the "First Proposal").
Fresenius USA issued a press release on February 5, 1996, announcing its receipt
of the First Proposal.
On February 12, 1996, Fresenius AG's financial advisor, Dresdner Securities
(USA) Inc. ("Dresdner Securities"), presented the First Proposal and explained
the calculation thereof to the Fresenius USA Independent Committee and its legal
counsel. Dresdner Securities and Fresenius AG also summarized the terms of the
Reorganization and the Reorganization Agreement, and responded to questions from
the
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Fresenius USA Independent Committee and its counsel concerning the structure of
the Reorganization, the future financing needs of Fresenius Medical Care, the
debt to be assumed by Fresenius Medical Care in the Reorganization, and the
value of the FMC Ordinary Shares.
On February 13, 1996, after considering proposals and interviewing numerous
prospective financial advisors, the Fresenius USA Independent Committee retained
Salomon Brothers as its financial advisor, and signed an engagement letter,
dated February 13, 1996, to that effect. The Committee directed Salomon Brothers
to undertake an evaluation of the Reorganization and to communicate with
Fresenius AG's financial advisors in order to assist the Fresenius USA
Independent Committee in its negotiations with Fresenius AG. In addition,
Salomon Brothers was charged with evaluating the fairness, from a financial
point of view, of the proposals made by Fresenius AG with regard to the exchange
ratio for the exchange of Fresenius USA Common Stock for FMC Ordinary Shares
held by the Fresenius USA Public Stockholders under the terms of the proposed
Reorganization.
On February 13, 1996, Dresdner Securities explained to Salomon Brothers the
financial terms of the First Proposal and described the methodology and basis
for calculating the share exchange ratio underlying the First Proposal. Dresdner
Securities and Fresenius AG also summarized the terms of the Reorganization and
the Reorganization Agreement.
Between February 13 and March 19, 1996, the Fresenius USA Independent
Committee and its legal and financial advisors met on a regular basis to discuss
the First Proposal and the transactions contemplated by the Reorganization
Agreement. Ropes & Gray and Salomon Brothers performed an extensive due
diligence review of Fresenius AG, NMC and the proposed transactions, and Salomon
Brothers conducted comprehensive and detailed economic valuations of Fresenius
USA, Fresenius Worldwide Dialysis, NMC and Fresenius Medical Care. In addition,
during this time, Mr. Ehrlich met several times with Salomon Brothers and
discussed in detail the economic models that Salomon Brothers would use for
valuing Fresenius USA, NMC, Fresenius Worldwide Dialysis, and Fresenius Medical
Care.
The Fresenius USA Independent Committee met on March 19, 1996 with its
legal and financial advisors. Ropes & Gray presented the Fresenius USA
Independent Committee with the results of its review of Fresenius AG and NMC,
tax issues implicated by the transaction, the OIG Investigation and other
government investigations of NMC and the potential asbestos liability of New
Grace. Salomon Brothers then presented its analysis. As described below in
"-- Recommendation of the Fresenius USA Independent Committee and the Board of
Directors -- Opinion of Salomon Brothers," this analysis included a preliminary
valuation of Fresenius Medical Care (based on the component parts -- NMC and
Fresenius Worldwide Dialysis) and Fresenius USA. This analysis included but was
not limited to the following methodologies to value the business: the historical
and current market for the Fresenius USA Common Stock and for the equity
securities of certain other companies comparable to Fresenius USA, Fresenius
Worldwide Dialysis, NMC or Fresenius Medical Care; discounted cash flow analysis
of each of Fresenius USA, NMC and Fresenius Worldwide Dialysis; and the nature
and terms of certain other transactions believed to be relevant. This analysis
also included a revision of the First Proposal. Salomon Brothers explained that,
in evaluating the offer made to the Fresenius USA Public Stockholders, Salomon
Brothers' analysis focused on the future prospects of each of the component
companies of Fresenius Medical Care. Salomon Brothers described the various
methodologies used in valuing Fresenius Medical Care and the possible synergies
created by the Reorganization, and advised the Fresenius USA Independent
Committee that the First Proposal was below market value and that the Fresenius
USA Independent Committee should continue to negotiate to maximize stockholder
value.
Between March 19 and the end of April 1996, the Fresenius USA Independent
Committee met at least twice weekly by telephone conference call to receive
advice from and give direction to its legal and financial advisors in connection
with its review of the Reorganization. At the request of the Fresenius USA
Independent Committee, Salomon Brothers met with Dresdner Securities on March
21, 1996, to discuss Fresenius AG's First Proposal. Salomon Brothers informed
Dresdner Securities that Salomon Brothers disagreed, as an economic matter, with
Dresdner Securities' valuation assumptions, methodologies, and conclusions, and
further stated that Salomon Brothers believed that the First Proposal was
inadequate and that
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the Fresenius USA Independent Committee would require the best price reasonably
available to the Fresenius USA Public Stockholders. Salomon Brothers stated that
the Fresenius USA Independent Committee was flexible as to how the consideration
could be structured.
The Fresenius USA Independent Committee informed Fresenius AG on March 26
that the Fresenius USA Independent Committee believed that the public
stockholders of Fresenius USA should receive a premium above the current market
value. The Fresenius USA Independent Committee asked Fresenius AG to meet with
representatives of Salomon Brothers so that they could present their valuations
of the Reorganization and the entities created thereby. Salomon Brothers
presented its valuation to Dr. Gerd Krick, Chairman of the Management Board of
Fresenius AG (the "Fresenius AG Management Board"), on March 29, 1996. Salomon
Brothers informed Fresenius AG that the Fresenius USA Independent Committee
believed the First Proposal was inadequate. Between April 3 and April 11, 1996,
Salomon Brothers and Dresdner Securities met on several occasions and explored
different means of providing the Fresenius USA Public Stockholders with the
greatest consideration reasonably available, including the use of consideration
other than FMC Ordinary Shares.
At a meeting on April 11, 1996, Salomon Brothers informed the Fresenius USA
Independent Committee that Fresenius AG was exploring the possibility of
offering Fresenius USA's stockholders a non-voting preferred stock instead of
FMC Ordinary Shares and advised that such a security would trade at a discount
to FMC Ordinary Shares. A discussion ensued regarding the value of different
forms of consideration and the strengths and weaknesses of each form for the
Fresenius USA Public Stockholders. Salomon Brothers advised that the Fresenius
USA Independent Committee negotiate further with Fresenius AG to maximize the
value offered to the Fresenius USA Public Stockholders in exchange for their
shares of Fresenius USA Common Stock.
On April 16, 1996, Fresenius AG informed the Fresenius USA Independent
Committee that it would offer 1.045 FMC Ordinary Shares for each publicly held
share of Fresenius USA Common Stock (assuming that Fresenius Medical Care would
issue 217,170,000 FMC Ordinary Shares and assuming a maximum of 10,183,123
shares of Fresenius USA Common Stock) (the "Second Proposal"). After
consultation with its advisors, the Fresenius USA Independent Committee rejected
the Second Proposal as providing, in the Fresenius USA Independent Committee's
view, inadequate value for the Fresenius USA Public Stockholders. The Fresenius
USA Independent Committee proposed including cash as a portion of the
consideration paid to the Fresenius USA Public Stockholders and were told that
Fresenius AG would not pay cash for any portion of the Fresenius USA Common
Stock.
On April 18, 1996, Salomon Brothers participated with Ropes & Gray in
further negotiations with representatives of Fresenius AG. On April 21, 1996,
Fresenius AG presented to the Fresenius USA Independent Committee its offer to
exchange 1.15 FMC Ordinary Shares for each share of Fresenius USA Common Stock
held by the Fresenius USA Public Stockholders (assuming that Fresenius Medical
Care would issue 217,170,000 FMC Ordinary Shares and assuming a maximum of
9,253,331 outstanding shares of Fresenius USA Common Stock held by persons other
than Fresenius AG, Grace and their respective subsidiaries), (the "Third
Proposal"). The Fresenius USA Independent Committee sought from and explored
with Fresenius AG the possibility of additional consideration and were informed
by Fresenius AG that the Third Proposal was its highest offer. The Fresenius USA
Independent Committee discussed the Third Proposal with its legal and financial
advisors at a meeting on April 22, 1996. After extensive consultation, the
Fresenius USA Independent Committee, believing that it had negotiated the
highest consideration reasonably attainable for the Fresenius USA Public
Stockholders, determined that the Third Proposal was a strong offer and that it
would make a decision with respect to whether the offer was fair to, and in the
best interests of, the Fresenius USA Public Stockholders when it received a
formal opinion from its financial advisors. On April 25, 1996, Salomon Brothers
gave its oral opinion as to the fairness from a financial point of view of the
Third Proposal. Subsequently, the Fresenius USA Independent Committee was
informed that Fresenius Medical Care would issue 70,000,000 FMC Ordinary Shares
(instead of 217,170,000 as previously anticipated) and that the Third Proposal
was, therefore, equivalent to an exchange of 0.37067735 FMC Ordinary Shares for
each share of Fresenius USA Common Stock held by the Fresenius USA Public
Stockholders.
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On May 8, 1996, Salomon Brothers delivered its written opinion to the
Fresenius USA Independent Committee that the exchange ratio of 0.37067735 FMC
Ordinary Shares (having given effect to the new capitalization) to be issued in
exchange for each share of Fresenius USA Common Stock was fair to the public
stockholders of Fresenius USA from a financial point of view. After full and
frank discussion, the Fresenius USA Independent Committee determined unanimously
that the Reorganization Agreement and the Fresenius USA Merger were fair to and
in the best interests of the Fresenius USA Public Stockholders. See
"-- Recommendation of the Fresenius USA Independent Committee and the Board of
Directors -- Opinion of Salomon Brothers." The Fresenius USA Independent
Committee then voted unanimously to recommend that the Fresenius USA Board
approve the Reorganization Agreement and the Fresenius USA Merger, and to
recommend to the Fresenius USA Public Stockholders that they vote in favor of
the Reorganization Agreement and the Fresenius USA Merger.
RECOMMENDATION OF THE FRESENIUS USA INDEPENDENT COMMITTEE AND THE BOARD OF
DIRECTORS
At a meeting held on May 8, 1996, the Fresenius USA Independent Committee
recommended unanimously to the full Fresenius USA Board that it approve the
Reorganization Agreement and the Fresenius USA Merger. Immediately thereafter,
the full Fresenius USA Board met and voted unanimously to approve the
Reorganization Agreement and to recommend that the holders of Fresenius USA
Common Stock vote in favor of the Reorganization Agreement and the Fresenius USA
Merger. The Fresenius USA Board, including all of the Fresenius USA Independent
Directors, believes that the transactions contemplated by the Reorganization
Agreement and the Fresenius USA Merger are in the best interests of Fresenius
USA and its stockholders. The terms of the Reorganization are the result of
arm's-length negotiations between Fresenius AG and Grace, each party conducting
its own analysis and acting with the advice of its own legal counsel,
independent accountants and financial advisors. The consideration payable to
Fresenius USA Public Stockholders was determined as a result of arm's-length
negotiations between the Fresenius USA Independent Committee and Fresenius AG.
In reaching their conclusion to recommend approval of the Reorganization
Agreement and the Fresenius USA Merger, the Fresenius USA Independent Committee
took into account a number of factors, including the factors discussed below in
"-- Opinion of Salomon Brothers" and the following:
- the holders of Fresenius USA Common Stock will hold equity interests in
the new global dialysis company, Fresenius Medical Care, and will be able
to benefit from the synergies which the Fresenius USA Independent
Committee and its advisors believe will result from the Reorganization;
- the opinion of Salomon Brothers, the Fresenius USA Independent
Committee's financial advisors, that the consideration per share to be
received by the holders of Fresenius USA Common Stock in the Fresenius USA
Merger is fair to such holders (other than Fresenius AG, Grace and their
respective subsidiaries) from a financial point of view (see "-- Opinion
of Salomon Brothers");
- the FMC Ordinary Shares to be issued in the Fresenius USA Merger will
trade on the NYSE as ADRs representing ADSs;
- the tax effects of the proposed Reorganization to Fresenius Medical Care
and to Fresenius USA and its stockholders, as described under "CERTAIN
INCOME TAX CONSEQUENCES OF THE TRANSACTIONS TO HOLDERS OF FRESENIUS USA
COMMON STOCK;"
- the Reorganization Agreement expressly provides that nothing in such
agreement shall be construed to prevent the Fresenius USA Independent
Committee from making a determination with respect to the adequacy of the
consideration payable to the Fresenius USA Public Stockholders or the
entire fairness of the transaction to the public stockholders of Fresenius
USA, consistent with their fiduciary duties;
- the fact that, while Fresenius AG would own a majority of the voting
securities of Fresenius Medical Care, Fresenius AG has agreed that at
least two members of the FMC Supervisory Board to be elected by the
shareholders will be persons who do not have any substantial professional
relationship with Fresenius Medical Care, Fresenius AG, or any of their
respective affiliates, and has also agreed to
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certain protections for minority shareholders as set forth under
"DESCRIPTION OF THE POOLING AGREEMENT;"
- the belief of the Fresenius USA Independent Committee, based in part on
the presentation by representatives of Salomon Brothers which included,
among other things, valuation analyses with respect to Fresenius Medical
Care and Fresenius USA, that the per share consideration payable to the
Fresenius USA Public Stockholders was, on May 8, 1996, worth more than the
then current fair market value of a share of Fresenius USA Common Stock;
and
- the various risks involved in the Reorganization that are more fully
described under "RISK FACTORS."
The negotiations between the Fresenius USA Independent Committee and
Fresenius AG dealt solely with the economic terms for the participation of the
Fresenius USA Public Stockholders in the Reorganization. The Fresenius USA
Independent Committee did not propose or request any changes or revisions to the
provisions of the Reorganization Agreement allocating 44.8% of the equity
securities of Fresenius Medical Care to Grace and 55.2% of such equity
securities to Fresenius AG and the Fresenius USA Public Stockholders, to the
requirement of the Reorganization Agreement that Fresenius AG receive not less
than 51% of Fresenius Medical Care's outstanding securities on a fully diluted
basis, or to any other provisions of the Reorganization Agreement as to Grace
and Fresenius AG. However, as a result of those negotiations, Grace agreed that
the percentage of FMC Ordinary Shares required to be held by Fresenius AG would
be reduced to 50.3%. See "THE REORGANIZATION -- Additional Agreements of
Fresenius USA."
The foregoing discussion of the information and factors taken into account
by the Fresenius USA Independent Committee, though not exhaustive, includes all
the material factors considered by the Fresenius USA Independent Committee. With
the exception of the regulatory and governmental investigations relating to the
conduct of NMC's business, the Fresenius USA Independent Committee does not
believe that any of these factors can generally be characterized as positive or
negative, but involve matters of valuation and business judgment.
(See -- "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters").
THE FRESENIUS USA BOARD UNANIMOUSLY RECOMMENDS THAT FRESENIUS USA
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY, AND FOR APPROVAL OF THE FRESENIUS USA
PLAN AMENDMENT.
See "BUSINESS OF FRESENIUS MEDICAL CARE -- Business of Fresenius
USA -- Material Contracts between Fresenius AG and Fresenius USA" for a
description of certain historical relationships between Fresenius AG and
Fresenius USA.
OPINION OF SALOMON BROTHERS
Salomon Brothers was retained subsequent to the execution by Fresenius AG
and Grace of the Reorganization Agreement to act as a financial advisor to the
Fresenius USA Independent Committee to assist the Fresenius USA Independent
Committee in connection with the Reorganization. Salomon Brothers was selected
by the Fresenius USA Independent Committee because of its reputation, its
experience with similar transactions and its knowledge of the health care
industry. Salomon Brothers is an internationally recognized investment banking
firm continuously engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bidding, secondary distributions, and for corporate and other purposes.
On April 25, 1996, Salomon Brothers orally rendered its opinion to the
effect subsequently set forth in its written opinion described below. Salomon
Brothers has delivered its written opinion, dated May 8, 1996, to the Fresenius
USA Independent Committee to the effect that, based upon and subject to various
considerations set forth in such opinion, as of that date, the exchange ratio
(the "Fresenius USA Public Stockholder Exchange Ratio") of 0.37067735 FMC
Ordinary Shares (having given effect to the new capitalization) to be issued in
exchange for each share of Fresenius USA Common Stock held by the Fresenius USA
Public
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Stockholders in the Fresenius USA Merger, pursuant to the Reorganization
Agreement, was fair from a financial point of view to the holders of Fresenius
USA Common Stock (other than Fresenius AG and Grace and their subsidiaries). In
rendering its opinion Salomon Brothers assumed, with the consent of the
Fresenius USA Independent Committee, that pursuant to the Reorganization
Agreement, immediately after the consummation of the Reorganization there would
be 70,000,000 outstanding FMC Ordinary Shares on a fully diluted basis,
resulting in the Fresenius USA public stockholders owning an aggregate of 4.9%
of FMC Ordinary Shares outstanding on a fully diluted basis immediately
following the Reorganization. Salomon Brothers also assumed that immediately
prior to the Fresenius USA Merger, there would be outstanding no more than
9,253,331 Fresenius USA Common Share Equivalents (i.e., the aggregate number of
shares of Fresenius USA Common Stock (i) outstanding and (ii) underlying
options, warrants and convertible securities of Fresenius USA) as required by
the Reorganization Agreement.
THE FULL TEXT OF SALOMON BROTHERS' OPINION TO THE FRESENIUS USA INDEPENDENT
COMMITTEE, DATED MAY 8, 1996, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY SALOMON BROTHERS, IS ATTACHED
AS APPENDIX D TO THIS JOINT PROXY STATEMENT-PROSPECTUS AND IS INCORPORATED
HEREIN BY REFERENCE. SALOMON BROTHERS' OPINION DELIVERED TO THE INDEPENDENT
COMMITTEE WAS DIRECTED ONLY TO THE FRESENIUS USA PUBLIC STOCKHOLDER EXCHANGE
RATIO IN THE FRESENIUS USA MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY FRESENIUS USA STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
FRESENIUS USA SPECIAL MEETING. THE SUMMARY OF THE SALOMON BROTHERS OPINION SET
FORTH IN THIS JOINT PROXY STATEMENT-PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. FRESENIUS USA STOCKHOLDERS ARE URGED
TO READ CAREFULLY SUCH OPINION IN ITS ENTIRETY.
In arriving at its opinion, Salomon Brothers reviewed and analyzed (i) the
Reorganization Agreement, the Distribution Agreement and the Contribution
Agreement, (ii) a draft of this Joint Proxy Statement-Prospectus, (iii) certain
publicly available information concerning Fresenius USA, Grace, NMC and
Fresenius AG, (iv) certain pro forma financial and other information concerning
Fresenius Worldwide Dialysis furnished to Salomon Brothers by Fresenius AG, (v)
certain other internal information, primarily financial in nature, including
projections, concerning the business and operations of each of Fresenius USA,
NMC and Fresenius Worldwide Dialysis furnished to Salomon Brothers by the
respective companies, (vi) certain estimates of anticipated synergies furnished
to Salomon Brothers by Fresenius USA, NMC, Grace and Fresenius AG, (vii) certain
publicly available information concerning the trading of, and the trading market
for, Fresenius USA Common Stock, Grace Common Stock and Fresenius AG Ordinary
Shares, (viii) certain publicly available information with respect to certain
other companies that Salomon Brothers believed to be comparable to Fresenius
USA, NMC or Fresenius Worldwide Dialysis and the trading markets for certain of
such other companies' securities, and (ix) certain publicly available
information concerning the nature and terms of certain other transactions that
Salomon Brothers considered relevant to its inquiry. The information reviewed by
Salomon Brothers included preliminary versions of the pro forma financial
information of Fresenius Medical Care contained in this Joint Proxy
Statement-Prospectus. Salomon Brothers believes that the differences between the
pro forma financial information of Fresenius Medical Care contained in this
Joint Proxy Statement-Prospectus and the preliminary versions of such financial
information reviewed by Salomon Brothers would not have had a material effect on
Salomon Brothers' analysis. Salomon Brothers also considered such other
information, studies, analyses, and financial, economic, market criteria as it
deemed relevant. In addition, Salomon Brothers discussed the foregoing as well
as other matters it believed relevant to its inquiry with certain officers,
employees and representatives of Fresenius USA, NMC, Fresenius Worldwide
Dialysis, Grace and Fresenius AG.
In arriving at its opinion, and in its April 25, 1996 presentation to the
Fresenius USA Independent Committee referred to below, Salomon Brothers did not
assume any obligations to verify any of the foregoing information and relied on
such information being complete and accurate in all material respects. With
respect to the projections as to the future financial performances of Fresenius
USA, NMC, Fresenius Worldwide
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Dialysis and the estimates of synergies for Fresenius Medical Care, Salomon
Brothers assumed they had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of Fresenius USA,
NMC and Fresenius Worldwide Dialysis, and Salomon Brothers expressed no opinion
with respect to such projections or estimates or the assumptions on which they
were based. Salomon Brothers did not make or obtain or assume any responsibility
for making or obtaining any independent evaluations or appraisals of any of the
properties or facilities of Fresenius USA, NMC or Fresenius Worldwide Dialysis.
While the Fresenius USA Independent Committee did not perform an
independent review of the financial information, projections and assumptions
provided to Salomon Brothers, Salomon Brothers did review certain financial
information and projections with the Fresenius USA Independent Committee. When
it accepted Salomon Brothers' fairness opinion, the Fresenius USA Independent
Committee was aware of Salomon Brothers' reliance on the information provided by
the managements of Fresenius USA, NMC and Fresenius AG.
In arriving at its opinion, Salomon Brothers considered such financial and
other factors as it deemed appropriate under the circumstances including, among
others, the following: (i) the historical and current financial position and
results of operations of Fresenius USA, NMC and Fresenius Worldwide Dialysis;
(ii) the business prospects of Fresenius USA, NMC, Fresenius Worldwide Dialysis
and Fresenius Medical Care; (iii) the historical and current market for
Fresenius USA Common Stock and for the equity securities of certain other
companies that Salomon Brothers believed to be comparable to Fresenius USA,
Fresenius Worldwide Dialysis, NMC or Fresenius Medical Care; and (iv) the nature
and terms of certain other transactions that Salomon Brothers believed to be
relevant. Salomon Brothers also took into account its assessment of general
economic, market and financial conditions as well as its experience in
connection with similar transactions and securities valuation generally. No
limitations were imposed by either Fresenius USA or Fresenius AG with respect to
the investigations made or the procedures followed by Salomon Brothers in
rendering its opinion. However, since Fresenius AG owns a majority of the
fully-diluted outstanding shares of Fresenius USA Common Stock and, pursuant to
the Reorganization Agreement, was prohibited from selling such shares, Salomon
Brothers was not authorized to, and did not, solicit potential third parties
that might have been interested in acquiring Fresenius USA.
In arriving at its opinion, Salomon Brothers understood that NMC is the
target of certain governmental and regulatory investigations relating to the
conduct of its business, which may result in substantial liabilities and
obligations being incurred by NMC in the future, as described in this Joint
Proxy Statement-Prospectus under "RISK FACTORS -- Risks Relating to Regulatory
Matters." While Salomon Brothers participated with the Fresenius USA Independent
Committee in discussions with the special counsel of the Fresenius USA
Independent Committee with respect to the potential outcome thereof, it was not
possible to predict that outcome and Salomon Brothers expressed no view with
respect thereto, although, in conducting its analysis and rendering its opinion,
it did, with the consent of the Fresenius USA Independent Committee, make
certain assumptions with respect thereto. In addition, in rendering its opinion,
Salomon Brothers assumed, with the consent of the Fresenius USA Independent
Committee, that (i) the Fresenius USA Merger would qualify as a tax-free
transaction under Section 351 of the Code; (ii) the transactions contemplated by
the Distribution Agreement would qualify as a tax-free distribution under
Section 355 of the Code; (iii) following the transactions contemplated by the
Distribution Agreement, Grace would have no material liabilities other than the
liabilities of NMC; (iv) Grace Chemicals and Fresenius AG would perform their
respective obligations (including indemnification obligations) under the
Distribution Agreement and the Contribution Agreement in accordance with their
respective terms; and (v) the Reorganization would not constitute a fraudulent
conveyance or fraudulent transfer under any applicable law and that the
Reorganization would comply with applicable U.S., foreign, federal and state
laws, including, without limitation, laws limiting payments of dividends and
distributions to stockholders.
Salomon Brothers' opinion was necessarily based upon conditions as they
existed upon, and could be evaluated as of, the date of its opinion, and Salomon
Brothers assumed no responsibility to update or revise its opinion based upon
circumstances or events occurring after the date of its opinion. Salomon
Brothers' opinion related solely to the fairness, from a financial point of
view, of the Public Stockholder Exchange Ratio to the
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holders of Fresenius USA Common Stock (other than Fresenius AG and Grace and
their subsidiaries) and did not address Fresenius USA's underlying business
decision to effect the Fresenius USA Merger or constitute a recommendation to
any holder of Fresenius USA Common Stock as to how such holder should vote with
respect to the Fresenius USA Merger.
In connection with its opinion, Salomon Brothers made a presentation to the
Fresenius USA Independent Committee on April 25, 1996, with respect to certain
analyses performed by Salomon Brothers in arriving at its opinion and other
considerations. While the Fresenius USA Independent Committee was familiar with
the methodologies and analyses performed by Salomon Brothers and believed them
to be appropriate, it relied on Salomon Brothers' expertise in such matters with
respect to the choice and application of the methodologies used in determining
the fairness of the Reorganization. At the time of this presentation, the
parties contemplated, and Salomon Brothers assumed, that the exchange ratio in
the Fresenius USA Merger would be 1.15 FMC Ordinary Shares to be issued in
exchange for each share of Fresenius USA Common Stock and that immediately after
the consummation of the Reorganization there would be 217,170,000 outstanding
FMC Ordinary Shares, on a fully diluted basis, resulting in the Fresenius USA
Public Stockholders owning an aggregate of 4.9% of FMC Ordinary Shares
outstanding, on a fully diluted basis, immediately following the Reorganization.
Subsequently it was determined by the parties, pursuant to the Reorganization
Agreement, that there would be 70,000,000 outstanding FMC Ordinary Shares, on a
fully diluted basis, immediately following the Reorganization. The actual
Fresenius USA Public Stockholder Exchange Ratio reflects the proportional
adjustment of the exchange ratio to reflect this change in the number of
outstanding FMC Ordinary Shares. Immediately following the Reorganization the
Fresenius USA Public Stockholders will own an aggregate of 4.9% of the FMC
Ordinary Shares outstanding, on a fully diluted basis, as assumed at the time of
Salomon Brothers' April 25, 1996 presentation. The following is a summary of
such Salomon Brothers presentation. The following quantitative information, to
the extent it is based on market data, is based on market data as it existed at
April 25, 1996, and is not necessarily indicative of current market conditions.
Estimated Fresenius Medical Care Public Market Valuation. In order to
derive an estimated market valuation range for Fresenius Medical Care common
stock Salomon Brothers first established estimates of firm value (which includes
both equity and net indebtedness) for each of Fresenius Worldwide Dialysis
(including Fresenius USA) and NMC, using both a comparable public market company
analysis and a discounted cash flow ("DCF") analysis, and then added them
together and made certain adjustments to establish an estimate of firm value for
Fresenius Medical Care. Based on a review of certain publicly available
information and stock market performance of selected publicly traded domestic
and international medical product companies (including firm value as a
percentage of 1995 revenues and the ratio of firm value to each of
price/earnings ratios, 1995 EBITDA, 1995 EBIT, 1995 earnings and certain
composite published analyst earnings estimates for 1996), Salomon Brothers
established a reference range for the firm value for Fresenius Worldwide
Dialysis (including Fresenius USA) of $2.1 billion to $2.5 billion. Applying a
similar approach to NMC (except using as comparable companies domestic medical
product companies) resulted in a reference range for the firm value of NMC of
$3.95 billion to $4.8 billion.
Using a DCF methodology, Salomon Brothers estimated, for each of Fresenius
Worldwide Dialysis (including Fresenius USA) and NMC, the present value of its
unlevered free cash flows if it were to perform independently in accordance with
its management's projections for 1996 through 2000. Unlevered free cash flow
represents the amount of cash generated and available for principal, interest
and dividend payments after providing for ongoing business operations. For each
of Fresenius Worldwide Dialysis and NMC, Salomon Brothers aggregated (x) the
present value of the projected unlevered free cash flow through 2000 with (y)
the present value of the range of estimated terminal values (representing an
estimate of such company's value beyond 2000). Those ranges of terminal values
were calculated by applying multiples of 8x to 10x to Fresenius Worldwide
Dialysis's estimated EBITDA in 2000 and multiples of 7.5x to 9.5x to NMC's
estimated EBITDA in 2000. Using discount rates of 11% to 15% for Fresenius
Worldwide Dialysis and 12% to 14% for NMC, Salomon Brothers computed a range of
firm values of $2.1 billion to $3.0 billion for Fresenius Worldwide Dialysis and
$3.8 billion to $5.0 billion for NMC. Using narrower ranges (8.5x to 9.5x for
Fresenius Worldwide Dialysis and 8.0x to 9.0x for NMC) of terminal multiples and
a 13% discount rate, Salomon
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Brothers computed a narrower range of firm values of $2.4 billion to $2.7
billion for Fresenius Worldwide Dialysis and $4.2 billion to $4.6 billion for
NMC.
Combining the total firm values of Fresenius Worldwide Dialysis and NMC and
adding the present value of all assumed synergies (based on estimates provided
by management of Fresenius USA, Fresenius Worldwide Dialysis, Fresenius AG , NMC
and Grace, as adjusted by Salomon Brothers) and subtracting net indebtedness and
an assumed amount to reflect certain contingent liabilities, resulted in implied
ranges of $15.60 to $23.60 ($16.13 to $24.41 per ADS after adjustment to reflect
the final determination by the parties pursuant to the Reorganization Agreement
as to the aggregate numbers of FMC Ordinary Shares to be outstanding, on a fully
diluted basis, immediately following the Reorganization (the "FMC Actual
Capitalization Adjustment")), per FMC Ordinary Share using public market trading
comparables and $18.10 to $23.60 ($18.72 to $24.41 per ADS after the FMC Actual
Capitalization Adjustment) per FMC Ordinary Share using the DCF analysis. Based
on this, Salomon Brothers estimated a reference range of $18 to $22 ($18.61 to
$22.75 per ADS after the FMC Actual Capitalization Adjustment) per FMC Ordinary
Share. Salomon Brothers noted however that there could be no assurance as to the
actual price at which FMC Ordinary Shares would trade and that such stock price
would vary over time and would be affected by various factors including
uncertainties and developments with respect to contingent liabilities (see "RISK
FACTORS"), the extent and timing of actual synergies, Fresenius Medical Care's
actual results and other factors affecting Fresenius Medical Care, its business
and economic and market conditions generally. Salomon Brothers noted that at the
Fresenius USA Public Stockholder Exchange Ratio, this reference range for FMC
Ordinary Shares implied a reference range of $20.70 to $25.30 per share of
Fresenius USA Common Stock, compared to a Fresenius USA Common Stock market
price of $20.50 on April 19, 1996, $19.75 on January 5, 1995 (one month prior to
the announcement of the Reorganization) and a weighted average (by trading
volume) market price of $17.15 over the 12 months ended April 23, 1996,
representing a range of premium of 1% to 23.4%, 4.8% to 28.1% and 20.7% to
47.5%, respectively.
Fresenius USA Public Market Valuation. Salomon Brothers reviewed certain
publicly available information and stock market performance data of selected
publicly traded domestic medical product companies with the financial and stock
market performance of Fresenius USA. Based on its review of these selected
companies' price/earnings ratios and firm value multiples of sales, EBITDA and
EBIT, Salomon Brothers established a reference range of estimated equity values
per share for Fresenius USA Common Stock of between $17.30 and $21.40 per share,
as compared with the reference range (described above) of $20.70 to $25.30 per
share of Fresenius USA Common Stock for the FMC Ordinary Shares to be received
in exchange therefor.
Fresenius USA Discounted Cash Flow Analysis. Using a DCF methodology,
Salomon Brothers estimated the present value of unlevered free cash flows of
Fresenius USA if Fresenius USA were to perform in accordance with Fresenius
USA's management's projections for 1996 through 2000. Salomon Brothers
aggregated (x) the present value of the projected unlevered free cash flow
through 2000 with (y) the present value of the range of estimated terminal
values (representing an estimate of Fresenius USA's value beyond 2000). The
range of terminal values was calculated by applying multiples of 10x to 14x to
Fresenius USA's estimated EBITDA in 2000. Using discount rates of 11% to 15%,
Salomon Brothers computed a range of firm values of $538 million to $845 million
and, using a narrower terminal value range of 11x to 13x and a discount of 13%,
Salomon Brothers computed a narrower range of firm values of $632 million to
$729 million. Using these ranges, Salomon Brothers computed a present value per
share of Fresenius USA Common Stock of $16.92 to $27.08 (using the broader
range) and $20.00 to $23.30 (using the narrower range), as compared with the
reference range (described above) of $20.70 to $25.30 per share of Fresenius USA
Common Stock for the FMC Ordinary Shares to be received in exchange therefor.
Precedent Minority Buyout Transactions. Salomon Brothers reviewed selected
transactions since 1984 in which the majority owner of a publicly traded
subsidiary corporation acquired the remaining public interest either for stock
of the parent corporation, cash or for mixed consideration ("minority buyout
transactions"). Salomon Brothers analyzed the premiums of the consideration paid
to the market price of the subsidiary's stock one month prior to announcement
for each of the three types of consideration. Salomon Brothers noted, among
other things, the median and mean premiums in the stock-for-stock minority
buyouts were 22.9% and
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26.0% respectively. Applying a range of market premiums from 22.9% to 26.0% to
the April 19, 1996 market price, the January 5, 1996 market price (one month
prior to the announcement of the Reorganization Agreement) and the weighted
average trading price for the 12 months, 6 months and 3 months ending April 23,
1996, implied stock-for-stock minority buyout prices of $25.19 to $25.83, $24.27
to $24.89, $21.08 to $21.61, $24.17 to $24.78 and $24.75 to $25.38,
respectively. From this, Salomon Brothers established a minority buyout
reference range for Fresenius USA of $22.00 to $25.00, as compared with the
reference range (described above) of $20.70 to $25.30 per share of Fresenius USA
Common Stock for the FMC Ordinary Shares to be received in exchange therefor.
The foregoing is a summary of the terms of the presentation by Salomon
Brothers to the Fresenius USA Independent Committee on April 25, 1996, including
all material valuation analyses performed by Salomon Brothers in connection
therewith, and does not purport to be a complete description of such
presentation or of the analyses performed by Salomon Brothers in connection with
the preparation of its opinion. The preparation of a fairness opinion is a
complex process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. In arriving at its
opinion Salomon Brothers did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each. Salomon Brothers believes that its analyses
must be considered as a whole and that selecting portions of such analyses and
the factors considered therein, without considering all factors and analyses,
could create an incomplete view of the analyses and the processes underlying
Salomon Brothers' opinion. The projections prepared by the management of each of
Fresenius USA, Fresenius Worldwide Dialysis, NMC and Grace, and the estimates of
synergies, underlying Salomon Brothers' analyses are not necessarily indicative
of future results or values, which may be significantly more or less favorable
than such projections and estimates. With regard to the comparable public market
trading company analyses summarized above, Salomon Brothers selected comparable
public companies on the basis of various factors, including the size of the
public market trading company and similarity of the line of business; however,
no public market trading company utilized as a comparison is identical to
Fresenius Worldwide Dialysis, Fresenius or NMC and no other transaction is
identical to the Reorganization. Salomon Brothers' evaluation of the results of
its analyses, and the selection of ratios, multiples and discount rates to use
in its analyses are not mathematical; rather, they involve complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable companies to which Fresenius
Worldwide Dialysis, Fresenius USA and NMC are being compared. Estimates of
values of companies do not purport to be appraisals or constitute a prediction
of the prices at which companies or their securities actually may be sold. As
noted under "BACKGROUND AND REASONS -- Background of the Reorganization; Reasons
for the Recommendation of the Fresenius USA Board," the fairness opinion of
Salomon Brothers was only one of many factors considered by the Fresenius USA
Independent Committee in determining to approve the Reorganization. Salomon
Brothers has consented to the inclusion in this Joint Proxy Statement-Prospectus
of its opinion delivered to the Independent Committee, a copy of which is
attached as Appendix D hereto, and to the references to it and its presentation
and analyses as set forth herein. Salomon Brothers' opinion delivered to the
Independent Committee was directed only to the Fresenius USA Public Stockholder
Exchange Ratio in the Fresenius USA Merger and does not constitute a
recommendation to any Fresenius USA stockholder as to how such stockholder
should vote at the Fresenius USA Special Meeting.
Salomon Brothers has provided and continues to provide financial advisory
and investment banking services to Grace, for which it has received and expects
to receive customary compensation. In the ordinary course of business, Salomon
Brothers or its affiliates may actively trade the securities of Fresenius USA,
Grace and Fresenius AG for its own account and for the accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities.
FINANCIAL ADVISORY FEES
Pursuant to a letter agreement dated February 13, 1996, Salomon Brothers
was engaged by the Fresenius USA Independent Committee to advise it and assist
it in connection with the Reorganization. Pursuant to such engagement letter,
Fresenius USA agreed to pay Salomon Brothers the following fees for its
services: (a)
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an initial fee of $100,000 (b) unless the Reorganization shall have been
terminated or withdrawn, or a fee paid pursuant to clause (c) of this paragraph,
a fee of $300,000 per month (less, in the case of the first month, the amount of
the initial fee) payable in arrears for up to five months; plus (c) upon
submission of Salomon Brothers' opinion to the Fresenius USA Independent
Committee or, if the Reorganization were terminated or withdrawn or Salomon
Brothers was not otherwise requested to render its opinion, upon Salomon
Brothers having substantially completed the work that was appropriate to prepare
it to render its opinion, an amount equal to $1,500,000 (less all amounts
previously paid pursuant to clauses (a) and (b) of this paragraph). As a result,
Salomon Brothers has become entitled to receive aggregate fees of $1,500,000.
Fresenius USA has also agreed to reimburse Salomon Brothers for its
out-of-pocket expenses, including reasonable fees and disbursements of counsel.
Fresenius USA has agreed to indemnify Salomon Brothers and certain related
persons against certain liabilities, including certain liabilities under the
federal securities laws, relating to or arising out of its engagement.
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THE REORGANIZATION
The following describes the material aspects of the proposed
Reorganization. The following summaries of certain aspects of the Reorganization
Agreement, and the agreements attached hereto as Appendices H and I, the Grace
Tax Sharing and Indemnification Agreement and the Fresenius Tax Indemnification
Agreement do not purport to be complete and are qualified in their entirety by
reference to such agreements, which are attached as Appendices to this Joint
Proxy Statement-Prospectus and/or filed as exhibits to the Registration
Statement and are incorporated herein by reference. ALL SHAREHOLDERS ARE URGED
TO READ THE REORGANIZATION AGREEMENT AND THE OTHER AGREEMENTS IN THEIR ENTIRETY.
THE REORGANIZATION AGREEMENT
The following transactions are to be consummated in connection with the
Reorganization:
- Fresenius AG will contribute Fresenius Worldwide Dialysis, including its
shares of Fresenius USA, to Fresenius Medical Care.
- NMC will enter into the NMC Credit Agreement and, on the Effective Date,
borrow an amount sufficient to finance the payment to, and the assumption
of indebtedness of, Grace Chemicals such that the Debt of Grace on a
consolidated basis, at the Effective Time, will not exceed $2.263
billion, subject to adjustment as provided in the Reorganization
Agreement.
- Grace Chemicals will then distribute the capital stock of NMC to Grace,
as a result of which Grace Chemicals and NMC will be sister companies.
- Immediately thereafter, Grace will contribute the capital stock of Grace
Chemicals to New Grace and effect the Distribution.
- Immediately following the Distribution, Grace will effect the
Recapitalization, in which each holder of Grace Common Stock will hold
thereafter one share of Grace Common Stock and one New Preferred Share
for each share of Grace Common Stock held.
- Immediately following the Recapitalization, each of Grace and Fresenius
USA will merge with wholly owned subsidiaries of Fresenius Medical Care.
- As promptly as practicable following the Mergers, Fresenius Medical Care
will contribute Fresenius USA to FNMC.
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The following chart represents the corporate organization of the parties to the
Reorganization on both pre-transaction and post-transaction bases:
[CHART]
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CONSIDERATION TO SHAREHOLDERS
In the Reorganization, Fresenius AG and shareholders of Grace and Fresenius
USA will receive the following consideration:
Fresenius AG
- Fresenius Worldwide Dialysis, including all Fresenius USA Common Stock
held by Fresenius AG or its subsidiaries, will be contributed to
Fresenius Medical Care in exchange for 35,210,000 FMC Ordinary Shares
representing approximately 50.3% of all FMC Ordinary Shares outstanding,
on a fully diluted basis, immediately following the Reorganization.
Grace Common Shareholders
- The closing price of Grace Common Stock in NYSE composite trading on
August 1, 1996 was $63 1/4 per share.
- Each holder of Grace Common Stock issued and outstanding at the Time of
Distribution will receive one share of New Grace Common Stock in the
Distribution.
- Each holder of Grace Common Stock issued and outstanding after the Time
of Distribution will receive one New Preferred Share.
- Holders of shares of Grace Common Stock issued and outstanding
immediately prior to the Effective Time (other than any shares of Grace
Common Stock owned by Fresenius AG or its subsidiaries, Fresenius USA or
its subsidiaries or any Grace subsidiary, any shares of Grace Common
Stock held in Grace's treasury or any shares of Grace Common Stock
dissenting from the Reorganization) and options with respect to Grace
Common Stock held by employees of NMC will be allocated 44.8% of the FMC
Ordinary Shares outstanding on a fully diluted basis. As of July 15,
1996, there were outstanding 92,001,176 shares of Grace Common Stock, and
options with respect to 231,006 shares of Grace Common Stock held by
employees of NMC (none of whom is an officer or director of Grace). On
this basis, assuming that there are no Grace Common Dissenting
Shareholders and that each option with respect to Grace Common Stock held
by employees of NMC is converted to an option with respect to 3.7 ADSs,
each share of Grace Common Stock will be converted in the Grace Merger
into the right to receive approximately 1.013 ADSs, each such ADS
representing one-third of an FMC Ordinary Share.
Grace Preferred Stockholders
- Each share of Grace Preferred Stock and each New Preferred Share issued
and outstanding immediately prior to the Effective Time and will remain
issued and outstanding as FNMC stock.
Fresenius USA Common Stockholders
- The closing price of Fresenius USA Common Stock in AMEX composite trading
on August 1, 1996 was $19 per share.
- Each share of Fresenius USA Common Stock issued and outstanding
immediately prior to the Effective Time (other than any shares of
Fresenius USA Common Stock owned by Grace or its subsidiaries or by
Fresenius AG or its subsidiaries, any shares of Fresenius USA Common
Stock held in Fresenius USA's treasury or any shares of Fresenius USA
Common Stock dissenting from the Reorganization) will be converted in the
Fresenius USA Merger into the right to receive approximately 1.112 ADSs,
each such ADS representing one-third of an FMC Ordinary Share, and each
holder of options or warrants to purchase Fresenius USA Common Stock
(other than Grace or its subsidiaries or Fresenius AG or its
subsidiaries) will receive options or warrants to purchase approximately
1.112 ADSs for each share of Fresenius USA Common Stock issuable upon
exercise of such options or warrants. As of July 29, 1996, there were
outstanding 26,374,218 shares of Fresenius USA Common Stock and options
or warrants with respect to 2,636,626 shares of Fresenius USA Common
Stock. On this basis, assuming that there are no Fresenius USA Dissenting
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Stockholders and that each option with respect to Fresenius USA Common
Stock is converted into an option with respect to FMC Ordinary Shares,
and that Fresenius USA effects certain securities repurchases (see "--
Additional Agreements of Fresenius USA"), holders of shares of (and
options and warrants with respect to) Fresenius USA Common Stock will be
allocated approximately 4.9% of the FMC Ordinary Shares.
GENERAL
- In lieu of fractional FMC Ordinary Shares or ADSs, each person who would
otherwise have been entitled to a fraction of an FMC Ordinary Share or
ADS will be paid an amount in cash (without interest) equal to such
holder's proportionate interest in the net proceeds from the sale in the
open market by the Exchange Agent appointed by Fresenius Medical Care
with the approval of Grace and Fresenius AG, on behalf of all such
holders, of the aggregate fractional FMC Ordinary Shares or ADSs issued.
- Each share of Grace Common Stock owned by Fresenius AG or its
subsidiaries, Fresenius USA or its subsidiaries or any Grace subsidiary,
or held in Grace's treasury, will be cancelled and retired without
payment of any consideration therefor and will cease to exist. As of July
26, 1996, Fresenius USA owned one share of Grace Common Stock.
- Each share of Fresenius USA Common Stock owned by Grace or its
subsidiaries, Fresenius AG or its subsidiaries, or any Fresenius USA
subsidiary, or held in Fresenius USA's treasury, will be cancelled and
retired without payment of any consideration therefor (except for the
consideration set forth above) and will cease to exist. As of July 15,
1996, Grace owned no shares of Fresenius USA Common Stock.
EFFECTIVE TIME
The Reorganization Agreement provides that the Fresenius USA Merger will
become effective on the date and at the time on which articles of merger
respecting the Fresenius USA Merger containing the provisions required by, and
executed in accordance with, Massachusetts law are accepted for filing with the
Office of the Secretary of State of the Commonwealth of Massachusetts (or such
later date and time as may be specified in the articles of merger in accordance
with applicable law). The Reorganization Agreement provides that the Grace
Merger will become effective at the Effective Time in accordance with New York
law. Subject to shareholder approval and other conditions, it is intended that
the Reorganization will be consummated as promptly as practicable following the
Special Meetings. While it is contemplated that such consummation will occur
following the date of the Special Meetings and prior to October 1, 1996, there
can be no assurance as to whether or when the Reorganization will occur. See "--
Conditions."
RECOMMENDATION OF THE GRACE BOARD; NON-SOLICITATION
RECOMMENDATION
The Reorganization Agreement provides that the Grace Board will recommend
approval and adoption of the Reorganization Agreement and the transactions
contemplated thereby and will take all lawful action to solicit such approval
and adoption by shareholders. However, the Reorganization Agreement provides
that the Grace Board may fail to make such a recommendation, or withdraw, modify
or change any such recommendation, or recommend any other offer or proposal, if
the Grace Board, based on the opinion of its outside counsel, determines that
making such recommendation, or the failure to recommend any other offer or
proposal, or the failure to so withdraw, modify or change its recommendation, or
the failure to recommend any other offer or proposal, could reasonably be deemed
to cause the members of the Grace Board to breach their fiduciary duties under
applicable law in connection with a written offer or written proposal which,
based upon the identity of the person or entity making such offer or proposal
and the terms thereof, and the availability of adequate financing therefor, the
Grace Board believes, in the good faith exercise of its business judgment and
based upon advice of its outside legal and financial advisors, could reasonably
be expected to be consummated and represents a transaction more favorable to its
shareholders than the Reorganization (a "Higher Offer").
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In such event, notwithstanding anything contained in the Reorganization
Agreement to the contrary, any such failure to recommend, or any withdrawal,
modification, or change of recommendation or any recommendation of such other
offer or proposal, or the entering by Grace into an agreement with respect to a
Higher Offer (provided that Grace provided Fresenius AG with at least 72 hours'
notice of its intention to enter into such an agreement and the identity of the
other party thereto), will not constitute a breach of the Reorganization
Agreement by Grace but may obligate Grace to pay a termination fee to Fresenius
AG. See "-- Termination Fees."
NON-SOLICITATION
The Reorganization Agreement provides that each of Grace and Fresenius AG
will not, and will use its best efforts to cause its employees, agents and
representatives not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
any equity securities of, it or any of its subsidiaries (an "Acquisition
Proposal") or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal. However, the Grace Board may furnish or cause to be
furnished information (pursuant to confidentiality arrangements) and may
participate in such discussions and negotiations directly or through its
representatives if (a) the failure to provide such information or participate in
such negotiations and discussions could, in the opinion of its outside counsel,
reasonably be deemed to cause the members of the Grace Board to breach their
fiduciary duties under applicable law, or (b) another corporation, partnership,
person or other entity or group makes a Higher Offer. The foregoing restriction
does not apply to an Acquisition Proposal exclusively involving all or part of
the stock or assets of Grace Chemicals.
TERMINATION FEES
The Reorganization Agreement provides that in the event that: (a) the
Reorganization Agreement is terminated (i) by the Grace Board on grounds that
the Grace Board fails to recommend approval, or withdraws, modifies or changes
its recommendation, or (ii) after Grace enters into an agreement with respect to
a Higher Offer, or (iii) because Grace shareholders do not approve the
Reorganization at the Grace Special Meeting and, at or prior to the time of the
Grace Special Meeting, the Grace Board failed to recommend approval to its
shareholders, or withdraws, modifies or changes such recommendation, or (iv)
because Grace shareholders do not approve the transaction at the Grace Special
Meeting and, at or prior to the time of the Grace Special Meeting, an
Acquisition Proposal was made that became public and, within six months
following such termination, Grace enters into a definitive agreement with
respect to the sale of Grace's health care business; and (b) at the time of such
termination, neither Fresenius AG nor Fresenius USA is in material breach of the
Reorganization Agreement; then, Grace will pay Fresenius AG a fee of $75 million
plus actual out-of-pocket expenses incurred after signing (although Grace will
not be responsible for the expenses of Fresenius USA). Pursuant to an agreement
between Fresenius AG and Fresenius USA, Fresenius USA is entitled to 34% of any
such termination fee.
EXPENSES
Except as set forth above, the Reorganization Agreement provides that,
whether or not the Reorganization is consummated, all costs and expenses
incurred in connection therewith will be paid by the party incurring such
expense, except that, if the Reorganization shall be consummated, certain
enumerated costs and expenses will be borne by Fresenius Medical Care. Pursuant
to the terms of the Supplemental Agreement, if the Reorganization is not
consummated, Fresenius USA shall bear 34% of the aggregate costs and expenses of
Fresenius AG and Fresenius USA. The foregoing expense sharing arrangement shall
be void if immediately prior to the Effective Time, the number of Fresenius USA
Common Share Equivalents exceeds 9,253,331. On July 29, 1996, the number of
Fresenius USA Common Share Equivalents was 10,572,299. See "-- Additional
Agreements of Fresenius USA" for the anticipated number of Fresenius USA Common
Share Equivalents immediately prior to the Effective Date.
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TERMINATION
The Reorganization Agreement may be terminated, and the Reorganization may
be abandoned, at any time prior to the Effective Time, before or after the
approval and adoption by the shareholders of Grace, Fresenius AG and/or
Fresenius USA, by the mutual consent of Grace and Fresenius AG, by action of
their respective Boards of Directors.
The Reorganization Agreement may be terminated, and the Reorganization may
be abandoned, by action of the Board of Directors of Grace or Fresenius AG, if
(a) the Reorganization is not consummated by October 1, 1996 or, (b) at the
Grace Special Meeting or at any adjournment thereof, the approval of Grace's
shareholders, or, at a meeting of Fresenius AG shareholders or any adjournment
thereof, the approval of Fresenius AG's shareholders, is not obtained. On April
11, 1996, approval of the shareholders of Fresenius AG was obtained.
The Reorganization Agreement may be terminated and the Reorganization may
be abandoned at any time prior to the Effective Time, before or after the
approval and adoption by shareholders of Grace, by action of the Grace Board, if
(a) either Fresenius AG or Fresenius USA fails to comply in any material respect
with any of the covenants or agreements contained in the Reorganization
Agreement to be performed by Fresenius AG or Fresenius USA at or prior to the
time of termination, which failure is not cured or capable of being cured within
30 days after notice thereof, or (b) the Grace Board fails to recommend to its
shareholders the approval of the transactions contemplated by the Reorganization
Agreement, or withdraws, modifies or changes such recommendation, in either case
in a manner permitted by the Reorganization Agreement, or (c) Grace enters into
an agreement with respect to a Higher Offer.
The Reorganization Agreement may be terminated and the Reorganization may
be abandoned at any time prior to the Effective Time by action of the Fresenius
AG Board of Directors, if (a) Grace fails to comply in any material respect with
any of the covenants or agreements contained in the Reorganization Agreement to
be performed by it at or prior to the time of termination, which failure is not
cured or capable of being cured within 30 days after notice thereof, or (b) the
Grace Board fails to recommend to its shareholders the approval of the
transactions contemplated by the Reorganization Agreement or withdraws, modifies
or changes in a manner materially adverse to Fresenius AG or Fresenius USA its
approval or recommendation of the Reorganization Agreement.
In the event of termination of the Reorganization Agreement and the
abandonment of the Reorganization as set forth above, other than as set forth
above regarding termination fees, neither Grace nor Fresenius AG (or any of
their respective directors or officers) will have any liability or further
obligation to any other party, except that the Reorganization Agreement does not
relieve any party from liability for any material and willful breach of any
covenant.
CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME; CERTAIN COVENANTS
INTERIM OPERATIONS
The Reorganization Agreement provides that each of Grace (only with respect
to the operations of NMC) and Fresenius AG (for itself and on behalf of
Fresenius USA) through the Effective Time, subject to certain exceptions, will
conduct its business in the ordinary and usual course, consistent with past
practice and existing business plans, and use all reasonable efforts to preserve
its business organization intact and maintain existing relations with customers,
suppliers, employees and business associates. In addition, the Reorganization
Agreement contains certain covenants on behalf of such parties governing
operations through the Effective Time as are customary for transactions of such
nature.
CERTAIN TRANSACTIONS
The Reorganization Agreement provides that: (a) prior to the Distribution,
(i) Grace and Grace Chemicals will use reasonable efforts to cause NMC to
arrange new credit facilities so that the Reorganization may be consummated,
(ii) Fresenius AG will use reasonable efforts to arrange new credit facilities
for Fresenius Worldwide Dialysis so that the Reorganization may be consummated,
and (iii) the parties will cooperate with respect to the foregoing; (b) prior to
or concurrent with the Reorganization, Grace and Fresenius AG will use
reasonable efforts to satisfy the conditions to the Reorganization Agreement;
(c) at the
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Effective Time, none of Grace, Fresenius Worldwide Dialysis or Fresenius USA
will have cash or marketable securities, it being contemplated that, in
connection with the Reorganization, such cash and marketable securities will be
transferred to Grace Chemicals and Fresenius AG, respectively, and that new
working capital facilities to finance working capital needs will be obtained;
(d) it is the intention of the parties that (i) Fresenius Medical Care will pay
dividends to the holders of its outstanding ordinary shares beginning in 1997,
subject to the approval of such dividends by the shareholders of Fresenius
Medical Care, and (ii) Fresenius Medical Care (or its subsidiary) will lease
real property and buildings located in Germany from Fresenius AG, for a total
rental of $12 million per year beginning in January 1997; and (e) following the
Reorganization, it is the intention of the parties that Fresenius Medical Care
will seek to refinance up to $700 million of credit facilities through the sale
of preferred securities which will be primarily "mezzanine" capital, which could
be classified as equity under German GAAP and the interest on which would be tax
deductible, but the sale (or commitments for sale) of such preferred securities
are not a condition to the consummation of the Reorganization.
FILINGS; OTHER ACTIONS
The Reorganization Agreement contains certain covenants regarding making
required securities laws filings, and otherwise cooperating, with respect to
regulatory notifications and approvals. Each of Grace and Fresenius AG will
cooperate with each other and promptly take or cause to be taken all actions and
do or cause to be done all things necessary, proper or advisable to obtain
favorable review of the proposed transaction under the HSR Act and any foreign
antitrust or competition laws, which efforts will include, without limitation,
undertaking litigation and/or agreeing to hold aside or divest, or enter into
any conduct restriction with respect to, any asset or business to be part of
Fresenius Medical Care after the Effective Time (all such decisions to be made
by the parties in consultation with one another, taking into consideration the
effect on Fresenius Medical Care). However, the foregoing does not require that
any action be taken with respect to (or by) Grace Chemicals or its businesses.
In addition, Grace is not required to commit to any action that is to be taken
prior to the Effective Time.
The Reorganization Agreement contains certain covenants regarding mutual
access to properties and records, notification of certain matters and
consultation respecting publicity.
RIGHTS AGREEMENT AND ANTI-TAKEOVER STATUTES
The Grace Board will take all requisite action in order to render the
Amended and Restated Rights Agreement between Grace and Manufacturers Hanover
Trust Company, dated June 7, 1990 (the "Grace Rights Agreement"), which provides
holders of Grace Common Stock with common stock purchase rights ("Grace
Rights"), and any applicable state anti-takeover statute inapplicable to the
Grace Merger and the other transactions contemplated by the Reorganization
Agreement and the Distribution Agreement and to extinguish the Grace Rights in
connection with the Reorganization.
SECURITIES ACT COMPLIANCE
As soon as practicable after the Special Meetings, each party to the
Reorganization Agreement will identify to Fresenius Medical Care all persons who
were, at the time of the Special Meetings, possible Affiliates (as defined in
the Reorganization Agreement), will use its reasonable efforts to obtain a
written agreement in the usual and customary form from each person who is so
identified as a possible Affiliate and will deliver such written agreements to
Fresenius Medical Care as soon as practicable after the Special Meetings.
STOCK EXCHANGE LISTING
Prior to the Effective Time, Fresenius AG will use reasonable efforts to
cause the Deposit Agreement, between Fresenius Medical Care, the holders of ADRs
and the Depositary (including any exhibits thereto, the "Deposit Agreement") and
the listing of the ADSs on the NYSE or the Nasdaq Stock Market to become
effective.
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EMPLOYEE BENEFITS
The Reorganization Agreement provides that all Grace employees who are
actively employed by NMC or its subsidiaries at the Effective Time (including
any NMC employees who are receiving long-term disability as of the Effective
Time) will receive compensation and benefits (including, without limitation,
severance benefits and retiree benefits) substantially the same as those
provided to such employees prior to the Effective Time. In addition, the
Reorganization Agreement provides that Grace employees will be given service
credit for all periods of employment with Grace or its affiliates prior to the
Effective Date for purposes of eligibility and vesting (but not for benefit
accrual) under any plan adopted by Fresenius Medical Care or any of its
subsidiaries or affiliates with respect to such employees to provide retirement
or welfare benefits. The Reorganization Agreement provides that, following the
Effective Time, NMC and FNMC, and not New Grace or Grace Chemicals, will bear
any costs and expenses associated with the termination of employees involved in
NMC's business.
As of July 15, 1996, there were outstanding employee stock options to
purchase approximately 4.7 million shares of Grace Common Stock. Of these,
options to purchase approximately 231,000 shares are held by persons who are
employees of NMC or a subsidiary, and the balance is held by individuals who
will become employees of New Grace or a subsidiary. Employee stock options with
respect to Grace Common Stock held by individuals who will be employees of New
Grace or a subsidiary thereof following the Distribution will be converted in
the Distribution into employee stock options with respect to New Grace Common
Stock, with the numbers of shares subject to such options, and the exercise
prices thereof, adjusted to preserve the value of such options; and employee
stock options with respect to Grace Common Stock held by persons who are
employees of NMC or a subsidiary thereof following the Distribution will remain
employee stock options with respect to Grace Common Stock (and, in turn, will
become options with respect to FMC Ordinary Shares), with the numbers of shares
subject to such options, and the exercise prices thereof, adjusted to preserve
the value of such options. As of July 23, 1996 there are outstanding employee
stock options and certain other options to purchase 886,626 shares of Fresenius
USA Common Stock. Such Grace options and such Fresenius USA options (other than
options issued under the Fresenius USA Non-Employee Directors Stock Option Plan,
which will lapse if not exercised prior to the closing of the Reorganization)
will be exchanged in the Grace Merger and the Fresenius USA Merger into
equivalent options with respect to FMC Ordinary Shares. In the case of options
to purchase Fresenius USA Common Stock and options to purchase Grace Common
Stock held by employees of Fresenius USA or NMC, respectively, FMC Ordinary
Shares cannot, under German corporate law, be reserved by Fresenius Medical Care
and issued upon the exercise of the options, as is done by U.S. corporations.
Instead, the FMC Ordinary Shares issuable upon exercise of the options will be
issued to Fresenius AG upon the closing of the Reorganization, which will hold
the shares pending exercise of the options. Fresenius AG has agreed that it will
not exercise voting power, and will return any dividends paid, with respect to
the FMC Ordinary Shares underlying options formerly relating to Grace Common
Stock. Upon exercise of any of these options, the option exercise price will be
paid to Fresenius Medical Care and Fresenius AG will deliver the FMC Ordinary
Shares to the Depositary against issuance of ADRs representing ADSs in the
name of the option holder. Upon cancellation or expiration without exercise of
options formerly relating to Grace Common Stock, the underlying FMC Ordinary
Shares held by Fresenius AG will be transferred to Fresenius Medical Care at no
cost to it. Upon cancellation or expiration without exercise of options formerly
relating to Fresenius USA Common Stock, the underlying FMC Ordinary Shares will
revert to Fresenius AG.
CONDITIONS
The respective obligations of the parties to consummate the Reorganization
are subject to a number of conditions, including the following: (a) approval by
the Grace shareholders of the Reorganization Agreement and the transactions
contemplated thereby, (b) approval by the Fresenius AG shareholders of the
Reorganization Agreement and the transactions contemplated thereby, (c)
expiration or termination of the waiting period applicable to the Reorganization
under the HSR Act, (d) receipt of all material governmental, regulatory and
third-party consents, approvals and authorizations, (e) there being in effect no
statute, rule, regulation, judgment, decree, injunction or other order of a
federal or state court or other Governmental Entity (as
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defined in the Reorganization Agreement) which prevents the consummation of the
transactions contemplated by the Reorganization Agreement, (f) the receipt by
Grace of certain legal opinions related to tax matters, (g) the effectiveness of
the Registration Statement and the New Grace Prospectus and no stop order
suspending such effectiveness being in effect, (h) receipt of necessary
financing on terms satisfactory to Grace and Fresenius AG, (i) the Distribution
of New Grace having been consummated, (j) the Deposit Agreement and the listing
of ADSs on the NYSE or the Nasdaq Stock Market each becoming effective, and (k)
the Debt of Fresenius Worldwide Dialysis and Grace being at levels not in excess
of the levels set forth in the Reorganization Agreement. All conditions to the
Reorganization may be waived by the relevant party, but neither Grace nor
Fresenius AG expects to waive any material conditions.
For purposes of the Reorganization Agreement, "Debt" means: (a) all
obligations for borrowed money, whether or not represented by a note, bond or
debenture, (b) off balance sheet financing including, without limitation, off
balance sheet receivables financings at NMC, (c) any obligation created or
arising under any conditional sale agreement or other title retention agreement
that is treated as a liability on a balance sheet prepared in accordance with US
GAAP, (d) the portion of the obligations with respect to capital leases that is
properly classified as a liability on a balance sheet prepared in accordance
with US GAAP, (e) a reasonable estimate, to be agreed by Fresenius AG and Grace
of the amounts payable in respect of dissenting shares of Fresenius USA or
Grace, as the case may be, (f) any obligation owed in respect of the deferred
purchase price of property (excluding any obligations incurred in the ordinary
course of business), and (g) the liquidation preference of, and accrued
dividends on, shares of Grace Preferred Stock outstanding at the Effective Time
(other than the New Preferred Shares).
The obligation of Grace to consummate the Reorganization is also subject to
the fulfillment or waiver by Grace, prior to the Closing Date (as defined in the
Reorganization Agreement), of each of the following conditions: (a) the
truthfulness and correctness in all material respects of the representations and
warranties of each of Fresenius AG and Fresenius USA (the "Fresenius Parties")
set forth in the Reorganization Agreement, (b) the performance by each Fresenius
Party in all material respects of all obligations required to be performed by it
under the Reorganization Agreement at or prior to the Closing Date, (c)
Fresenius AG having entered into the Pooling Agreement, and Grace having
received an opinion of nationally recognized counsel, dated the Closing Date, to
the effect that it is valid, binding and enforceable, (d) the receipt by Grace
of an opinion, dated the Closing Date, to the effect that Fresenius Medical Care
has no liability with respect to the restructuring of Fresenius AG and the
Contribution under the Code and applicable German law, and (e) there not having
occurred any change or any development or combination of developments which,
individually or in the aggregate, resulted or is reasonably likely to result in
a material adverse effect on the properties, business, financial condition,
results of operations or prospects of New Grace and its subsidiaries taken as a
whole, or any condition to the Distribution contained in the Distribution
Agreement failing to be satisfied.
In addition, the obligation of Fresenius AG to consummate the
Reorganization is also subject to the fulfillment or waiver by Fresenius AG,
prior to the Closing Date, of each of the following conditions: (a) the
truthfulness and correctness in all material respects of the representations and
warranties of Grace set forth in the Reorganization Agreement, (b) the
performance by each of Grace and New Grace in all material respects of all
obligations required to be performed by it under the Reorganization Agreement or
the Distribution Agreement at or prior to the Closing Date, and (c) Fresenius AG
having entered into the Pooling Agreement, and Fresenius USA having received an
opinion of nationally recognized counsel, dated the Closing Date, to the effect
that the Pooling Agreement is valid, binding and enforceable.
It is a condition to the consummation of the Reorganization that the
waiting period under the HSR Act, shall have expired or terminated. Under the
HSR Act, certain transactions, including the Reorganization, may not be
consummated unless certain notification and waiting period requirements have
been satisfied. On March 11, 1996, each of Grace and Fresenius AG filed a
Premerger Notification and Report Form pursuant to the HSR Act with the U.S.
Department of Justice (the "DOJ") and the FTC. The required waiting period for
the Reorganization under the HSR Act was extended by a Request for Additional
Information and Documentary Material issued by the FTC on April 10, 1996. On
July 25, 1996, the FTC accepted for public comment an Agreement Containing
Consent Order with Fresenius AG and Fresenius USA, and the HSR Act waiting
period terminated on July 26, 1996. Following the public comment period, the FTC
may either take
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steps to enter a final order or withdraw acceptance of the Agreement Containing
Consent Order. Unless acceptance is withdrawn by the FTC, the Agreement
Containing Consent Order will require the divestiture of Fresenius USA's
dialysate concentrate manufacturing facility in Lewisberry, Pennsylvania. See
"BUSINESS OF FRESENIUS MEDICAL CARE -- Business of Fresenius USA -- Properties."
At any time before or after the Effective Time, the FTC, the DOJ or others could
take action under the antitrust laws with respect to the Mergers, including
seeking to enjoin the consummation of the Mergers, to rescind the Mergers, or to
require divestiture of substantial assets of Grace, Fresenius USA or Fresenius
Medical Care. There can be no assurance that the Mergers will not be challenged
on antitrust grounds, or, if such a challenge is made, that it would not be
successful. See " -- Conditions." Further, under the antitrust and competition
laws of other jurisdictions, including Germany, the Reorganization will be
subject to approval by national authorities.
Under Germany's Law Against Restraints of Competition, Fresenius AG and NMC
have filed for premerger clearance with the FCO. The FCO has granted clearance
subject to the divestiture prior to the consummation of the Reorganization of
Schiwa and Rena-Med, German subsidiaries of Fresenius AG and Grace,
respectively, whose products include dialysate concentrates. Efforts are
underway to divest Schiwa and Rena-Med. The costs and proceeds of the
disposition of Rena-Med will be for the account of Fresenius Medical Care. The
costs of the disposition of Schiwa will be for the account of Fresenius AG, and
the Schiwa net assets of $2.806 million and any gains on the disposition of
those assets will be retained by Fresenius AG. See Note 9 to the Fresenius
Medical Care AG Unaudited Pro Forma Condensed Combined Financial Information.
Grace and Fresenius AG have agreed in the Reorganization Agreement, subject
to certain exceptions, promptly to take all actions and do all things necessary,
proper or advisable to obtain favorable review of the Reorganization and related
transactions under the HSR Act and under any foreign antitrust or competition
laws. There can be no assurance that such approvals will be obtained. See "THE
REORGANIZATION -- Conditions."
Other. It is a condition to the Reorganization that all filings, consents,
approvals and authorizations required to be made or obtained in connection with
the Reorganization be made or obtained from the applicable governmental or
regulatory authority, agency, court or other entity, domestic or foreign, prior
to the Effective Time. In this regard, it should be noted that certain
regulatory approvals may be required by state and local authorities and by
certain government agencies which regulate the health care business. NMC and
Fresenius Worldwide Dialysis are working toward obtaining all such consents and
approvals and expect that such consents and approvals will be obtained.
WAIVER AND AMENDMENT
The conditions to each party's obligation to consummate the Reorganization
are for the sole benefit of such party and may be waived by such party, in whole
or in part, to the extent permitted by applicable law. Subject to the applicable
provisions of the NYBCL and the MBCL, at any time prior to the Effective Time,
the parties to the Reorganization Agreement may modify or amend the
Reorganization Agreement by written agreement executed and delivered by duly
authorized officers of the respective parties.
THE CONTRIBUTION AGREEMENT
The Contribution Agreement provides, among other things, that prior to the
Effective Time, Fresenius AG will contribute its worldwide dialysis business to
Fresenius Medical Care, retain and lease to Fresenius Medical Care certain real
property and buildings in Germany, and license to Fresenius Medical Care the
"Fresenius" name and mark and the "F" logo. Subject to certain limitations, the
Contribution Agreement also provides that Fresenius AG will indemnify, defend
and hold harmless New Grace from and against losses other than losses arising
from Fresenius Worldwide Dialysis, losses arising from or relating to litigation
brought by Fresenius USA stockholders relating to the Reorganization and certain
losses relating to this Joint Proxy Statement-Prospectus.
The Contribution Agreement provides that Fresenius AG will contribute to
Fresenius Medical Care all the property and assets (including intangible assets,
goodwill and leaseholds) of its worldwide dialysis business
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which are reflected on its consolidated balance sheet, prepared according to US
GAAP, contained in the Fresenius Worldwide Dialysis audited financial statements
(including any related notes and schedules) or otherwise predominately relating
to or predominately used or useful in the business and operations of Fresenius
Worldwide Dialysis (other than the property subject to the Lease), plus (i) all
property and assets which have been or will be acquired in the ordinary course
of business since the date of the balance sheet, less (ii) any property and
assets which have been or will be disposed of or consumed in the ordinary course
of business since the date of the balance sheet.
THE DISTRIBUTION AGREEMENT
Grace and Grace Chemicals have entered into the Distribution Agreement
which provides for, among other things, the principal corporate transactions
required to effect the Distribution, the conditions thereto and certain other
agreements governing the Reorganization.
Subject to certain exceptions, the Distribution Agreement provides for
certain cross-indemnities designed principally to place financial responsibility
for the liabilities of Grace's health care businesses with NMC (including,
without limitation, all liabilities relating to compliance or non-compliance
with U.S. food and drug law, medical and Medicare billing and reimbursement law,
other health care matters, and all liabilities relating to the OIG
Investigation); and to place financial responsibility for the liabilities of
Grace and its other subsidiaries with Grace Chemicals (including, without
limitation, liabilities relating to the manufacture or sale of
asbestos-containing materials by any Grace Chemicals business). The Distribution
Agreement also provides for cross-indemnities in respect of losses arising out
of or based on any untrue or allegedly untrue statement or omission of a
material fact required to be stated in certain registration statements. In
addition, the Distribution Agreement provides for cross-indemnities respecting
losses arising out of or relating to the new credit facilities, debt instruments
and securities obtained in connection with the Reorganization. Under the
Distribution Agreement, NMC, and the members of its group, may not settle or
compromise any matters relating to NMC's business, including any aspect of the
OIG investigation, unless the terms of such settlement or compromise include an
unconditional release of Grace Chemicals, and the members of its group, from all
liability in respect thereof.
In connection with the Distribution, the Distribution Agreement provides
that Grace and Grace Chemicals will cooperate, and will cause their respective
groups to cooperate, to terminate, to cause Grace to be substituted in all
respects for Grace Chemicals, and to cause Grace Chemicals to be substituted in
all respects for Grace, in respect of all obligations, if any, under any loan,
financing, lease, contract, or other obligation in existence as of the Time of
Distribution pertaining to Grace or Grace Chemicals for which Grace or Grace
Chemicals may be liable, as guarantor, original tenant, primary obligor or
otherwise. The failure to do so will require cross-indemnification with respect
to any losses arising from or relating thereto.
THE GRACE TAX SHARING AND INDEMNIFICATION AGREEMENT
Pursuant to a tax sharing and indemnification agreement (the "Grace Tax
Sharing and Indemnification Agreement"), each of Grace, Grace Chemicals and NMC
will be responsible for its allocable share of tax liabilities before and after
the Grace Merger. The Grace Tax Sharing and Indemnification Agreement provides
that Grace Chemicals will be entitled to receive and retain all refunds of taxes
with respect to periods beginning after the Time of Distribution which are
attributable to the New Grace businesses. The Grace Tax Sharing and
Indemnification Agreement further provides that NMC will be entitled to receive
and retain all refunds of taxes with respect to periods beginning after the Time
of Distribution which are attributable to the NMC businesses. Grace Chemicals
and Grace will also indemnify each other from and against any payment required
to be made as a result of a breach of the Grace Tax Sharing and Indemnification
Agreement. In particular, Grace Chemicals will indemnify FNMC and its affiliates
against any tax liability resulting from the Distribution's failure to qualify
under Section 355 of the Code or the Grace Merger's failure to qualify under
Section 368 of the Code, unless such failure is due to either a breach by
Fresenius AG or FNMC of any obligations under the Grace Tax Sharing and
Indemnification Agreement or an impermissible transaction in the stock or assets
of FNMC or its subsidiaries (including NMC and its subsidiaries.)
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THE FRESENIUS TAX INDEMNIFICATION AGREEMENT
Pursuant to a tax indemnification agreement (the "Fresenius Tax
Indemnification Agreement"), Fresenius AG will agree to indemnify, defend and
hold harmless Grace, Grace Chemicals, Fresenius Medical Care and Fresenius
Medical Care's subsidiaries from and against certain tax liabilities resulting
from the Contribution or the Fresenius USA Merger, or arising out of, relating
to or associated with any business or assets of Fresenius AG or its subsidiaries
other than Fresenius Worldwide Dialysis assets or FWD Business Subsidiaries.
"FWD Business Subsidiaries" means all subsidiaries of Fresenius AG and all other
entities in which Fresenius AG holds any direct or indirect equity interest
other than Fresenius USA and its subsidiaries, which conduct any of Fresenius
Worldwide Dialysis' business.
ADDITIONAL AGREEMENTS OF FRESENIUS USA
At the time of the Fresenius USA Board's approval of the Reorganization and
the transactions contemplated thereby, Fresenius USA entered into two
agreements. Pursuant to an agreement among Fresenius AG, Fresenius USA and Grace
(the "Joinder Agreement"), Fresenius USA undertook the obligations of a party to
the Reorganization Agreement and, for itself, made directly to Grace certain
representations and warranties, including the representations and warranties in
the Reorganization Agreement with respect to Fresenius USA. Under the Joinder
Agreement, Fresenius USA's undertaking and its representations and warranties
made therein shall be null and void if, immediately prior to the effective time
of the Fresenius USA Merger, the number of Fresenius USA Common Share
Equivalents exceeds 9,253,331. On the Fresenius USA Record Date, the number of
Fresenius USA Common Share Equivalents was 10,572,299. Effective July 10, 1996,
Fresenius AG and Fresenius USA entered into a letter of intent with Abbott
Laboratories ("Abbott") providing for the repurchase by Fresenius USA of
warrants to purchase 875,000 shares of Fresenius USA Common Stock held by
Abbott. See "FRESENIUS USA EXECUTIVE COMPENSATION -- Securities Repurchases."
Upon consummation of the repurchase of such warrants from Abbott and the
repurchase of additional options held by Dr. Ben J. Lipps, President and Chief
Executive Officer of Fresenius USA (which Fresenius USA expects will occur prior
to closing), the number of Fresenius USA Common Share Equivalents will be
9,253,331 or less. The Joinder Agreement also reduced the minimum percentage of
FMC Ordinary Shares required to be held by Fresenius AG upon consummation of the
Reorganization from 51% to 50.3%.
Pursuant to a separate agreement between Fresenius AG and Fresenius USA
(the "Supplemental Agreement"), Fresenius USA and Fresenius AG agreed that
liquidated damages payable to Fresenius AG under the Reorganization Agreement
(see "THE REORGANIZATION -- Termination Fees") would be payable $49.5 million to
Fresenius AG and $25.5 million to Fresenius USA and that, if the Reorganization
is not consummated, Fresenius AG and Fresenius USA will bear 66% and 34%,
respectively, of their aggregate costs and expenses. The Supplemental Agreement
also confirms certain understandings of Fresenius USA and Fresenius AG relating
to the determination of the exchange ratio of FMC Ordinary Shares for Fresenius
USA Common Stock, including Fresenius USA's intention to repurchase sufficient
vested and unvested stock purchase options held by Fresenius USA employees and
other equity securities of Fresenius USA so that, immediately prior to the
Fresenius USA Merger, there shall be no more than 9,253,331 Fresenius USA Common
Share Equivalents. Such sharing arrangements and understandings will also be
null and void if immediately prior to the Effective Time, the number of
Fresenius USA Common Share Equivalents exceeds 9,253,331.
The summaries of the Joinder Agreement and the Supplemental Agreement set
forth above are qualified in their entirety by reference to such agreements,
which are attached as Appendices H and I, respectively, to this Joint Proxy
Statement-Prospectus. All shareholders are urged to read such agreements in
their entirety.
The invalidation of Fresenius USA's obligations under the Joinder Agreement
and the Supplemental Agreement would not affect Fresenius AG's obligations under
the Reorganization Agreement to cause the Fresenius USA Board to adopt, approve
and ratify the Reorganization Agreement and the other Transaction Agreements, to
submit the Fresenius USA Merger to a vote of holders of Fresenius USA Common
Stock and to vote its shares of Fresenius USA Common Stock in favor of the
Fresenius USA Merger.
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CONTINUING ARRANGEMENTS BETWEEN FRESENIUS MEDICAL CARE AND FRESENIUS AG
In connection with the Reorganization, Fresenius Medical Care and Fresenius
AG will enter into several agreements for the purpose of giving effect to the
Reorganization and defining their ongoing relationship. These agreements were
negotiated between Fresenius AG and Grace. The following sets forth the material
aspects of certain agreements, arrangements and transactions between Fresenius
Medical Care and Fresenius AG. Certain of these agreements have been filed as
exhibits to the Registration Statement. The following descriptions are not
complete and are qualified in their entirety by reference to such exhibits. For
a description of certain other continuing arrangements set forth in the
Contribution Agreement among Fresenius AG, Fresenius Medical Care and Grace
Chemicals and in the Distribution Agreement among Grace, Grace Chemicals and
Fresenius AG, see "-- The Contribution Agreement" and " -- The Distribution
Agreement." Fresenius AG intends that the Lease, the Supply Agreements and the
Services Agreements shall be no less favorable to Fresenius Medical Care and
Fresenius AG than would have been obtained in arm's-length bargaining between
independent parties. The trademark and other intellectual property agreements
summarized below were negotiated as part of the overall Reorganization, and,
taken independently, are not necessarily indicative of market terms.
REAL PROPERTY LEASE
The land and buildings in Germany used by Fresenius Worldwide Dialysis will
not be transferred to Fresenius Medical Care. Fresenius AG will lease certain of
such real property to Fresenius Medical Care (or its affiliates) directly and
will transfer the remainder of such real property to two limited partnerships,
the sole limited partner of each of which, and sole shareholder of the general
partner of each of which, will be Fresenius AG (such leases collectively are
referred to as the "Leases"). These limited partnerships, as landlords, will
lease such properties to Fresenius Medical Care and to Fresenius AG, as
applicable, for use in their respective businesses. The aggregate annual rent
payable by Fresenius Medical Care under the Leases will be 16.8 million
Deutschemarks (which was approximately $11,273,000 as of July 23, 1996),
exclusive of maintenance and other costs, and will be subject to escalation
based upon the German cost of living index for a four-person employee household.
The Leases for manufacturing facilities will have a ten-year term, followed by
two successive optional renewal terms of ten years each at the election of
Fresenius Medical Care. The Leases for the other facilities will have a term of
ten years. Based upon an appraisal, Fresenius AG believes that the rents under
the Leases represent fair market value for such properties. For information with
respect to Fresenius AG's principal properties in Germany, see "BUSINESS OF
FRESENIUS MEDICAL CARE -- Business of Fresenius Worldwide
Dialysis -- Properties."
COVENANTS NOT TO COMPETE
On or before the Effective Date, each of Fresenius AG and Grace will agree
that, for a period of ten years after the consummation of the Reorganization, it
will not compete with Fresenius Medical Care in any aspect of the business of
supplying renal care-related goods and services, including laboratories (the
"Renal Business"), as interpreted by reference to the Reorganization Agreement,
the Distribution Agreement and the Contribution Agreement; provided, that in any
event Fresenius AG may continue its home care business. The interpretation of
the meaning of "Renal Business" by reference to the Reorganization Agreement,
the Distribution Agreement and the Contribution Agreement will also apply to the
licenses of intellectual property for use in the Renal Business that are
described below (see "-- Trademarks" and "-- Other Intellectual Property").
TRADEMARKS
After the Reorganization, Fresenius AG will continue to own the name and
mark "Fresenius" and the "F" logo. On or before the Effective Date, Fresenius AG
and Fresenius Medical Care will enter into agreements containing the following
provisions. Fresenius AG will grant to Fresenius Medical Care an exclusive,
worldwide, royalty-free, perpetual license (i) to use "Fresenius Medical Care"
in its corporate names, and (ii) to use the Fresenius marks (including certain
combination marks containing the Fresenius name that are used by Fresenius
Worldwide Dialysis), and the Fresenius Medical Care name as a trade name,
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in all aspects of the Renal Business (see "-- Covenants Not to Compete").
Fresenius Medical Care will also be granted a worldwide, royalty-free, perpetual
license (i) to use the "Fresenius Medical Care" mark in the current NMC business
other than the Renal Business (the "Other NMC Business") if it is used as part
of "Fresenius Medical Care" together with one or more descriptive words (for
example, "Fresenius Medical Care Home Care" or "Fresenius Medical Care
Diagnostics"), (ii) to use the "F" logo mark in the Other NMC Business with the
consent of Fresenius AG, which consent will not be unreasonably withheld if the
mark includes one or more additional descriptive words or symbols, and (iii) to
use "Fresenius Medical Care" as a trade name in both the Renal Business and the
Other NMC Business. Fresenius Medical Care will have the right to use "Fresenius
Medical Care" as a trade name in other medical businesses only with the consent
of Fresenius AG, which consent will not be unreasonably withheld. In the U.S.
and Canada, Fresenius AG will not use "Fresenius" or the "F" logo as a trademark
or service mark, except that it (i) will be permitted to use "Fresenius" in
combination with one or more additional words such as "Pharma Home Care" as a
service mark in connection with its home care business and (ii) may use the "F"
logo as a service mark with the consent of Fresenius Medical Care, which consent
will not be unreasonably withheld if the service mark includes one or more
additional descriptive words or symbols. Similarly, in the U.S. and Canada,
Fresenius AG will have the right to use "Fresenius" as a trade name (but not as
a mark) only in connection with its home care and other medical businesses other
than the Renal Business (the "Other Fresenius AG Business") and only in
combination with one or more other descriptive words, provided that such name is
not confusingly similar to the Fresenius Medical Care marks and trade names.
After the expiration of Fresenius AG's ten-year covenant not to compete with
Fresenius Medical Care (see "-- Covenants Not to Compete"), Fresenius AG may use
"Fresenius" in its corporate names if it is used in combination with one or more
additional descriptive word or words, provided that such name is not confusingly
similar to the Fresenius Medical Care marks or corporate or trade names.
OTHER INTELLECTUAL PROPERTY
Certain of the patents, patent applications, inventions, know-how and trade
secrets used by Fresenius Worldwide Dialysis are also used by other divisions of
Fresenius AG (the "Shared Intellectual Property"). In the case of Biofine(TM),
Fresenius AG's PVC-free packaging material (see "BUSINESS OF FRESENIUS MEDICAL
CARE -- Business of Fresenius Worldwide Dialysis -- Fresenius Worldwide Dialysis
Products -- Peritoneal Dialysis Products"), Fresenius AG will grant to Fresenius
Medical Care an exclusive license for the Renal Business (see "-- Covenants Not
to Compete") and a non-exclusive license for all other fields except the Other
Fresenius AG Business (the "Non-Exclusive Business"). Any royalties from
licenses of the Biofine(TM) intellectual property by either Fresenius Medical
Care or Fresenius AG to third parties outside the Renal Business and the Other
Fresenius AG Business will be shared equally by Fresenius Medical Care and
Fresenius AG. In addition, Fresenius AG will transfer to Fresenius Medical Care
the other Shared Intellectual Property that is used predominantly in Fresenius
Worldwide Dialysis. With respect to the other Shared Intellectual Property in
which Fresenius Worldwide Dialysis and the other FAG divisions as a whole each
paid a significant part of the development costs, (i) such Shared Intellectual
Property transferred to Fresenius Medical Care will be licensed back to
Fresenius AG exclusively in the Other Fresenius AG Business and non-exclusively
in the Non-Exclusive Business, and (ii) such Shared Intellectual Property
retained by Fresenius AG will be licensed to Fresenius Medical Care exclusively
in the Renal Business and non-exclusively in the Non-Exclusive Business.
SUPPLY AGREEMENTS
Following the Reorganization, Fresenius Medical Care will own or lease the
facilities in which most of its product sales volume is manufactured. However,
certain products (principally concentrates) are manufactured at facilities that
will be retained by Fresenius AG (the "Retained Facilities"). The Retained
Facilities are located in Brazil, France (Sevres) and the United Kingdom.
Conversely, a facility in Italy that will be transferred to Fresenius Medical
Care in the Reorganization will produce products for the Pharmaceuticals
Division and Intensive Care and Diagnostics Division of Fresenius AG (the
"Transferred Facilities"). For 1995, the aggregate costs that were allocated to
Fresenius Worldwide Dialysis for products manufactured at the Retained
Facilities were approximately $24.4 million, while the aggregate costs that were
allocated to the
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Pharmaceuticals Division and Intensive Care and Diagnostics Division for
products manufactured at the Transferred Facilities were approximately $11.8
million.
Prior to the Reorganization, Fresenius Medical Care and Fresenius AG will
negotiate and enter into agreements (the "Supply Agreements") for the purchase
and sale of products from the Retained Facilities and the Transferred
Facilities. Prices under the Supply Agreements will include a unit cost
component for each product and an annual fixed cost charge for each facility.
The unit cost component, which will be subject to annual review by the parties,
is intended to compensate the supplier for variable costs such as costs of
materials, variable labor and utilities. The fixed cost component generally will
be based on an allocation of the 1995 fixed costs of such facility, such as
rent, depreciation, production scheduling and quality control. The fixed cost
component will be subject to adjustment by good-faith negotiation every
twenty-four months. If the parties cannot agree upon an appropriate adjustment,
the adjustment will be made based on an appropriate consumer price index in the
country in which the facility is located.
Each Supply Agreement will have a term that is approximately equal to the
estimated average life of the relevant production assets as of the Effective
Date. It is expected that this will result in an average term of approximately
five years. Each Supply Agreement may be terminated by the purchasing party
after a specified notice period, subject to a compensation payment reflecting a
portion of the relevant fixed costs. The terms and conditions of the Supply
Agreements will be subject to review by Grace prior to the Effective Time. It is
the intention of Fresenius AG that the terms and conditions of the Supply
Agreements shall be no less favorable to Fresenius Medical Care and Fresenius AG
than would have been obtained in arm's-length bargaining with independent
parties.
Following the Reorganization, the parties may modify existing or enter into
additional supply agreements, arrangements and transactions. Any such future
modifications, agreements, arrangements and transactions will be negotiated
between the parties and will be subject to the approval provisions of the
Pooling Agreement discussed under "DESCRIPTION OF THE POOLING
AGREEMENT -- Interested Transactions" and the regulatory provisions of German
law regarding dominating enterprises discussed under "COMPARISON OF CERTAIN
RIGHTS OF SHAREHOLDERS OF GRACE AND FRESENIUS USA -- State Anti-takeover
Statutes -- Fresenius Medical Care."
SERVICES AGREEMENTS
As a division of Fresenius AG, Fresenius Worldwide Dialysis has obtained
administrative and other services from Fresenius AG headquarters and from other
divisions and subsidiaries of Fresenius AG. These services relate to, among
other things, data processing, financial and management accounting and audit,
human resources, legal, risk management, quality control, production management,
research and development, marketing and logistics. For 1995, approximately $51.2
million was allocated to Fresenius Worldwide Dialysis for these services.
Conversely, Fresenius Worldwide Dialysis has provided certain services to other
divisions and subsidiaries of Fresenius AG relating to research and development,
plant administration, patent administration and warehousing. For 1995,
approximately $20.1 million was allocated to the other divisions and
subsidiaries for services rendered to them by Fresenius Worldwide Dialysis.
Prior to the Reorganization, Fresenius Medical Care and Fresenius AG intend
to enter into transitional agreements for continuation of many of the services
described above (the "Services Agreements"). The Services Agreements may also
include agreements for services currently provided as part of corporate overhead
and allocated to Fresenius Worldwide Dialysis in its combined financial
statements included in this Joint Proxy Statement-Prospectus. The Services
Agreements are expected to be short-term, because each party intends to develop
its organization to provide most of the services for itself within 12 to 18
months after the Reorganization. The terms and conditions of the Services
Agreements will be subject to review by Grace prior to the Effective Time. It is
the intention of Fresenius AG that the terms and conditions of the Services
Agreements shall be no less favorable to Fresenius Medical Care and Fresenius AG
than would have been obtained in arm's length bargaining with independent
parties.
Following the Reorganization, the parties may modify existing or enter into
additional services agreements, arrangements and transactions. Any such future
modifications, agreements, arrangements and transactions will be negotiated
between the parties and will be subject to the approval provisions of the
Pooling Agreement discussed under "DESCRIPTION OF THE POOLING
AGREEMENT -- Interested Transac-
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tions" and the regulatory provisions of German law regarding dominating
enterprises discussed under "COMPARISON OF CERTAIN RIGHTS OF SHAREHOLDERS OF
GRACE AND FRESENIUS USA -- State Anti-takeover Statutes -- Fresenius Medical
Care."
ACCOUNTING TREATMENT
Each of the Grace Merger and the Fresenius USA Merger will be accounted for
under US GAAP as purchases by Fresenius Medical Care. In accordance therewith,
the assets and liabilities acquired will be recorded at their fair values; any
remaining excess of the purchase prices over the fair values of the assets and
liabilities acquired will be recorded as goodwill.
APPRAISAL RIGHTS
GRACE
Holders of Grace Common Stock are entitled to appraisal rights under
Sections 623 and 910 of the NYBCL. The following summary of the applicable
provisions of Sections 623 and 910 of the NYBCL is not intended to be a complete
statement of such provisions and is qualified in its entirety by reference to
the full text of Sections 623 and 910 of the NYBCL, copies of which are attached
to this Joint Proxy Statement-Prospectus as Appendix F. A PERSON HAVING A
BENEFICIAL INTEREST IN SHARES OF GRACE COMMON STOCK THAT IS HELD OF RECORD IN
THE NAME OF ANOTHER PERSON, SUCH AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO
CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW PROPERLY AND IN A
TIMELY MANNER TO PERFECT WHATEVER APPRAISAL RIGHTS THE BENEFICIAL OWNER MAY
HAVE. THIS DISCUSSION AND APPENDIX F SHOULD BE REVIEWED CAREFULLY BY ANY
SHAREHOLDER OF GRACE WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO
WISHES TO PRESERVE THE RIGHT TO DO SO BECAUSE FAILURE STRICTLY TO COMPLY WITH
ANY OF THE PROCEDURAL REQUIREMENTS OF SECTION 623 OR SECTION 910 OF THE NYBCL
MAY RESULT IN A TERMINATION OR WAIVER OF APPRAISAL RIGHTS UNDER SECTION 623 AND
SECTION 910 OF THE NYBCL.
A holder of Grace Common Stock as of the Grace Record Date for the Grace
Special Meeting who elects to dissent from the approval and adoption of the
Reorganization Agreement and the transactions contemplated thereby and who has
not voted in favor thereof ("Grace Common Dissenting Shareholder") is entitled,
under the provisions of Sections 623 and 910 of the NYBCL, as an alternative to
receiving the applicable consideration for such holder's Grace Common Stock, to
a judicial determination of the fair value in cash of such holder's Grace Common
Stock. The Reorganization Agreement provides that if any Grace Common Dissenting
Shareholder fails to perfect or effectively withdraws or loses the right to
dissent, the Grace Common Stock held by such Grace Common Dissenting Shareholder
will thereupon be treated as though such shares had been converted pursuant to
the Reorganization Agreement.
Any holder of Grace Common Stock who elects to exercise such holder's
appraisal rights with respect to the Reorganization Agreement must file a
written objection to the Reorganization with Grace before the Grace Special
Meeting, or at the Grace Special Meeting but before the vote on the
Reorganization is taken, which objection must include (a) a notice of such
holder's election to dissent, (b) such holder's name and residence address, (c)
the number of shares of Grace Common Stock as to which such holder dissents, and
(d) a demand for payment of the fair value of such holder's Grace Common Stock
if the Reorganization is consummated. Such objection is not required from any
holder of Grace Common Stock to whom Grace did not give notice of the Grace
Special Meeting in accordance with the applicable provisions of the NYBCL. For
purposes of perfecting appraisal rights pursuant to Section 623 of the NYBCL,
the written objection of a holder of Grace Common Stock, which is addressed as
provided below, will be deemed filed with Grace upon receipt of such objection
by Grace. Neither voting against nor failure to vote for the Reorganization
Agreement will constitute the written objection required to be filed by a Grace
Common Dissenting Shareholder. Failure to vote against the Reorganization
Agreement, however, will not constitute a waiver of rights under Sections 623
and 910 of the NYBCL, provided that a written objection has been properly filed.
A shareholder voting to approve the Reorganization will be deemed to have waived
such shareholder's appraisal rights. Any proxy may be revoked before it is voted
by filing with the Secretary of Grace a written notice of revocation or a duly
executed proxy bearing a later date or by attending the Grace Special Meeting
and voting in person. The return of a signed proxy without instructions as to
the Reorganization will be deemed a vote in
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favor of the Reorganization Agreement. See "THE SPECIAL MEETINGS -- Voting and
Revocation of Proxies."
A shareholder may not dissent as to less than all the Grace Common Stock
held of record that such holder beneficially owns. A nominee or fiduciary may
not dissent on behalf of any beneficial owner as to less than all the Grace
Common Stock of such beneficial owner, as to which such nominee or fiduciary has
a right to dissent, held of record by such nominee or fiduciary. Furthermore, if
the Grace Common Stock is owned of record in a fiduciary capacity, such as by a
trustee, guardian, or custodian, the demand must be made in that capacity, and,
if the Grace Common Stock is owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand must be made by or for all owners
of record. An authorized agent, including one of two or more joint owners, may
execute the demand for appraisal for a holder of record; however, such agent
must identify the record owner or owners and expressly state, in such demand,
that the agent is acting as agent for the record owner or owners of such Grace
Common Stock.
A record holder, such as a broker or an agent, who holds Grace Common Stock
as a nominee for beneficial owners, some of whom desire to demand appraisal,
must exercise appraisal rights on behalf of such beneficial owners who desire to
demand appraisal with respect to the Grace Common Stock held for such beneficial
owners.
All notices of election to dissent should be addressed to W. R. Grace &
Co., One Town Center Road, Boca Raton, Florida 33486-1010, Attention: Secretary.
Within 10 days after the date of the shareholders' vote approving the
Reorganization, FNMC, as the surviving corporation, will give written notice of
such approval by registered mail to each holder of Grace Common Stock who timely
filed a written objection to the Reorganization, or from whom written objection
was not required, and who did not vote in favor of the Reorganization.
At the time of filing a notice of election to dissent or within one month
thereafter, a Grace Common Dissenting Shareholder must submit the certificate or
certificates representing such holder's Grace Common Stock to Grace, or its
transfer agent, with a conspicuous notation thereon of the election to dissent,
after which such certificates will be returned to such holder or other person
who submitted them on behalf of such holder. Chemical Mellon Shareholder
Services, L.L.C. serves as the transfer agent for the Grace Common Stock, and
its address is 450 West 33rd Street, New York, New York 10001. Any holder who
fails to submit such certificates for notation will, at the election of FNMC
exercised by written notice to such holder within 45 days from the date of
filing of the notice to dissent, lose such holder's appraisal rights unless a
court, for good cause shown, otherwise directs.
Within 15 days after the expiration of the period within which holders of
Grace Common Stock may file their notices of election to dissent, or within 15
days after the Effective Time, whichever is later (but in no case later than 90
days after the shareholders' vote approving the Reorganization), Grace or the
surviving corporation, as the case may be, is required to make a written offer
by registered mail to each Grace Common Dissenting Shareholder to pay for such
holder's Grace Common Stock at a specified price which Grace or the surviving
corporation, as the case may be, considers to be their fair value. Such offer
will be accompanied by a statement setting forth the aggregate number of shares
of Grace Common Stock with respect to which notices of election to dissent from
approval and adoption of the Reorganization Agreement have been received and the
aggregate number of Grace Common Dissenting Shareholders. If the Reorganization
has been consummated at the time such offer is made, such offer will also be
accompanied by (a) advance payment to each Grace Common Dissenting Shareholder
who has submitted such holder's certificates to Grace for notation thereon of
such holder's election to dissent, of an amount equal to 80% of the amount of
such offer, or (b) as to each Grace Common Dissenting Shareholder who has not
yet submitted such certificates for such notation, a statement that advance
payment to such holder of an amount equal to 80% of the amount of such offer
will be made by FNMC promptly upon submission of such certificates. If the
Reorganization has not been consummated at the time of such offer, such advance
payment or statement as to advance payment will be sent to each holder entitled
thereto forthwith upon consummation of the Reorganization. Every advance payment
or statement as to advance payment will include advice to such holder that
acceptance of such advance payment will not constitute a waiver of such holder's
appraisal rights. If the Reorganization has not
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been consummated by the expiration of the above-mentioned 90-day period, Grace's
offer may be conditioned upon the consummation of the Reorganization. If within
30 days after the making of such a written offer, FNMC and any Grace Common
Dissenting Shareholder agree upon the price to be paid for such shareholder's
Grace Common Stock, payment therefor will be made within 60 days after the
making of such offer or the Effective Time, whichever is later, upon the
surrender of the certificates representing such Grace Common Stock. From and
after the Effective Time, any payments with respect to any demands for appraisal
or in settlement of any such demands will be made by the surviving corporation
in all circumstances, but only to the extent not prohibited by Section 623(j) of
the NYBCL, which is described below.
If FNMC fails to make such an offer within the 15-day period described in
the preceding paragraph, or if it makes such an offer but FNMC and a Grace
Common Dissenting Shareholder do not agree within 30 days of the making of the
offer upon the price to be paid for such holder's Grace Common Stock, FNMC must,
within 20 days of such 15- or 30-day period, as the case may be, institute a
special proceeding in the New York Supreme Court, New York County (the "Court"),
to determine the rights of Grace Common Dissenting Shareholders and fix the fair
value of their Grace Common Stock. It is the current intention that FNMC will
institute any such proceeding within the 20-day period; however, if FNMC does
not institute such proceeding within the 20-day period, any Grace Common
Dissenting Shareholder may, within 30 days after the expiration of such 20-day
period, institute a proceeding for the same purpose. If such proceeding is not
instituted within such 30-day period, Grace Common Dissenting Shareholders who
have not agreed with FNMC as the case may be, as to the price to be paid for
their shares of Grace Common Stock will lose their appraisal rights, unless the
Court, for good cause shown, otherwise directs.
All Grace Common Dissenting Shareholders, other than those who will have
agreed with FNMC as the case may be, as to the price to be paid for their Grace
Common Stock, will be made parties to such appraisal proceeding. The Court will
determine whether each Grace Common Dissenting Shareholder, as to whom FNMC
requests the Court to make such determination, is entitled to receive payment
for such holder's shares of Grace Common Stock. If FNMC does not request any
such determination or if the Court finds that such Grace Common Dissenting
Shareholder is so entitled, the Court will then determine the fair value of such
holder's Grace Common Stock as of the close of business on the day prior to the
date the Reorganization Agreement was approved by Grace shareholders. In fixing
the fair value of the shares of Grace Common Stock, the Court will consider the
nature of the transaction giving rise to the Grace Common Dissenting
Shareholder's right to receive payment for such holder's Grace Common Stock
under the NYBCL, the effects of such transaction on Grace and its shareholders,
the concepts and methods then customary in the relevant securities and financial
markets for determining the fair value of shares of a corporation engaging in a
similar transaction under comparable circumstances, and all other relevant
factors. Within 60 days after the final determination of any such Court
proceeding, FNMC will be required to pay to each Grace Common Dissenting
Shareholder the amount found to be due such holder, with interest thereon at
such rate as the Court finds to be equitable, from the date the Reorganization
is consummated to the date of payment, upon surrender to FNMC by such holder of
the certificates representing such shares of Grace Common Stock. If the Court
finds that the refusal of any Grace Common Dissenting Shareholder to accept the
offer of Grace was arbitrary, vexatious or otherwise not in good faith, no
interest will be allowed to such Grace Common Dissenting Shareholder. From and
after the Effective Time, any amount found to be due to Grace Common Dissenting
Shareholders, and any interest allowed thereon, will be paid by the FNMC unless
prohibited by Section 623(j) of the NYBCL.
Each party to such appraisal proceeding will bear its own costs and
expenses, including the fees and expenses of its counsel and any experts
employed by it, except that the Court, in its discretion, (a) may apportion and
assess all or any part of the costs, expenses, and fees incurred by Grace Common
Dissenting Shareholders against FNMC, if, among other things, the Court finds
that the fair value of the Grace Common Stock materially exceeds the offer by
Grace or the surviving corporation, as the case may be, or (b) may apportion and
assess all or any part of the costs, expenses, and fees incurred by FNMC,
against all of the Grace Common Dissenting Shareholders, including any Grace
Common Dissenting Shareholders who have withdrawn their notices of election to
dissent from the Reorganization, who the Court finds were arbitrary, vexatious
or otherwise not acting in good faith in refusing any offer of payment FNMC may
have made.
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Any shareholder who has filed a notice of election to dissent will not,
after the Effective Time, have any of the rights of a shareholder with respect
to such holder's shares of Grace Common Stock, other than the right to be paid
the fair value of such shares of Grace Common Stock under the NYBCL and any
other right provided under the NYBCL for shareholders who have filed such a
notice. Any notice of election to dissent may be withdrawn by a Grace Common
Dissenting Shareholder at any time prior to such shareholder's acceptance in
writing of an offer made by Grace or the surviving corporation, as the case may
be, as described above, but in no case later than 60 days after the Effective
Time (or if Grace or the surviving corporation, as the case may be, fails to
make a timely offer to pay such shareholder the fair value of such holder's
Grace Common Stock as described above, at any time within 60 days after any date
such an offer is made), or thereafter with the written consent of the surviving
corporation. In order to be effective, withdrawal of a notice of election to
dissent must be accompanied by the return to FNMC of any advance payment to the
Grace Common Dissenting Shareholder made by FNMC as described above. Any Grace
Common Dissenting Shareholder who withdraws such holder's notice of election to
dissent or otherwise loses such holder's appraisal rights will thereupon have
only the right to receive the applicable consideration for each of such holder's
shares of Grace Common Stock.
Under Section 623(j) of the NYBCL, no payment may be made to Grace Common
Dissenting Shareholders by FNMC if FNMC is to be insolvent or if such payment
would render FNMC insolvent. In that event, each Grace Common Dissenting
Shareholder would be required to either (a) withdraw such shareholder's notice
of election to dissent, or (b) retain such shareholder's status as a claimant
against the surviving corporation. If a Grace Common Dissenting Shareholder were
to elect to remain a claimant against FNMC, such Grace Common Dissenting
Shareholder's rights would be subordinated to the rights of FNMC's creditors but
would be superior to those of non-dissenting shareholders, should the surviving
corporation be liquidated. If the surviving corporation were not liquidated, the
Grace Common Dissenting Shareholder would retain such holder's right to payment
for such shareholder's Shares of Grace Common Stock, which obligation FNMC would
be required to satisfy once it was no longer insolvent and if such payment would
not render FNMC insolvent. If a Grace Common Dissenting Shareholder fails to
exercise either of such options within 30 days after FNMC has given such holder
written notice that payment cannot be made because of the restrictions of
Section 623(j) of the NYBCL, FNMC would be required to exercise such option by
written notice to such holder within 20 days after the expiration of such period
of 30 days. For purposes of NYBCL Section 623(j), an "insolvent corporation" is
a corporation that is unable to pay its debts as they come due in the usual
course of its business.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that, at the time FNMC
makes any payment in respect of fair value of any dissenting shares (each, a
"Transfer"), FNMC (a) made the Transfer with intent to hinder, delay or defraud
creditors or (b) received less than a reasonably equivalent value or fair
consideration for the Transfer and (i) was insolvent at the time of the
Transfer, (ii) was rendered insolvent by reason of the Transfer, (iii) was
engaged or about to engage in a business or transaction for which the assets
remaining with the surviving corporation constituted unreasonably small capital
to carry on its business, or (iv) intended to incur, or believed that it would
incur, debts beyond its ability to pay as such debts matured, the court could
find that the Transfer constituted a "fraudulent conveyance" under applicable
federal or state law. If the Transfer were determined to be a fraudulent
conveyance, there is a risk that Grace Common Dissenting Shareholders, as
recipients of the Transfers, would be ordered to turn over to the surviving
corporation, its creditors or its trustee in bankruptcy, all or a portion of the
payments made to Grace Common Dissenting Shareholders. The measure of insolvency
for purposes of the foregoing will vary depending upon the law of the
jurisdiction that is being applied. Generally, however, FNMC would be considered
insolvent if, at the time of the Transfer in question, the fair value (or fair
saleable value) of its assets was less than the amount required to pay its total
debts and liabilities (including contingent liabilities) as they become absolute
and matured, or if the sum of FNMC's debts (including any contingent
liabilities) at the time of the Transfer is greater than the fair value of all
of FNMC's properties. The Transfers could be deemed to be a fraudulent
conveyance even if FNMC is not deemed to be an insolvent corporation for
purposes of Section 623(j) of the NYBCL.
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FRESENIUS USA
Set forth below is a summary of the procedure which a dissenting Fresenius
USA stockholder ("Fresenius USA Dissenting Stockholder") must follow in order to
seek to exercise appraisal rights. The information contained below with respect
to stockholders' appraisal rights is qualified in its entirety by reference to
the applicable sections of the MBCL, which are attached to this Joint Proxy
Statement-Prospectus as Appendix G. A PERSON HAVING A BENEFICIAL INTEREST IN
SHARES OF FRESENIUS USA THAT ARE HELD OF RECORD IN THE NAME OF ANOTHER PERSON,
SUCH AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO
FOLLOW THE STEPS SUMMARIZED BELOW PROPERLY AND IN A TIMELY MANNER TO PERFECT
WHATEVER APPRAISAL RIGHTS THE BENEFICIAL OWNER MAY HAVE. THIS DISCUSSION AND
APPENDIX G SHOULD BE REVIEWED CAREFULLY BY ANY FRESENIUS USA COMMON STOCKHOLDER
WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE
RIGHT TO DO SO. FAILURE STRICTLY TO COMPLY WITH ANY OF THE PROCEDURAL
REQUIREMENTS OF SECTIONS 85 THROUGH 98 OF THE MBCL COULD RESULT IN A TERMINATION
OR WAIVER OF APPRAISAL RIGHTS UNDER SECTIONS 85 THROUGH 98 OF THE MBCL.
Section 85 and Sections 86 through 98, inclusive, of the MBCL contain
provisions which, in the case of a merger of a corporation organized under
Massachusetts law, grant to dissenting stockholders who comply with the
procedures specified in these sections the right to receive payment in cash
equal to the "fair value" of their shares. The principal provisions of the
statute are summarized below. This summary is qualified in its entirety by the
provisions of Sections 85 through 98 of the MBCL, which are annexed as Appendix
G to this Joint Proxy Statement-Prospectus and should be carefully reviewed by
holders of Fresenius USA Common Stock.
To claim appraisal rights, a stockholder must (a) file a written objection
to the Reorganization and the transactions contemplated thereby prior to the
stockholder vote on the Fresenius USA Merger, stating that such Fresenius USA
Dissenting Stockholder intends to demand payment for his or her shares of
Fresenius USA Common Stock if the Fresenius USA Merger is consummated, (b) not
vote such Fresenius USA Dissenting Stockholder's shares in favor of approval of
the Reorganization and the transactions contemplated thereby, and (c) in the
event the Reorganization and the transactions contemplated thereby is approved
by Fresenius USA's stockholders and consummated, demand in writing payment for
such shares of Fresenius USA Common Stock from Fresenius USA within 20 days
after the date of mailing to the Fresenius USA Dissenting Stockholder of a
notice that the Fresenius USA Merger has become effective. Such notice is to be
mailed by registered or certified mail by Fresenius USA within 10 days of the
effective date of the Fresenius USA Merger to all stockholders who have complied
with the requirements described in (a) and (b) above.
A vote against the Reorganization and the transactions contemplated thereby
will not be deemed to satisfy the requirement that a written objection be filed
with Fresenius USA prior to the taking of the stockholder vote on the
Reorganization and the transactions contemplated thereby. However, a stockholder
who has filed a written objection to the Reorganization and the transactions
contemplated thereby as provided in (a) above will not be deemed to have waived
such Fresenius USA Dissenting Stockholder's appraisal rights by failing to vote
against the Reorganization and the transactions contemplated thereby so long as
such Fresenius USA Dissenting Stockholder does not actually vote in favor of it.
Fresenius USA is required to make payment of the fair market value of the
shares of Fresenius USA Common Stock owned by each Fresenius USA Dissenting
Stockholder within 30 days after the expiration of the 20-day period during
which a demand for payment for shares may be made. If, during such 30-day
period, Fresenius USA and a Fresenius USA Dissenting Stockholder fail to agree
as to the fair value of such Fresenius USA Dissenting Stockholder's shares,
either Fresenius USA or the Fresenius USA Dissenting Stockholder may, within
four months after the expiration of such 30-day period, request a court
determination of the fair value of the shares of all shares held by the
Fresenius USA Dissenting Stockholders by filing a bill in equity in the Superior
Court of Middlesex County in the Commonwealth of Massachusetts. The cost of such
an action, other than counsel fees and fees of experts retained by a party, will
be determined by the court and apportioned in such a manner as appears to the
court to be equitable; however, all costs of giving notice to the stockholders
entitled to notice of the filing of such an action will be paid by Fresenius
USA. Amounts
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required to be paid to Fresenius USA Dissenting Stockholders will be included in
the $170 million limit on indebtedness of Fresenius Worldwide Dialysis permitted
to exist at the Effective Time. In any such action, the fair value of the shares
of Fresenius USA Common Stock of the stockholder parties to the action will be
determined as of the day preceding the date that the Reorganization and the
transactions contemplated thereby were approved by the stockholders of Fresenius
USA, and will not include any element of value arising from the expectation or
consummation of the Fresenius USA Merger. Fresenius USA has not yet determined
whether it will file such a bill in equity and, therefore, any stockholder who
desires such a bill in equity to be filed is advised to file it on a timely
basis. Unless Fresenius USA files such a bill in equity, the failure by a
Fresenius USA Dissenting Stockholder to file such a bill could nullify all
written demands for appraisal.
Any Fresenius USA stockholder contemplating the exercise of the rights
summarized above is urged to consult with counsel. The failure by a stockholder
to follow precisely all of the steps required by Sections 85 through 98 of the
MBCL will result in the loss of those rights. Under Section 98 of the MBCL, the
enforcement by a stockholder of the right to receive payment for his or her or
its shares of Fresenius USA Common Stock is an exclusive remedy, except that
such provisions do not exclude the right of a stockholder to bring or maintain
an appropriate proceeding to obtain relief on the ground that the Fresenius USA
Merger will be or is fraudulent or illegal as to him or her.
EXCHANGE OF CERTIFICATES
Promptly after the Effective Time, the Exchange Agent will mail a letter of
transmittal (the "Letter of Transmittal") to each former holder of record of
shares of Grace Common Stock or Fresenius USA Common Stock (other than Grace,
Fresenius AG, Fresenius USA or the subsidiaries thereof or any Grace Common
Dissenting Shareholder or Fresenius USA Dissenting Stockholder), together with
instructions for the exchange of Grace stock certificates or Fresenius USA stock
certificates for the consideration into which such stock has been converted in
the Reorganization. The Letter of Transmittal will specify that delivery shall
be effected and risk of loss and title to certificates previously representing
Grace Common Stock or Fresenius USA Common Stock will pass only upon receipt of
such certificates by the Exchange Agent. It is contemplated that the Exchange
Agent will also serve as the distribution agent for the New Preferred Shares to
be issued in the Recapitalization, which shares will be distributed to each
former holder of record of Grace Common Stock without the need for any letter
of transmittal. GRACE SHAREHOLDERS AND FRESENIUS USA STOCKHOLDERS SHOULD NOT
SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL AND
INSTRUCTIONS.
Upon surrender to the Exchange Agent of one or more certificates for shares
of Grace Common Stock or Fresenius USA Common Stock, together with a properly
completed Letter of Transmittal, there will be issued and mailed to the holder
thereof (a) ADRs representing ADSs to which such holder is entitled, unless the
holder complies with the procedures set forth in the Deposit Agreement and
requests that certificates for FMC Ordinary Shares be delivered in lieu thereof,
and (b) in the case of a surrender of certificates for shares of Grace Common
Stock, a certificate or certificates representing New Preferred Shares. ADRs, or
certificates representing New Preferred Shares, or any check representing cash
in lieu of fractional shares, may be issued in a name other than the name in
which the surrendered certificate is registered only if (i) the certificate
surrendered is properly endorsed, accompanied by a guaranteed signature if
required by the Letter of Transmittal, and otherwise in proper form for
transfer, and (ii) the person requesting the issuance of such certificate either
pays to the Exchange Agent any transfer or other taxes required by reason of the
issuance of a certificate for such shares in a name other than the registered
holder of the certificate surrendered or establishes to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable. Six months
after the Effective Time, each of FNMC and Fresenius USA will be entitled to
cause the Exchange Agent to deliver to it any applicable ADSs and cash
(including any interest thereon) made available to the Exchange Agent that are
unclaimed by their respective former shareholders. Any such former shareholders
who have not theretofore exchanged their certificates will thereafter be
entitled to look exclusively to FNMC or Fresenius USA, as the case may be, and
only as general creditors thereof, for the consideration to which they become
entitled upon exchange of their certificates pursuant to the Reorganization
Agreement. Each of
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FNMC and Fresenius USA will pay all applicable charges and expenses, including
its applicable share of those of the Exchange Agent, in connection with the
exchange of certificates and cash for certificates of Grace Common Stock or
Fresenius USA Common Stock.
No dividends in respect of ADSs will be paid to any person holding a
certificate representing Grace Common Stock or Fresenius USA Common Stock until
such certificate is surrendered for exchange. Subject to the effect of
applicable laws, following surrender of any such certificate by any holder
thereof, other than a certificate representing shares as to which appraisal
rights have been asserted, there will be paid to the holder of the ADS issued in
exchange therefor, without interest, (a) at the time of such surrender, the
amount of dividends or other distributions with a record date after the
Effective Time theretofore payable with respect to the ADSs represented thereby
and not paid, less the amount of any withholding taxes which may be required
thereon, and (b) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to the
time of such surrender and a payment date subsequent to the time of such
surrender payable with respect to the ADSs represented thereby, less the amount
of any withholding taxes which may be required thereon. Upon the Effective Time,
there will be no transfers on the transfer books of Grace or Fresenius USA of
the shares of Grace Common Stock or Fresenius USA Common Stock that were
outstanding immediately prior to the Effective Time, respectively.
If any certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such certificate to
be lost, stolen or destroyed and, if required by FNMC or Fresenius USA, as the
case may be, the posting by such person of a bond in such reasonable amount as
FNMC or Fresenius USA, as applicably may direct as indemnity against any claim
that may be made against it with respect to such certificate, FNMC or Fresenius
USA, as the case may be, will, in exchange for such lost, stolen or destroyed
certificates, cause to be issued the ADSs and pay or cause to be paid the
amounts deliverable in respect thereof pursuant to the Reorganization Agreement.
None of FNMC, Fresenius AG, Fresenius USA, the Exchange Agent, Fresenius Medical
Care, Grace Chemicals or New Grace shall be liable to any holder of Grace Common
Stock or Fresenius USA Common Stock for any cash delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
The Exchange Agent, on behalf of FNMC or Fresenius USA, as the case may be,
will be entitled to deduct and withhold from the consideration otherwise payable
to any holder of Grace Common Stock or Fresenius USA Common Stock such amounts
as may be required to be deducted and withheld with respect to the making of
such payment under any provision of state, local or foreign tax law. To the
extent that amounts are so withheld and paid over to the appropriate taxing
authority, such withheld amounts will be treated as having been paid to the
holder of the Grace Common Stock or Fresenius USA Common Stock in respect of
which such deduction and withholding was made.
No fractional ADSs will be issued in the Reorganization. In lieu of any
such fractional shares, each person who would otherwise have been entitled to a
fraction of an ADS will be paid an amount in cash (without interest) equal to
such holder's proportionate interest in the net proceeds from the sale or sales
in the open market by the Exchange Agent, on behalf of all such holders, of the
aggregate fractional ADSs issued. As soon as practicable following the Effective
Time, the Exchange Agent will determine the excess of (a) the number of full
ADSs delivered to the Exchange Agent over (b) the aggregate number of full ADSs
to be distributed in respect of Grace Common Stock or Fresenius USA Common Stock
(such excess being herein called the "Excess Shares"), and the Exchange Agent,
as agent for the former holders of such shares, will sell the Excess Shares at
the prevailing prices on the open market. The sale of the Excess Shares by the
Exchange Agent will be executed on a public exchange through one or more firms
and shall be executed in round lots to the extent practicable; and, at the
discretion of the Exchange Agent, the Excess Shares may be exchanged for ADSs
pursuant to the Deposit Agreement and such ADSs will be sold on the Exchange as
aforesaid in lieu of the Excess Shares. Fresenius Medical Care will pay all
commissions, transfer taxes and other out-of-pocket transaction costs, including
the expenses and compensation of the Exchange Agent, incurred in connection with
such sale of Excess Shares. Until the net proceeds of such sale or sales have
been distributed, the Exchange Agent will hold such proceeds in trust for such
former stockholders (the "Fractional Securities Fund"). As soon as practicable
after the determination of the amount of cash to be paid in lieu of any
fractional interests, the Exchange Agent will make available such amounts to
such former stockholders.
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BUSINESS OF FRESENIUS MEDICAL CARE
GENERAL
Fresenius Medical Care will be the world's largest integrated dialysis
products and services company. Fresenius Medical Care will combine Fresenius
Worldwide Dialysis, a leading international provider of dialysis products with a
commitment to technological superiority and innovation, with NMC, a leading
provider of dialysis services with a commitment to quality clinical treatment.
Fresenius AG expects that the combination of these complementary businesses will
allow it to develop and utilize more effectively its products and therapies and
to gain significant advantages and efficiencies in the manufacture and
distribution of dialysis products and the delivery of dialysis services on a
worldwide basis. Through these strategies, Fresenius Medical Care hopes to
improve the lives of dialysis patients, continue and accelerate its
international growth, and create value for shareholders over the long term.
Fresenius Medical Care will be a holding company, and all of its business will
be conducted through direct and indirect operating subsidiaries. Following the
Reorganization, each of FNMC and Fresenius USA will be wholly owned subsidiaries
of Fresenius Medical Care, and Fresenius USA will continue to manufacture and
distribute products for the treatment of ESRD in North America.
Fresenius Medical Care's global operations will be organized in four
regions: North America (in which 1995 sales were $2.14 billion on a pro forma
basis); Europe/Africa/Middle East (in which 1995 sales were $660 million on a
pro forma basis); Asia/Pacific (in which 1995 sales were $40 million on a pro
forma basis); and South America (in which 1995 sales were $50 million on a pro
forma basis).
Fresenius Medical Care was originally incorporated as "Sterilpharma GmbH",
a wholly owned subsidiary of Fresenius AG organized under German law.
Sterilpharma GmbH's name has been changed to "Fresenius Medical Care GmbH," and,
prior to the Reorganization, it will be converted into a German stock
corporation (Aktiengesellschaft) and renamed "Fresenius Medical Care AG." Prior
to the contribution of Fresenius Worldwide Dialysis by Fresenius AG, Fresenius
Medical Care will have conducted no business for the preceding five years. After
consummation of the Reorganization, Fresenius Medical Care will have its
corporate headquarters at Borkenberg 14, 61440 Oberursel, Germany (near
Frankfurt).
RENAL INDUSTRY OVERVIEW
KIDNEY DISEASE AND TREATMENT MODALITIES
A normally functioning human kidney removes waste products and excess water
from the blood, preventing toxin buildup, eventual poisoning of the body and
water overload. Chronic kidney disease is a progressive disease culminating in
ESRD, which is characterized by the total and irreversible loss of kidney
function. Chronic kidney disease can be caused by a number of conditions,
primarily nephritis, inherited diseases, hypertension and diabetes. Nearly 60%
of all people with ESRD acquire the disease as a complication of one or more of
these primary conditions. However, a high percentage of kidney disease is caused
by unknown factors. Unlike acute renal failure (a sudden interruption of kidney
function caused by trauma, acute infection, blockage or other causes which are
generally temporary and permit the kidneys to return to normal function in 40%
to 60% of the cases after the failure is treated), ESRD cannot be reversed, and
all those affected eventually require artificial dialysis or kidney
transplantation.
Since 1972, patients with ESRD in the U.S. have generally been entitled to
Medicare benefits regardless of age or financial circumstances. Based on
information published by HCFA, the number of patients in the U.S. who received
chronic dialysis grew from approximately 66,000 in 1982 to approximately 187,000
at December 31, 1994. Fresenius Medical Care believes that, over the next five
to ten years, the number of patients suffering from ESRD in the U.S. will
continue to grow at approximately the same rate. According to data published by
HCFA and the European Dialysis Transplantation Society, outside of the U.S., the
number of chronic dialysis patients is growing at annual rates of 8% for
patients receiving hemodialysis and 10% for patients receiving peritoneal
dialysis. Total worldwide dialysis patients (including the U.S.) were estimated
to exceed 700,000 in 1995. Fresenius Medical Care attributes the continuing
growth in the number of dialysis patients principally to the aging of the
general population, better treatment and survival of patients with
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hypertension, diabetes and other illnesses that lead to ESRD, and increases in
reimbursements for treatments in many countries. Moreover, improved technology
has enabled older patients and those who previously could not tolerate dialysis
due to other illnesses to benefit from this life-prolonging treatment.
There are presently only two methods for the treatment of ESRD: dialysis
and kidney transplantation. Transplants, although a viable form of treatment for
some patients, are limited by the scarcity of compatible kidneys. Therefore,
most patients suffering from ESRD must rely on dialysis, which is the removal of
toxic waste products and excess fluids from the body by artificial means. There
are two major dialysis modalities (i.e., methods of treatment) commonly in use
today, hemodialysis and peritoneal dialysis. Generally, the method of treatment
used by an ESRD patient is chosen by the physician in consultation with the
patient, and is based on the patient's abilities, medical conditions and needs.
Hemodialysis. Hemodialysis is the process by which waste products and
excess fluids are removed from the blood extracorporeally. Hemodialysis is
generally performed at a dialysis center or hospital. According to HCFA, as of
December 31, 1994, hemodialysis patients represented 83% of all dialysis
patients in the U.S. and, according to published reports, as of December 1994,
approximately 85% of all dialysis patients worldwide.
In hemodialysis, the blood flows outside the body by means of plastic tubes
known as bloodlines into a specially designed filter -- a dialyzer -- which
separates waste products and excess water from the blood by diffusion and
ultrafiltration. In the dialyzer, which functions as an artificial kidney, the
patient's blood flows past a semipermeable membrane, which is, in turn,
surrounded by dialysis solution, the cleansing liquid. Toxic substances pass
through the semipermeable membrane by diffusion. Through ultrafiltration, excess
water and dissolved electrolytes also pass from the blood through the membrane
into the dialysis solution. The dialysis solution carries away the waste
products and excess water, and the cleansed blood is returned to the patient.
The movement of the blood and dialysis solution is controlled by a hemodialysis
machine, which pumps blood, adds anti-coagulants, regulates the purification
process and controls the mixing of dialysis solution and the rate of its flow
through the system. This machine may also monitor and record the patient's vital
signs.
Hemodialysis treatments are generally administered to a patient three times
per week and typically last from two and one-half to four hours or longer. A
hemodialysis patient must follow a restricted diet and take a variety of
medications and vitamin supplements. Complications suffered by patients being
treated by hemodialysis include anemia, malnutrition, fluid imbalance and
calcium deficiency. In addition, because of the buildup of toxins and fluid in
the blood on days in which no treatment occurs, a patient tends to feel worse on
these days. However, hemodialysis is the only form of treatment (other than
transplantation) currently available to patients who have very low residual or
nonexistent renal function and are inadequately dialyzed using peritoneal
dialysis.
To permit close physician monitoring, patients with medical complications
are sometimes hemodialyzed in the hospital. However, the majority of
hemodialysis patients are referred to outpatient dialysis centers, such as those
which will be operated by Fresenius Medical Care, where hemodialysis treatments
are performed with the assistance of a nurse or dialysis technician under the
general supervision of a physician. A small number of patients who have capable
assistants and who undergo training are hemodialyzed at home.
Peritoneal Dialysis. Peritoneal dialysis removes waste products from the
blood by use of the peritoneum, the membrane lining covering the internal organs
located in the abdominal area. Most peritoneal dialysis treatments are
self-administered by patients in their own homes and workplaces, either by a
treatment known as continuous ambulatory peritoneal dialysis ("CAPD") or by a
treatment introduced by Fresenius USA in 1980 known as continuous cycling
peritoneal dialysis ("CCPD"). In both of these treatments, the patient has a
catheter surgically implanted to provide access to the peritoneal cavity. Using
this catheter, a sterile dialysis solution is introduced into the peritoneal
cavity and the peritoneum operates as the dialyzing membrane.
A typical CAPD peritoneal dialysis program involves the daily introduction
and disposal of approximately eight liters of solution, two liters at a time. A
patient using CAPD drains, by use of gravity, the dialysis solution then
contained in his or her peritoneum into a disposable drainage bag at several
points during the
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day. A new solution bag is connected to the drainage set and the new solution
fills the peritoneum by gravity. The patient then manually disconnects from the
drainage tubing, caps the catheter and discards the waste solution and used
drainage set. With CCPD the patient connects the implanted catheter to a
disposable "cycler" tubing set that is connected to one or more bags containing
a prescribed amount of sterile dialysis solution. A machine is used to "cycle"
solution to and from the patient's peritoneum during sleep.
In both CAPD and CCPD the patient undergoes dialysis daily, and typically
does not experience the buildup of toxins and fluids experienced by hemodialysis
patients on the days they are not treated. In addition, because the patient is
not required to make frequent visits to a hemodialysis clinic, and because the
solution exchanges can be accomplished at convenient (although more frequent)
times, a patient on peritoneal dialysis may experience much less disruption to
his or her life than a patient on hemodialysis. Peritoneal dialysis patients may
also face fewer dietary and fluid intake restrictions than hemodialysis
patients. Two aspects of peritoneal dialysis, however, limit its use as a
long-term therapy for some patients. First, certain patients cannot effect
sterile connections of the peritoneal dialysis tubing to the catheter, leading
to excessive episodes of peritonitis, a bacterial infection of the peritoneum
which can result in serious adverse health consequences, including death.
Second, treatment by current forms of peritoneal dialysis may not be as
effective in removing wastes and fluids as hemodialysis; therefore, patients
using peritoneal dialysis must have some residual renal function (which may
deteriorate over time) or the amount of therapy must be increased. As residual
renal function decreases, peritoneal dialysis is less effective. Therefore, in
general, ESRD patients require hemodialysis treatments for some period during
the term of their disease.
According to HCFA, as of December 31, 1994, there were approximately 2,600
outpatient dialysis centers in the U.S. Ownership of these centers is extremely
fragmented; published reports estimate that approximately 36% are owned by
multi-center providers, approximately 34% are physician-owned private treatment
centers and approximately 30% are affiliated with hospitals. According to HCFA,
as of December 31, 1994, approximately 82% of the dialysis patients in the U.S.
received in-center hemodialysis treatment and approximately 18% were treated at
home. Of those treated at home, more than 90% received peritoneal dialysis.
Outside the U.S., ratios of patients using hemodialysis versus peritoneal
dialysis vary significantly from country to country. Regionally, according to
published reports, the percentages are as follows:
<TABLE>
<CAPTION>
PERITONEAL
AREA HEMODIALYSIS DIALYSIS
------------------------------------------------------ ------------ ----------
<S> <C> <C>
Western Europe........................................ 84% 16%
Japan................................................. 93 7
Latin America......................................... 69 31
Asia (excluding Japan)................................ 78 22
Other areas........................................... 90 10
</TABLE>
Alternative Therapies. The only generally recognized alternative treatment
for ESRD is kidney transplantation. According to HCFA, an average of
approximately 8,700 dialysis patients received kidney transplants annually in
the U.S. during the period from 1989 through 1994. Although this option, when
successful, may be the most desirable form of therapeutic intervention, the
shortage of suitable donors of compatible kidneys limits the availability of
this surgical procedure. Medical advances, including advances in the field of
xenografting, which involves the use of animal organs for human transplantation,
may ultimately lead to other treatment options for patients with ESRD, but such
options are not expected to be available in the foreseeable future.
New medical therapies that cure or mitigate the primary causative diseases
linked to kidney failure could potentially reduce the ESRD patient population
growth rate. Such new medical therapies include diet control, intensive diabetes
therapy, improved control of hypertension, improved treatment of causative
primary infections, pancreas transplants and techniques for widening blocked
renal arteries. Fresenius Medical Care believes, however, that most of these
therapies will only provide benefits over an extended time horizon and,
therefore, will not significantly reduce the growth of the ESRD patient
population in the near term.
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STRATEGY1
Following the Reorganization, Fresenius Medical Care will combine Fresenius
Worldwide Dialysis' expertise in dialysis products with NMC's experience in
dialysis services, with a commitment to providing high-quality patient care. By
offering both innovative products and cost-effective services, Fresenius Medical
Care believes that it will be well positioned to compete in the challenging
health care environment. Key elements of Fresenius Medical Care's strategy will
be to:
- offer complete hemodialysis and peritoneal dialysis product lines;
- extend Fresenius Worldwide Dialysis' position as a technology innovator
in the dialysis products industry, utilizing NMC's expertise in patient
treatment and its clinical data;
- enhance production technologies, improve the efficiency of production
processes, and expand international manufacturing operations;
- expand Fresenius Worldwide Dialysis' current global market position in
the products business;
- provide high standards of patient care and quality in dialysis services,
laboratory services and home health care;
- enhance NMC's market position in the provider business through strategic
expansion and acquisitions, particularly in those regions where Fresenius
Worldwide Dialysis already maintains strong product sales and contacts;
and
- establish a presence for Fresenius Medical Care in selected new
geographic markets through a fully integrated and market-tailored
approach to dialysis treatment.
In order to meet local customer preferences and adapt to differences in the
health care systems of different countries, Fresenius Medical Care will be
organized in four regions: North America, Europe/Africa/Middle East,
Asia/Pacific and South America. It is intended that each region eventually will
have a single chief executive officer responsible for all Fresenius Medical Care
business in the region. It is intended that such business will be organized into
three operating segments -- a hemodialysis business, a peritoneal dialysis
business and a provider business, each with a single head. Marketing will also
be organized on a regional basis, with global strategic marketing based in
Germany. Fresenius Medical Care will facilitate the exchange of products,
process technology and expertise among the regions.
DIALYSIS PRODUCTS AND PRODUCTION
Fresenius Medical Care intends to continue to offer Fresenius Worldwide
Dialysis' broad and competitive hemodialysis and peritoneal dialysis product
lines. These product lines enjoy broad market acceptance and enable customers to
purchase all of their dialysis machines and disposable products from a single
source. In particular, Fresenius Medical Care believes that Fresenius Worldwide
Dialysis' leading hemodialysis product, the Fresenius Polysulfone(R) dialyzer,
is the best-performing, mass-produced low-, medium- and high-flux dialyzer on
the market. Fresenius AG was the first company to produce dialyzers in high
volumes utilizing the polysulfone membrane and has over 12 years of experience
in the production of polysulfone dialyzers. Polysulfone is widely regarded as
being more biocompatible and higher performing than most commonly used
alternative fibers. Fresenius Medical Care will also offer a variety of durable
products, such as its modular hemodialysis machines, the components of which can
be tailored to individual therapeutic practices and local preferences. Fresenius
Medical Care also believes that it offers innovative systems for peritoneal
dialysis treatments which can create further opportunities for growth in new and
existing peritoneal dialysis markets.
- ---------------
1 The discussion under this "Strategy" section contains forward-looking
statements. These forward-looking statements are made based on management's
expectations and beliefs concerning future events impacting Fresenius Medical
Care, but no assurance can be given that such events will occur or that
results will be as anticipated.
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Fresenius Medical Care's strategy will be to strengthen its technological
leadership position in dialysis products through continued product development.
For example, Fresenius Medical Care intends to introduce a non-polyvinyl
chloride ("PVC") system for peritoneal dialysis and to develop new generations
of hemodialysis machines offering improved physiological monitoring. See
"-- Business of Fresenius Worldwide Dialysis -- Fresenius Worldwide Dialysis
Products."
Fresenius Medical Care intends to continue to operate a state-of-the-art
production facility for disposable dialysis products in St. Wendel, Germany (the
"St. Wendel Facility"). The St. Wendel Facility is fully automated, achieving
significant production efficiencies as well as a high level of quality control
and reliability. In addition, the central research and development activities of
Fresenius Worldwide Dialysis for disposable dialysis products will continue to
be based at the St. Wendel Facility. Fresenius Medical Care believes that this
proximity helps to integrate product research and development with manufacturing
process engineering, and fosters continuous product and process innovation and
cost reduction. Recent process innovations in the production of disposable
dialysis products include the automation of steam sterilization and a new laser
welding technology for producing non-PVC products. See "-- Business of Fresenius
Worldwide Dialysis -- Fresenius Worldwide Dialysis Products." Fresenius Medical
Care will continue to emphasize innovations in production process technology in
order to reduce costs and improve product quality.
Fresenius Medical Care plans to continue to develop and employ the know-how
developed in the St. Wendel Facility in other plants for disposable products
around the world. For example, Fresenius USA's plant in Ogden, Utah and the
manufacturing facilities of Fresenius Worldwide Dialysis' joint ventures in
Japan and Belarus are based on the St. Wendel Facility.
Fresenius Medical Care intends to continue to produce and develop durable
products such as dialysis machines and peritoneal dialysis cyclers at the
Fresenius Worldwide Dialysis production facility in Schweinfurt, Germany (the
"Schweinfurt Facility"). The centralization of the production of machine
components at the Schweinfurt Facility creates production efficiencies.
Components that need to be tailored to local preferences will be produced and
assembled locally in facilities around the world. For servicing durable
products, Fresenius Medical Care intends to build on the established
international organization of Fresenius Worldwide Dialysis. The Schweinfurt
Facility will provide training and education in equipment set-up, installation
and calibration and will act as a support center for Fresenius Medical Care's
regional service centers.
Fresenius Medical Care plans to expand its international sales of dialysis
products in new and existing markets. This strategy includes building new
production facilities for disposable products in new and existing markets around
the world by setting up additional subsidiaries and local sales forces and by
entering into joint venture agreements with local partners. Fresenius Medical
Care anticipates that it will continue to make capital expenditures for its
dialysis products business at a level of magnitude comparable to the combined
expenditures of Fresenius Worldwide Dialysis and MPG prior to the
Reorganization, or approximately $400 to $500 million over the next five years.
This expansion will be funded primarily from internally generated funds, as well
as from Fresenius Medical Care's credit facilities and possible future debt and
equity offerings.
PROVIDER BUSINESS
In its provider business, Fresenius Medical Care plans to continue to
follow the basic principles that have guided NMC over the past two decades.
These principles include: a commitment to high standards of clinical quality in
the provision of health care services; identification and implementation of
innovations and new management systems to control or reduce costs and enhance
quality; growth through strategic expansion and acquisitions around the world;
affiliation with leading health care practitioners and institutions; use of
economies of scale and scope to achieve administrative efficiencies; and
promotion of complementary products and services to achieve diversification as
well as cost management and quality enhancement.
In the dialysis services area, Fresenius Medical Care's strategy will be to
expand further in the U.S. through the continued development of new dialysis
centers and the acquisition of existing dialysis centers, thereby combining
Fresenius USA's extensive relationships in the U.S. with NMC's experience,
systems and resources over an expanded patient base. Outside the U.S., Fresenius
Medical Care plans to expand its service
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operations in Europe, South America and the Asia/Pacific region utilizing the
global experience and contacts of both Fresenius Worldwide Dialysis and NMC.
Worldwide, many dialysis centers that are potential acquisition or joint
venture candidates of Fresenius Medical Care are owned by physicians. In the
U.S., doctors may be motivated to sell their centers to obtain relief from
day-to-day administrative responsibilities and changing governmental
regulations, to focus on patient care and to realize a return on their
investment. Outside of the U.S., doctors may be motivated to sell and/or enter
into joint ventures or other relationships with Fresenius Medical Care to
achieve the same goals and to gain a partner with extensive expertise in
dialysis products and services. While price is typically the key factor in
securing acquisitions, Fresenius Medical Care believes that it will be an
attractive acquiror or partner to many dialysis center owners due to its
reputation for patient treatment, its proprietary Patient Statistical Profile
("PSP") database (which contains clinical and demographic data on over 40,000
dialysis patients), its comprehensive clinical and administrative systems,
manuals and policies and its ability to provide ancillary services for dialysis
centers and patients and its reputation for technologically advanced products.
Fresenius Medical Care believes that these factors will also be advantages in
expanding by opening new centers. Fresenius Medical Care's ability to acquire
existing centers and open new centers will depend, among other things, on
Fresenius Medical Care's available financial resources. See "RISK
FACTORS -- Risks Relating to the Business of Fresenius Medical
Care -- Dependence on Acquisitions." Fresenius Medical Care anticipates that
expenditures for expansion of its provider business will average approximately
$200 million per year over the next five years and that such expenditures will
be funded primarily from internally generated funds, as well as from Fresenius
Medical Care's credit facilities and possible future debt and equity offerings.
Fresenius Medical Care plans to expand its provider business to countries
(other than Germany) where Fresenius Worldwide Dialysis currently has a strong
position in product sales and where privately owned dialysis centers can be
established. Additionally, Fresenius Medical Care plans to expand, on a selected
basis, both its products and provider businesses to regions of the world where
dialysis treatment currently is not yet universally available.
Fresenius Medical Care's ability to expand internationally will be
dependent, in large part, on the availability and level of local governmental
support of dialysis treatment. In a limited number of countries, reimbursement
rates are higher than in the U.S., and certain hemodialysis treatments, such as
hemodiafiltration with high-flux membranes, are sometimes reimbursed at premium
rates. In other countries, however, government payment or reimbursement rates
for dialysis treatment are significantly lower than U.S. reimbursement rates. In
addition, the legal and regulatory framework in certain countries may be more
restrictive and cumbersome than in the U.S. International operations may also
involve certain additional risks, including fluctuations in exchange rates and
delays in payment. Fresenius Medical Care's management believes that its
vertical integration will enable it to compete successfully in international
markets.
Fresenius Medical Care also believes that vertically integrated enterprises
like Fresenius Medical Care will be able to realize efficiencies that may lower
patient care costs and help it compete in a managed care environment. In the
U.S., managed care exists in a variety of forms, ranging from traditional
fee-for-service insurance with cost and utilization controls to capitation-based
HMOs, which pay providers a fixed amount per member per month, with the provider
bearing the risk of loss if the costs of services exceed the capitated payment.
Fresenius Medical Care believes that its core strategic principles, particularly
its commitment to maintaining clinical quality, cost management and control and
to developing superior cost-effective products, are key elements in sustaining
profitability in the face of the trend toward managed care. Fresenius Medical
Care believes that its strengths in clinical data systems, its professional
affiliations with broad networks of providers and institutions, extensive
geographic market coverage in dialysis services and products and ongoing
internal development of an integrated care capability should afford Fresenius
Medical Care attractive partnering opportunities with managed care enterprises.
Fresenius Medical Care believes that the vertical integration of Fresenius
Medical Care will provide opportunities for cost savings that are essential to
competing in a managed care environment. Fresenius Medical Care believes that
these cost savings, together with NMC's extensive clinical information database
and large dialysis center network, should allow Fresenius Medical Care to
benefit from the trend toward managed care and may enable Fresenius Medical Care
to improve patient care and therefore contain hospitalization and overall
treatment costs of ESRD patients.
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INTEGRATION OF FRESENIUS WORLDWIDE DIALYSIS AND NMC
In order to implement its strategic plans, management of Fresenius Medical
Care has been reviewing and will continue to review the operations of Fresenius
Worldwide Dialysis and NMC in order to achieve potential synergies, and will
refine and implement plans regarding, among other things, the integration or
combination of certain research and development efforts, production facilities
and other operations of Fresenius Worldwide Dialysis and NMC. Management of
Fresenius Medical Care also believes that economies of scale are realizable
through sourcing efficiencies, coordination of manufacturing and distribution
activities and rationalization and consolidation of corporate staffs and sales
forces. In addition, some or all of the gross margin which would otherwise have
gone to distributors will remain with Fresenius Medical Care in those countries
where either of Fresenius Worldwide Dialysis or NMC previously used distributors
and, following the Reorganization, will be able to use the sales organization of
Fresenius Medical Care.
Fresenius Medical Care management believes that new market opportunities
may become available as a result of the Reorganization. In 1995, approximately
17% of all purchases of dialysis machines and related products by NMC in the
U.S. were from Fresenius USA, the remainder were from other third-party
producers. Management of Fresenius Medical Care believes that significant cost
savings and economies of scale may be achieved in the future as a result of an
increase in the percentage of Fresenius Worldwide Dialysis products purchased
and used in NMC dialysis centers, without compromising the physician's freedom
to prescribe as they choose, and a consolidation of their previously separate
distribution networks. Furthermore, at December 31, 1995, approximately 85% of
the centers operated by NMC were located in the United States and over 90% of
NMC's revenues were generated in the United States. As previously discussed,
management of Fresenius Medical Care believes that significant opportunities
exist for Fresenius Medical Care to effect acquisitions and/or joint ventures
through the combination of Fresenius Worldwide Dialysis' international presence
with NMC's experience in operating dialysis centers. In addition, Fresenius
Medical Care intends to make peritoneal dialysis available in NMC dialysis
centers where currently only hemodialysis is offered.
Vertical integration on the scale represented by Fresenius Medical Care has
not been tried previously in the renal industry. Accordingly, there can be no
assurance, that any of the foregoing potential synergies will be realized or
that they will be material to Fresenius Medical Care. Furthermore, independent
dialysis centers and those operated by other chains that are presently customers
of Fresenius Worldwide Dialysis may elect to limit or terminate their purchases
of Fresenius Medical Care dialysis products in order to avoid purchasing
products manufactured by a competitor. Fresenius Medical Care believes that
customers will continue to consider its long-term customer relationships and
reputation for product quality in making product purchasing decisions and
intends to compete vigorously for such customers.
BUSINESS OF FRESENIUS WORLDWIDE DIALYSIS
FRESENIUS AG
Fresenius AG is a German corporation, listed on the Frankfurt, Dusseldorf
and Munich stock exchanges, which develops, manufactures and distributes
pharmaceuticals and medical systems products and services on a global basis.
Fresenius AG conducts business in four operating divisions: Fresenius Worldwide
Dialysis, Pharmaceuticals Division, Intensive Care and Diagnostics Division, and
Project Business Division. The Pharmaceuticals Division manufactures and
distributes, among other things, solutions for infusion therapy and enteral and
parenteral nutrition, and specialty pharmaceuticals. The Intensive Care and
Diagnostics Division manufactures and distributes products for hemotherapy and
intensive medicine, diagnostic products, specialty membranes and transplantation
medicine. Fresenius AG's Project Business Division, through its subsidiaries,
Pharmaplan GmbH and Hospitalia GmbH, makes scientific and manufacturing know-how
available for planning and construction of pharmaceutical and medical systems
manufacturing facilities and for equipping of hospitals. For the year ended
December 31, 1995, the sales of Fresenius Worldwide Dialysis represented 58% of
Fresenius AG's consolidated sales. Fresenius AG's corporate headquarters are
located in Oberursel, Germany (near Frankfurt).
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A majority of Fresenius AG's ordinary shares, nominal value DM 5 per share
("Fresenius AG Ordinary Shares") are held by the Else Kroner-Fresenius-Stiftung
(the "Foundation"), a charitable foundation founded to promote medical science,
particularly in the fields of research and treatment of diseases, and the
education and training of physicians and other persons primarily engaged in
dialysis. See "SECURITY OWNERSHIP" for more information regarding the
Foundation.
FRESENIUS WORLDWIDE DIALYSIS
Fresenius Worldwide Dialysis is the global dialysis business of Fresenius
AG, including the business conducted through Fresenius USA. Based on 1995
revenues, Fresenius Worldwide Dialysis is currently the world's second largest
manufacturer and distributor of equipment and related products for each of
hemodialysis and peritoneal dialysis. Fresenius Worldwide Dialysis operates in
Germany and in more than 20 other countries through 32 subsidiaries and joint
ventures. Fresenius Worldwide Dialysis' products are sold in more than 100
countries. As of March 31, 1996, Fresenius Worldwide Dialysis also provided
kidney dialysis treatment and related services at nine treatment centers located
in Argentina, Brazil, Hungary, Italy and the United Kingdom.
Fresenius Worldwide Dialysis manufactures a comprehensive line of renal
dialysis equipment and related products for each of the hemodialysis and
peritoneal dialysis markets. Such products include hemodialysis machines,
peritoneal dialysis cyclers and related equipment, dialyzers, peritoneal
dialysis solutions in flexible plastic bags, hemodialysis concentrates and
solutions, granulate mixes, bloodlines, and disposable tubing assemblies and
equipment for water treatment in dialysis centers. During 1995 and the
three-month period ended March 31, 1996, hemodialysis machines and related
disposable products accounted for 70.9% and 72.0% of Fresenius Worldwide
Dialysis' total revenues, and revenues from peritoneal dialysis solutions and
machines and equipment accounted for approximately 19.9% and 20.9% of total
revenues. The balance of revenues, approximately 9.2% and 7.1%, respectively,
primarily represents technical service. During 1995 and the three-month period
ended March 31, 1996, 59.8% and 59.7%, respectively, of total Fresenius
Worldwide Dialysis revenues were generated within Europe/Africa/Middle East
(including 28.0% and 26.0%, respectively, generated in Germany), 33.8% and
34.3%, respectively, of total revenues were generated in North America by
Fresenius USA, and the balance, 6.4% and 6.0%, respectively, of total revenues,
was generated in other parts of the world.
The combined financial statements of Fresenius Worldwide Dialysis contained
elsewhere in this Joint Proxy Statement-Prospectus include Fresenius USA and,
except as otherwise noted, the information set forth below with respect to
Fresenius Worldwide Dialysis includes Fresenius USA. For information specific to
Fresenius USA, see "-- Business of Fresenius USA."
Fresenius Worldwide Dialysis began business with the distribution of
dialysis machines and dialyzers made by other manufacturers in 1966. In 1977,
Fresenius Worldwide Dialysis began the production of cuprophane dialyzers at the
St. Wendel Facility and, in following years, began manufacturing the other
elements of its product line. In 1978, Fresenius Worldwide Dialysis began the
development of the polysulfone membrane for a new generation of dialyzers. These
development efforts were realized in 1983, with the commencement by Fresenius
Worldwide Dialysis of large-scale production of synthetic hollow-fiber
polysulfone dialyzer membranes at the St. Wendel Facility. In Germany, Fresenius
Worldwide Dialysis currently manufactures polysulfone membranes and dialyzers,
bloodlines and peritoneal dialysis bags at the St. Wendel Facility and
hemodialysis machines and peritoneal dialysis cyclers at the Schweinfurt
Facility. Fresenius Worldwide Dialysis also has manufacturing and assembly
facilities in North America, other parts of Europe, Asia and South America.
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The following table shows, for each of the past three years, Fresenius
Worldwide Dialysis' total revenues by region:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------- -------------------
1993 1994 1995 1996
------------------- ---------------- ---------------- -------------------
TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
----------- ----- -------- ----- -------- ----- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Europe/Africa/Middle
East................. $ 384,874 63.0% $426,033 59.2% $535,755 59.8% $140,285 59.7%
North America.......... 200,414 32.8 250,369 34.8 302,725 33.8 80,529 34.3
South America.......... 15,435 2.5 19,607 2.7 25,373 2.8 7,700 3.2
Asia/Pacific........... 10,558 1.7 23,834 3.3 32,687 3.6 6,546 2.8
-------- ----- -------- ----- -------- ----- -------- -----
Total......... $ 611,281 100.0% $719,843 100.0% $896,540 100.0% $235,060 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
FRESENIUS WORLDWIDE DIALYSIS PRODUCTS
OVERVIEW
Fresenius Worldwide Dialysis' products include machines and related
disposable products for hemodialysis and cyclers, solutions and related
disposable products for peritoneal dialysis treatment. Fresenius Worldwide
Dialysis' product catalogs contain over 3,000 different items. The following
table shows, for each of the past three years, total revenues related to
hemodialysis products, peritoneal dialysis products and other activities,
principally technical service:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------- -------------------
1993 1994 1995 1996
------------------- ---------------- ---------------- -------------------
TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
----------- ----- -------- ----- -------- ----- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hemodialysis
Products............. $ 429,071 70.2% $504,850 70.1% $636,000 70.9% $169,228 72.0%
Peritoneal Dialysis
Products............. 130,929 21.4 153,422 21.3 178,307 19.9 49,197 20.9
Other.................. 51,281 8.4 61,571 8.6 82,233 9.2 16,635 7.1
-------- ----- -------- ----- -------- ----- -------- -----
Total......... $ 611,281 100.0% $719,843 100.0% $896,540 100.0% $235,060 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
HEMODIALYSIS PRODUCTS
Fresenius Worldwide Dialysis management believes that it is a leader in the
hemodialysis product field and continually strives to extend and improve the
capabilities of its hemodialysis systems to offer an advanced treatment mode at
reasonable cost. Fresenius Worldwide Dialysis offers a comprehensive
hemodialysis product line, consisting of hemodialysis machines, modular
accessories for dialysis machines, polysulfone and cuprophane dialyzers,
bloodlines, dialysis solutions and concentrates, fistula needles, connectors,
devices for water treatment, data management systems, dialysis chairs, machines
and supplies for the reuse of dialyzers and other similar supplies.
Dialysis Machines. All Fresenius Worldwide Dialysis hemodialysis machines
provide a unique volumetric dialysate balancing and ultrafiltration control
system. This system, first developed and introduced by Fresenius AG in 1977,
provides for the safe and more efficient use of highly permeable dialyzers.
Fresenius Worldwide Dialysis hemodialysis machines are available in North
America in Series 2008 models and, elsewhere, in both its Series 2008 and its
newer Series 4008 models, which were introduced in 1992. Fresenius Worldwide
Dialysis also provides machine upgrade kits to allow for advanced therapy modes,
thus offering the customer maximum performance with highly permeable polysulfone
dialyzers.
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Since 1990, Fresenius Worldwide Dialysis periodically has introduced
"intelligent" modules for machines, which actively monitor and respond to
selected biophysical patient parameters (such as body temperature, relative
blood volume, electrolyte balances, and so forth). This concept, known as
"physiological dialysis," permits hemodialysis treatments with lower incidence
of a variety of intradialytic symptoms, which still occur frequently in standard
hemodialysis. The modularity of Fresenius Worldwide Dialysis dialysis machines
ensures that this modern technology can be applied to all Series 4008 machines
and to many Series 2008 machines.
All models in the newer Series 4008 comprise a sophisticated,
microprocessor-controlled monitor in combination with an improved and extended
version of the proven Fresenius AG hydraulic system, allowing for a high degree
of treatment and service flexibility. Modular design allows Fresenius Worldwide
Dialysis' machines to be upgraded by substituting modules instead of replacing
the entire machine. Modular design also permits Fresenius Worldwide Dialysis to
offer dialysis centers a broad range of options to meet specific patient or
regional treatment requirements. The display panel can also be adapted using
different modules to meet local language requirements. All machines have battery
backup, permitting operation of the blood circuit and all protective systems for
15 to 20 minutes in the event of a power failure.
Fresenius Worldwide Dialysis also offers a computer interface module
(FINESSE), which performs on-line data collection during dialysis, automatic
entry of nursing records at the bedside, and prescribed therapy monitoring and
assessment. The FINESSE system allows a large number of hemodialysis machines
and other peripheral devices, such as patient scales, blood chemistry analyzers
and blood pressure monitors, to be hooked up to a standard personal computer
("PC") network. This system makes it possible to register automatically the
various parameters of each individual dialysis treatment for documentation and
billing purposes, as well as to analyze medium- and long-term trends to assess
the quality of the treatment and the patient's health. This hardware system and
the related software are further important factors enabling treatment in the
hospital or center with Fresenius Worldwide Dialysis products to be individually
adapted to the patient. FINESSE is designed as an "open" system to allow
adaptability to new devices and future trends in PC development.
Dialyzers. Most dialyzers sold by Fresenius Worldwide Dialysis use hollow
fiber polysulfone membranes, a synthetic material. Fresenius Worldwide Dialysis
developed the technology to mass-produce polysulfone dialyzers. Fresenius
Medical Care believes that polysulfone has superior performance characteristics
compared to other materials used in dialyzers, because polysulfone dialyzers are
highly biocompatible and have greater clearing capacities for uremic toxins.
Fresenius Worldwide Dialysis' polysulfone dialyzer line consists of a complete
range of permeability (high, medium and low flux) to allow tailoring of the
dialysis therapy to the individual patient. Fresenius Polysulfone(R) dialyzers
are also available in an ultra-flux version for acute dialysis. While
competitors of Fresenius Worldwide Dialysis currently sell polysulfone membranes
in the market, Fresenius Worldwide Dialysis is the only manufacturer with more
than 12 years' experience in applying the technology required to manufacture
polysulfone membranes. Fresenius Worldwide Dialysis also manufactures cuprophane
low-flux dialyzers. Dialyzer sales accounted for approximately 28% of Fresenius
Worldwide Dialysis' revenues in each of 1995 and the three-month period ended
March 31, 1996.
Other Hemodialysis Products. Fresenius Worldwide Dialysis manufactures and
distributes arterial, venous, single needle and pediatric bloodlines. Fresenius
Worldwide Dialysis produces both liquid and dry dialysate concentrates. Liquid
dialysate concentrate is mixed with purified water by the hemodialysis machine
to produce dialysis solution, which is used in hemodialysis treatment to remove
the waste products and excess water from the patient's blood. Dry concentrate,
developed more recently, is less labor-intensive to use, requires less storage
space and may be less prone to bacterial growth than liquid solutions. Fresenius
Worldwide Dialysis also produces dialysis solutions in bags, including solutions
for priming and rinsing hemodialysis bloodlines, as well as connection systems
for central concentrate supplies and devices for mixing dialysis solutions and
supplying them to hemodialysis machines. Other Fresenius Worldwide Dialysis
products include solutions for disinfecting and decalcifying hemodialysis
machines, fistula needles, hemodialysis catheters, and products for acute renal
treatment.
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New Hemodialysis Products. Fresenius Worldwide Dialysis has recently
developed the Acu-men(TM), a compact dialysis machine for use in acute dialysis
therapy. This machine is used together with a self-contained disposable
cartridge, the Acu-cart(TM), comprising a dialyzer, a blood pump and a dialysis
fluid chamber, and includes a battery for operation during patient movement from
the intensive care unit (where acute dialysis is generally commenced) to a
patient's hospital room or ward. Fresenius Worldwide Dialysis expects to
complete the regulatory compliance process in the fall of 1996 and to conduct a
multi-center field evaluation prior to product launch in 1997. For a discussion
of the regulatory steps necessary to bring new products to market in Europe, see
"-- Regulatory and Legal Matters -- Product Regulation -- Non-U.S."
PERITONEAL DIALYSIS PRODUCTS
Fresenius Worldwide Dialysis offers a full product line for peritoneal
dialysis patients. In 1995, approximately 80% of Fresenius Worldwide Dialysis'
global peritoneal dialysis product sales represented sales of solutions; the
balance comprised peritoneal dialysis systems and components. Fresenius
Worldwide Dialysis' peritoneal dialysis products include peritoneal dialysis
cycling machines for CCPD and disposable products for both CAPD and CCPD, such
as tubing, sterile solutions and sterile kits to prepare patients for dialysis.
CAPD Systems. Fresenius Worldwide Dialysis manufactures standard and
specialized peritoneal dialysis solutions. Fresenius Worldwide Dialysis believes
that its peritoneal solution products with Safe-Lock(R) connection systems offer
significant advantages for CAPD and CCPD home patients, including ease of use
and greater protection against touch contamination than other peritoneal
dialysis systems presently available. The Safe-Lock(R) system involves the
connection procedure of introducing and draining the dialysis solution into and
from the abdominal cavity through the use of the same bag for introduction and
drainage. To use Safe-Lock(R) products, a catheter that has been surgically
implanted in the patient is fitted with one part of the Safe-Lock(R) connector,
and the peritoneal dialysis solution bag and tubing are fitted with the other
part of the Safe-Lock(R) connector. Fresenius Worldwide Dialysis also
manufactures the A.N.D.Y. and A.N.D.Y. Plus systems (A Non-Disconnect Y-system).
These are disposable double bag systems utilizing a special drainage bag and a
snap-off Y-shaped piece that is connected to the Safe-Lock(R) connector at the
catheter. A.N.D.Y. double bag systems further reduce possible entry of
contaminants during peritoneal dialysis. Fresenius Worldwide Dialysis has
recently developed a new Stay-Safe(TM) system which Fresenius Medical Care
believes will offer additional improvements over the Safe-Lock(R) system. See
"-- New Peritoneal Dialysis Products."
Cyclers. Although CAPD is the predominant form of peritoneal dialysis
therapy, Fresenius Worldwide Dialysis believes that CCPD therapy offers patients
benefits over CAPD therapy for patients who need more therapy due to body size,
ultrafiltration loss or any other reason. In a standard CAPD program, a patient
undergoes four manual two-liter exchanges of peritoneal dialysis solution over a
24-hour period, with treatment occurring seven days per week. CAPD must be
performed by the patient when he or she is awake. With CCPD therapy, peritoneal
dialysis cyclers provide automated dialysis solution exchange. The cycler
delivers a prescribed volume of dialysis solution into the peritoneal cavity
through an implanted catheter, allows the solution to dwell for a specified
time, and completes the process by draining the solution. Cycling may be
performed by patients at home throughout the night while sleeping. CCPD delivers
more effective therapy than CAPD due to the supine position of the patient
during the night, higher volume exchanges and preferable cycle management. With
nighttime cycling, the patient has complete daytime freedom, wearing only the
surgically-implanted catheter and capping device. In addition, Fresenius
Worldwide Dialysis believes that CCPD reduces the risk of peritonitis due to
less frequent handling of the catheter.
Fresenius USA introduced the first CCPD machine in 1980 and, in 1994,
introduced a new variant on CCPD therapy, PD-Plus(R), that is now offered by
Fresenius Worldwide Dialysis in Europe. See "-- Business of Fresenius
USA -- Fresenius USA Products -- Peritoneal Dialysis Products."
Other Peritoneal Dialysis Products. Fresenius Worldwide Dialysis also
manufactures and distributes pediatric treatment systems for administration of
low volumes of dialysis solutions, assist devices to facilitate automated bag
exchange for handicapped patients, catheters, catheter implantation instruments,
silicon glue, Pack-PD (a computer program which analyzes patient and peritoneal
characteristics to present a range of
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treatment options for individual therapies), disinfectants, adapters, and
products to assist and enhance connector sterility. Fresenius Worldwide Dialysis
also provides scientific and patient information products, including support
materials, such as brochures, slides, videos, instructional posters and training
manuals.
New Peritoneal Dialysis Products. Fresenius Worldwide Dialysis has
recently developed a new CAPD system, comprising tubing, connectors and a
peritoneal dialysis double bag, together with the process technology for the
manufacture of the system. The Fresenius Stay-Safe(TM) peritoneal dialysis
system utilizes a single switching mechanism that replaces the three tubing
clamps to control drainage of solution, flushing of tubes that connect solution
bags to catheters and introduction of new solution. The control device also
further reduces the possibility of catheter contamination during connection and
disconnection by sealing the catheter access and surrounding the catheter
adapter with a disinfectant solution.
The entire Stay-Safe(TM) system is expected to be the first mass-produced
PVC-free peritoneal dialysis system. The Stay-Safe(TM)system is made with
Biofine(TM), a new foil developed by Fresenius AG and manufactured from
multi-layered polyolefins. Fresenius Worldwide Dialysis management believes that
the use of Biofine(TM) offers substantial advantages over PVC, which is
currently in use. Biofine(TM) provides higher biocompatibility because it
contains no plasticisers, which are known to leach into solutions. In addition,
it is less gas permeable and interacts less with peritoneal dialysis solutions,
thereby permitting a wider range of solutions (including bicarbonates) to be
administered to peritoneal dialysis patients. Biofine(TM) foils may be disposed
of with less harm to the environment than foils made with PVC because they
require less material and, when burned, release only harmless carbon dioxide and
water, and no Dioxine or Furane, as do foils made with PVC. Fresenius AG's
management believes this will make its products more attractive, especially in
Europe, where the disposal of PVC materials is heavily regulated.
European regulatory filings have been made in various countries for
Biofine(TM). See "--Regulatory and Legal Matters -- Product
Regulation -- Non-U.S." Following the conclusion of clinical trials and
regulatory approval for Biofine(TM) materials, Fresenius Worldwide Dialysis
expects to introduce its new peritoneal dialysis products featuring the
Stay-Safe(TM) system in Europe. Thereafter, Fresenius Worldwide Dialysis expects
to seek regulatory approval for these products in the U.S. Such approval is
anticipated to take at least five years to obtain.
MARKETING, DISTRIBUTION AND SERVICE
Most of Fresenius Worldwide Dialysis' products are sold to hospitals,
clinics and specialized treatment centers. Fresenius Worldwide Dialysis' sales
and marketing operations are coordinated through separate strategic marketing
centers for hemodialysis products and for peritoneal dialysis products, each
based in Oberursel, Germany, which formulate global marketing strategies
emphasizing therapy and product development. Regional marketing centers for
hemodialysis products and for peritoneal dialysis products develop and implement
regional marketing strategies and provide product management, training and
support for local marketing offices. In addition to direct customer calls and
advertising, Fresenius Worldwide Dialysis also sponsors medical conferences and
scientific symposia as a means for disseminating product information.
With its comprehensive product line and years of experience in dialysis,
Fresenius Worldwide Dialysis believes that it has been able to establish and
maintain very close relationships with its clinic customer base on a global
basis. Close interaction among Fresenius Worldwide Dialysis' sales force and
research and development personnel enables concepts and ideas that develop in
the field to be considered and integrated into product development.
In Fresenius Worldwide Dialysis' basic distribution system, products are
shipped from factories to central warehouses which are frequently located near
the factories. From this central warehouse, peritoneal dialysis products are
distributed to regional warehouses, from which the product is distributed to the
patient at home, and hemodialysis products are shipped directly to dialysis
centers and other customers. All products are sold by local sales forces,
independent distributors, dealers and sales agents.
Fresenius Worldwide Dialysis offers customer service, training and
education in the applicable local language, and technical support such as field
service, repair shops, maintenance, and warranty regulation for
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each country in which it sells dialysis products. In its main training and
education center at the Schweinfurt Facility, Fresenius Worldwide Dialysis
performed 62 training sessions for 300 technicians from 50 countries around the
world in 1995. Additionally, in 1995 and 1996, Fresenius Worldwide Dialysis
organized regional service centers which are now responsible for day-to-day
international service support. The Schweinfurt Facility also provides training
and acts as a backup for the regional service centers. Fresenius Worldwide
Dialysis management believes its service organizations have a reputation for
reliability and high quality service. Fresenius Worldwide Dialysis employs more
than 250 employees worldwide, including approximately 150 customer service
engineers, to serve its installed base of hemodialysis machines. In addition,
Fresenius Worldwide Dialysis provides technical training to employees of
hospitals and other health care providers in the use of Fresenius Worldwide
Dialysis products.
MANUFACTURING OPERATIONS AND SOURCES OF SUPPLY
Fresenius Worldwide Dialysis operates a state-of-the-art production
facility for disposable products at the St. Wendel Facility. More than 71% of
all dialyzers containing the Fresenius Polysulfone(R) membrane produced
worldwide were manufactured at the St. Wendel Facility in 1995 (67% in the
three-month period ended March 31, 1996). Fresenius Worldwide Dialysis has
invested significantly in developing proprietary processes, technologies and
manufacturing equipment which Fresenius Worldwide Dialysis believes provide a
competitive advantage in the manufacture of its products. Fresenius Medical Care
intends to use the St. Wendel Facility as a center of competence for development
and manufacturing and to implement similar technologies at its other facilities.
See "THE REORGANIZATION -- Continuing Arrangements between Fresenius Medical
Care and Fresenius AG -- Real Property Lease." In addition to the St. Wendel
Facility, Fresenius Worldwide Dialysis' dialyzers and polysulfone membranes are
produced in Ogden, Utah, and by joint ventures in Belarus and Japan. Cuprophane
dialyzers are manufactured at a plant in France.
Fresenius Worldwide Dialysis develops and manufactures hemodialysis
machines in the Schweinfurt Facility, and also in Walnut Creek, California, and
maintains facilities in Argentina, Egypt, France, Italy, The Netherlands, China,
Brazil and Russia for the testing and calibration of dialysis machines
manufactured or assembled elsewhere. Fresenius Worldwide Dialysis manufactures
peritoneal dialysis cyclers in Germany (Schweinfurt), the U.S. (Walnut Creek,
California) and France. Peritoneal dialysis solutions are manufactured in
Germany (St. Wendel), the U.S. (Ogden, Utah), Brazil, Spain, and England.
Hemodialysis bloodlines and peritoneal dialysis tubing sets are manufactured in
Germany (St. Wendel), Belarus, France and Italy. Fresenius Worldwide Dialysis
also manufactures hemodialysis concentrates and solutions in Germany, the U.S.,
Austria, Australia, France and Great Britain and hemodialysis concentrates and
peritoneal dialysis solutions at a facility in Brazil. The facilities in
Austria, Brazil, France (Sevres), and Great Britain are predominantly used by
Fresenius AG's Pharmaceuticals Division. Following the Reorganization, the
facilities predominately used by Fresenius AG's Pharmaceuticals Division will
remain with Fresenius AG, and Fresenius Medical Care will enter into the Supply
Agreements with Fresenius AG for the products used by Fresenius Worldwide
Dialysis that are produced at these facilities. For a description of the terms
of these supply contracts, see "THE REORGANIZATION -- Continuing Arrangements
between Fresenius Medical Care and Fresenius AG -- Supply Agreements."
Raw materials essential to Fresenius Worldwide Dialysis' business are
purchased worldwide from numerous suppliers and no serious shortages or delays
in obtaining raw materials have been encountered. To assure continuous high
quality, Fresenius Worldwide Dialysis has single supplier agreements for many of
its polymers, including polysulfone, polyvinylpyrrolidone, and polyurethane for
dialyzer production and for polypropylene for polyolefin resins used to produce
Biofine(TM). Wherever single supplier agreements exist, an alternative supplier
is available whose material has already been tested in manufacturing processes
and, Fresenius Medical Care management believes, can be introduced without major
delays. However, use of raw materials obtained from alternative suppliers could
cause costs to rise due to necessary adjustments in the production process.
Each step in the manufacture of Fresenius Worldwide Dialysis' products,
from the initial processing of raw materials through the final packaging of the
completed product, is carried out under controlled quality assurance procedures
required by law and under GMP, as well as under comprehensive quality management
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systems, such as the internationally recognized ISO 9000-9004 standards, which
are mandated by regulatory authorities in the countries in which Fresenius
Worldwide Dialysis operates. In addition, the St. Wendel Facility periodically
undergoes FDA inspection. The St. Wendel Facility was last inspected in December
1992 and no adverse findings were made.
Incoming raw materials for solutions are subjected to infrared, ultraviolet
and physical and chemical analyses to assure quality and consistency. During the
production cycle, sampling and testing are performed in accordance with
established quality assurance procedures. Pressure, temperature and time for
various processes are monitored to assure consistency of semifinished goods.
Environmental conditions are monitored to assure that particulate and
bacteriological levels do not exceed specified maximums. Sampling and testing
are done in accordance with physical and chemical procedures required to insure
sterility, safety and potency of finished products. Fresenius Worldwide Dialysis
maintains continuing quality control and GMP education and training programs for
its employees. See "-- Regulatory and Legal Matters."
INTERNATIONAL DEVELOPMENT
In 1971, Fresenius AG founded its first non-German subsidiaries in France
and Switzerland, and, between 1976 and 1995, subsidiaries were established or
acquired in Austria, Australia, Spain, Brazil, the Netherlands, Great Britain,
Hungary, Russia, Italy, the Czech Republic, Belgium, Portugal, Japan, Argentina
and Colombia. In 1985, Fresenius AG commenced distribution of hemodialysis
machines and other hemodialysis products in the U.S. through a wholly owned
subsidiary and, in 1987, Fresenius AG acquired effective control of Fresenius
USA. See "-- Business of Fresenius USA -- History." In 1987, Fresenius AG also
acquired Laboratories SMAD, a French company based in L'Arbresle (near Lyon).
In 1989, Fresenius AG formed a joint venture in Borisov, Belarus with the
Borisov Collective Combine for the production of disposable dialysis products
for global sale. Fresenius AG holds a 21.7% stake in this venture. In 1990,
Fresenius AG entered into a 50/50 joint venture with Kawasumi of Japan to
produce (in Kyushyu, Japan) and sell polysulfone dialyzers for the Japanese
market.
In 1994, Fresenius AG formed Ningbo Fresenius Medical Equipment Co. Ltd., a
joint venture in China, in which Fresenius AG holds an 80% share. Plans for this
venture, while still under development, include assembly of filters and
manufacture of bloodlines. In the same year, Fresenius AG founded the joint
venture Fresenius Tunisie S.A., in which Fresenius AG has a 51% beneficial
ownership interest, which will initially manufacture hemodialysis and irrigation
solutions in Tunisia. Fresenius AG also acquired a 39% share of Medical Dialyzer
Corporation Ltd. in Jeddah, Saudi Arabia, thereby extending Fresenius AG's
distribution capabilities in the Middle East.
The subsidiaries and joint venture interests described above are all
included in Fresenius Worldwide Dialysis. Certain of the joint venture
agreements referred to above require the consent of the other party for a
transfer of the joint venture interest to Fresenius Medical Care. Consents with
respect to the joint ventures in Japan, Belarus, China, Saudi Arabia and Tunisia
have been obtained. Certain of Fresenius Worldwide Dialysis' joint venture
agreements include non-competition clauses applicable during the term of, and
for a specific period after termination of, the joint venture and provide the
parties with first refusal rights in connection with the transfer of interests
in the venture.
RESEARCH AND DEVELOPMENT
Current research and development activities of Fresenius Worldwide Dialysis
are strongly focused on the development of new products, technologies and
treatment concepts to optimize the quality of treatment for dialysis patients,
and on process technology for the manufacture of Fresenius Worldwide Dialysis
products. Research and development is conducted through the Innovation &
Technology Group which is divided into hemodialysis and peritoneal dialysis
segments. These units work closely with the respective marketing and medical
departments in each dialysis segment.
In addition to the Stay-Safe(TM) system described under "-- Fresenius
Worldwide Dialysis Products -- Peritoneal Dialysis Products -- New Peritoneal
Dialysis Products," recent innovations include the
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PD-NIGHT(TM) cycler, which has been developed for overnight cycling peritoneal
dialysis treatments. Clinical trials have commenced for various peritoneal
dialysis solutions with new compounds. Additional developments include various
hemodialysis machine modules which will allow the continuous measurement and
control of dialysis dosage during treatment.
Fresenius Worldwide Dialysis employs approximately 130 persons in research
and development (including medical doctors, engineers, technicians and research
scientists), and conducts its activities at three locations in Germany (at the
St. Wendel Facility, the Schweinfurt Facility and the Bad Homburg facility), and
in Walnut Creek, California. Fresenius Worldwide Dialysis' research and
development expenses were $17.3 million, $16.9 million and $15.9 million in
1995, 1994 and 1993, respectively and $3.6 million and $3.3 million for the
three-month periods ended March 31, 1996 and 1995, respectively.
Fresenius Worldwide Dialysis seeks to maintain its profile in scientific
circles through articles in scientific and medical journals, participation in
academic symposia, relationships with scientists and physicians in relevant
fields and the organization of scientific meetings and workshops. Fresenius
Worldwide Dialysis also establishes scientific advisory boards and works with
medical and other consultants.
PATENTS, TRADEMARKS AND LICENSES
As the owner of or licensee under patents and trademarks throughout the
world, Fresenius AG holds rights under more than 600 patents and patent
applications relating to dialysis technology in major markets. Patented
technologies of Fresenius AG that relate to dialyzers include Fresenius
Worldwide Dialysis' polysulfone hollow fiber, Fresenius Worldwide Dialysis'
in-line sterilization method, and sterile closures for in-line sterilized
medical devices. For dialysis machines, Fresenius AG patents include the process
for volumetric mixing of concentrate with water, the location for a filter
device for sterile filtering dialysate in the dialysis machine circuit, and
conductivity sensor devices and a mathematical algorithm for using such devices.
Pending patents include the safety concept for the control of the
ultrafiltration rate in a dialysis machine used for high flux dialysis and the
connector system for the Fresenius Worldwide Dialysis' biBag(TM) bicarbonate
concentrate powder container.
For peritoneal dialysis, Fresenius AG holds patents on the Safe-Lock(R)
system, the double bag for bicarbonate peritoneal dialysis solution, and its
orientation of the two compartments. Pending patents include non-PVC film
(Biofine(TM)) for general use in intravenous and peritoneal dialysis
applications and a special film for a peelable, non-PVC double bag for
peritoneal dialysis solutions. In connection with the Reorganization, Fresenius
Medical Care and its subsidiaries will acquire or license all intellectual
property rights of Fresenius AG relating to Fresenius Worldwide Dialysis. See
"THE REORGANIZATION -- Continuing Arrangements between Fresenius Medical Care
and Fresenius AG -- Trademarks" and "-- Other Intellectual Property" for a
summary of the terms of the licensing arrangements.
The patent family covering Fresenius Polysulfone(R) high flux membranes has
been subject to opposition by competitors in Europe and Japan. While Fresenius
AG believes that these patents are valid in the relevant jurisdictions, a
successful opposition could have a material adverse effect on Fresenius Medical
Care.
Fresenius AG believes that the success of Fresenius Worldwide Dialysis will
depend, in large part, on its technology. While Fresenius Worldwide Dialysis, as
a standard practice, obtains such legal protections it believes are appropriate
for its intellectual property, such intellectual property is subject to
infringement or invalidation claims. In addition, technological developments in
ESRD therapy could reduce the value of Fresenius Worldwide Dialysis' existing
intellectual property, which reduction could be rapid and unanticipated.
COMPETITION
The markets in which Fresenius Worldwide Dialysis sells its products are
highly competitive. Among Fresenius Worldwide Dialysis' competitors in the sale
of hemodialysis and peritoneal dialysis products are CGH Medical (an affiliate
of Gambro AB), Baxter, Althin CD Medical, Inc., NMC, Asahi Medical Co., Ltd.,
Bellco S.p.A. (a subsidiary of Sorin Biomedica S.p.A.), Bieffe Medital S.p.A.,
Braun Melsungen AG,
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Nissho Corporation (including Nissho Nipro Corporation Ltd.), Nikkiso Co., Ltd.,
Terumo Medical Corporation and Toray Medical Co., Ltd. Some of Fresenius
Worldwide Dialysis' competitors possess greater financial, marketing and
research and development resources than Fresenius Worldwide Dialysis.
Fresenius Worldwide Dialysis believes that in the dialysis product market,
companies compete primarily on the basis of product performance,
cost-effectiveness, reliability, assurance of supply and service and continued
technological innovation. Fresenius Worldwide Dialysis believes its products are
highly competitive in all of these areas.
EMPLOYEES
At March 31, 1996, Fresenius Worldwide Dialysis employed approximately
4,360 people worldwide, of whom approximately 1,900 were employed in Germany,
approximately 1,660 were employed in the U.S. and approximately 800 were
employed in other countries. Fresenius AG is a member of the Chemical Industry
Employers Association in Germany and is bound by an industry-wide employment
agreement negotiated with union representatives in that industry. Fresenius AG
is also a party to additional labor agreements negotiated with works councils at
individual facilities relating to those facilities. Management believes that
Fresenius Worldwide Dialysis' relations with its employees are good.
PROPERTIES
The table below describes Fresenius Worldwide Dialysis' principal
facilities as of the date hereof, other than those of Fresenius USA. The land
and buildings comprising Fresenius Worldwide Dialysis' principal facilities in
Germany will not be acquired by Fresenius Medical Care, but, rather, will be
leased by Fresenius AG or a Fresenius AG affiliate to Fresenius Medical Care or
a Fresenius Medical Care affiliate. For a description of the terms of this lease
see "THE REORGANIZATION -- Continuing Arrangements between Fresenius Medical
Care and Fresenius AG." For information relating to the principal facilities of
Fresenius USA, see "-- Business of Fresenius USA -- Properties."
<TABLE>
<CAPTION>
CURRENTLY
OWNED
FLOOR AREA OR LEASED
(APPROXIMATE BY FRESENIUS
LOCATION SQUARE METERS) AG USE
- ------------------------------ -------------- -------------- -------------------------------
<S> <C> <C> <C>
Oberursel, Germany............ 6,629 owned Corporate headquarters and
4,193 99-year lease administration.
St. Wendel, Germany........... 100,543 owned Manufacture of polysulfone
membranes and dialyzers, blood
lines, and peritoneal dialysis
solutions; research and
development.
Schweinfurt, Germany.......... 32,496 owned Manufacture of hemodialysis
machines and peritoneal
dialysis cyclers; research and
development.
L'Arbresle, France............ 57,290 owned Manufacture of cuprophane
dialyzers and special filters,
dry hemodialysis concentrates
and bloodlines.
Saumur, France................ 10,000 owned Assembly of peritoneal dialysis
cyclers and manufacturing of
components.
</TABLE>
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<PAGE> 108
<TABLE>
<CAPTION>
CURRENTLY
OWNED
FLOOR AREA OR LEASED
(APPROXIMATE BY FRESENIUS
LOCATION SQUARE METERS) AG USE
- ------------------------------ -------------- -------------- -------------------------------
<S> <C> <C> <C>
Kyushyu, Japan................ 24,083 owned Manufacture of polysulfone
(Owned by a joint venture membranes and dialyzers,
50% owned by Fresenius AG) dialysis solutions, dialysis
machine components and assembly
of dialysis machines.
Palazzo Pignano, Italy........ 66,550 owned Manufacture of bloodlines and
tubing.
</TABLE>
LITIGATION
In the ordinary course of business, Fresenius Worldwide Dialysis asserts
claims against others and defends claims asserted by others against it.
Fresenius Worldwide Dialysis believes that its obligations, if any, with respect
to all of such claims will not have a material adverse effect on the financial
position or results of operations of Fresenius Worldwide Dialysis.
Fresenius Worldwide Dialysis' insurance is currently provided through the
insurance program of Fresenius AG. The insurance coverage is maintained with
third-party carriers and selected as part of a comprehensive risk management
process, involving risk analysis and risk minimization. Fresenius Worldwide
Dialysis maintains insurance which Fresenius AG management believes is adequate
for the risks involved. In addition to local policies which meet local needs and
characteristics, international policies cover those risks which could threaten
the existence of Fresenius Worldwide Dialysis. Special focus in this context is
directed at coverage which relates to product liability, property damage,
pollution and business income.
BUSINESS OF FRESENIUS USA
FRESENIUS USA
Fresenius USA manufactures and distributes equipment and disposable
products for the treatment of kidney failure by hemodialysis and by peritoneal
dialysis. Fresenius USA offers a full line of hemodialysis machines, peritoneal
dialysis cyclers and disposable products. Fresenius USA has exclusive North
American distribution rights for Fresenius Worldwide Dialysis' products.
On February 24, 1993, Fresenius USA acquired the renal dialysis business
(other than the Calcijex(R) product line and certain other excluded assets) of
Abbott in the U.S., Australia and New Zealand (the "Abbott Acquisition"). Among
other things, the Abbott Acquisition gave Fresenius USA rights in and access to
Abbott's patents, trademarks, know-how, manufacturing technology and other
intangible rights and property used by Abbott in the renal dialysis business.
Abbott also agreed to manufacture certain peritoneal dialysis products for
Fresenius USA for five years, after which time Fresenius USA intends to
manufacture these products itself. With the Abbott Acquisition, Fresenius USA
obtained rights to peritoneal dialysis products utilizing connection systems
that are compatible with those of Baxter, its primary competitor, thereby
enhancing the breadth and marketability of Fresenius USA's peritoneal dialysis
product line and giving Fresenius USA a larger base of potential peritoneal
dialysis patients. As a result of the Abbott Acquisition, Fresenius USA became
the second largest producer and supplier of peritoneal dialysis products in the
U.S.
In 1995, Fresenius USA completed the expansion of its plant in Ogden, Utah
(modeled on the St. Wendel Facility) and commenced production of polysulfone
dialyzers (previously purchased by Fresenius USA exclusively from Fresenius AG).
Fresenius USA intends to utilize this plant's expanded capacity further to
include the production of certain additional peritoneal dialysis products
(currently manufactured for Fresenius USA by Abbott) and the plastic film used
in the manufacture of Fresenius USA's peritoneal
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dialysis solution plastic bags (currently imported from The Netherlands). This
expansion reflects the increasing globalization of Fresenius Medical Care's
manufacturing activities. See "-- Strategy." The management of Fresenius USA
believes that this expansion also will help to integrate Fresenius USA's
manufacturing processes vertically and thereby enable Fresenius USA to become
less dependent on other manufacturers, and, in the case of the polysulfone
dialyzers and the plastic film, to reduce significantly the pricing, allocation
and currency risks to which Fresenius USA is currently subject.
HISTORY
Fresenius USA comprises the combined operations of two businesses, which
have been owned or effectively controlled by Fresenius AG since October 1987,
and the assets of which were formally combined on December 31, 1991. One was
Fresenius USA itself which, prior to December 31, 1991, operated under the name
Delmed, Inc. ("Delmed") and manufactured peritoneal dialysis solutions and
systems. The other was Fresenius U.S.A., Inc., a California corporation ("Old
FUSA") and a wholly owned subsidiary of Fresenius AG, which engaged in the
manufacture and sale of hemodialysis machines and related equipment and
supplies.
In October 1987, Fresenius AG acquired effective control of Delmed by
purchasing Delmed's Series F Series Preferred Stock and certain other securities
of Delmed, such that Fresenius AG then beneficially owned approximately 49% of
Delmed's outstanding common stock. Following this acquisition, Delmed continued
to operate independently of Old FUSA, with NMC as its exclusive distributor. The
exclusive distribution arrangement between Delmed and NMC expired in March 1990
and, in April 1990, Old FUSA began to act as the exclusive distributor of
Delmed's peritoneal dialysis products. During 1990 and 1991, Old FUSA made
significant expenditures to establish a sales and distribution network for
Delmed's peritoneal dialysis products. On December 30, 1991, Delmed changed its
name to "Fresenius USA, Inc." and effected a one-for-ten reverse split of its
common stock. Effective December 31, 1991, Fresenius USA acquired substantially
all of Old FUSA's assets, which included the exclusive North American
distribution rights for certain Fresenius AG products and the distribution
network for Delmed's peritoneal dialysis products established by Old FUSA,
subject to substantially all of Old FUSA's liabilities. These transactions
resulted in an increase in Fresenius AG's beneficial ownership of Fresenius USA
Common Stock to approximately 80%. A public offering by Fresenius USA of
Fresenius USA Common Stock in 1994 reduced Fresenius AG's beneficial ownership
to approximately 71%.
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FRESENIUS USA PRODUCTS
OVERVIEW
Fresenius USA's products include machines and related disposables for
hemodialysis and peritoneal dialysis treatment of ESRD. Fresenius USA's product
catalogs contain over 2,500 different items. The following table shows, for each
of the past three years and the three month period ended March 31, 1996, total
revenues related to hemodialysis products and peritoneal dialysis products, as
well as total revenues related to all other products:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------------- -------------------
1993 1994 1995 1996
----------------- ----------------- ----------------- -------------------
TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hemodialysis........... $134,117 65% $170,579 67% $206,875 68% $ 55,706 69%
Peritoneal
Dialysis(1).......... 65,073 32 77,331 30 89,561 29 23,038 28
Other Products......... 6,770 3 6,434 3 8,528 3 2,318 3
-------- --- -------- --- -------- --- -------- ---
Total........ $205,960 100% $254,344 100% $304,964 100% $ 81,062 100%
======== === ======== === ======== === ======== ===
</TABLE>
- ---------------
(1) On February 24, 1993, Fresenius USA consummated the Abbott Acquisition,
which is included in the above figures only from and after this date. If the
Abbott Acquisition had occurred on January 1, 1993, Fresenius USA's pro
forma total revenues from peritoneal dialysis in 1993 would have been $69.8
million.
HEMODIALYSIS PRODUCTS
Fresenius USA offers a full line of products for hemodialysis, consisting
of: four different hemodialysis machines; high, medium and low flux dialyzers;
bloodlines; dialysis solutions and concentrates; needles, connectors and other
similar supplies; and machines and supplies for the reuse of dialyzers.
Fresenius USA assembles, tests and calibrates hemodialysis machines and
sells these machines in the U.S., Canada and Mexico. Components for these
machines are purchased from Fresenius AG and other vendors. Hemodialysis
machines sold by Fresenius USA employ the same modular design as the Fresenius
Worldwide Dialysis dialysis machines described under "-- Business of Fresenius
Worldwide Dialysis -- Fresenius Worldwide Dialysis Products -- Hemodialysis
Products," but are tailored to local markets. Fresenius USA has extended the
Fresenius Series 2008 hemodialysis machines for the North American market
through development of the model 2008H, which combines the reliable hydraulic
system of the Series 2008 with electronic systems developed by Fresenius USA.
Fresenius USA's hemodialysis machines are capable of operating with dialyzers
manufactured by all manufacturers, and are compatible with a wide variety of
bloodlines and dialysis solutions.
All dialyzers produced by Fresenius USA use hollow fiber polysulfone
membranes. Fresenius USA's polysulfone dialyzer line consists of a complete
range of permeability (high, medium and low flux) to allow tailoring of the
dialysis therapy to the individual patient. Until 1995, all polysulfone
dialyzers sold by Fresenius USA were manufactured by Fresenius AG in Germany.
Fresenius USA commenced manufacturing of certain polysulfone dialyzers at its
plant in Ogden, Utah in August, 1995, but plans to continue to import certain
dialyzers manufactured in Germany.
Fresenius USA distributes disposable bloodlines which carry a hemodialysis
patient's blood from the patient to the hemodialysis machine and dialyzer and
then back to the patient. These bloodlines are manufactured abroad by a third
party. Fresenius USA produces both liquid and dry dialysate concentrate.
Fresenius USA also sells dialyzer reuse and rinse machines manufactured by
Fresenius USA for Seratronics, Inc. ("Seratronics"). These machines cleanse
dialyzers after dialysis, permitting multiple usage for the same patient before
disposal of the dialyzer. The Seratronics machines facilitate the reuse of
disposable
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dialyzers and, therefore, permit hemodialysis providers to reduce operating
costs. The reuse business of Seratronics is managed by Fresenius USA.
PERITONEAL DIALYSIS PRODUCTS
Fresenius USA offers a full product line for peritoneal dialysis patients.
Fresenius USA's peritoneal dialysis products include four different peritoneal
dialysis cycling machines for CCPD and more than 90 disposable products for both
CAPD and CCPD, such as tubing, sterile solutions and sterile kits to prepare
patients for dialysis.
Fresenius USA believes that its Delflex(R) solution products with
Safe-Lock(R) connectors offer significant advantages for CAPD and CCPD home
patients, including ease of use and greater protection against touch
contamination than other peritoneal dialysis systems. The Inpersol(R) line of
peritoneal dialysis products acquired from Abbott is interchangeable and
competitive with the peritoneal dialysis products offered by Baxter, Fresenius
USA's major competitor in this field. Therefore, the addition of the Inpersol(R)
product line to Fresenius USA's other products enables Fresenius USA to expand
the potential customer base for which it competes, because Fresenius USA now
supplies peritoneal dialysis products usable by all peritoneal dialysis patients
in the U.S.
In March 1996, Fresenius USA received FDA approval of its new Premier twin
bag CAPD system. This system comprises a single product, the Delflex(R) solution
bag and the tubing and drainage set necessary for CAPD exchanges. The Premier
bag system also utilizes Safe-Lock(R) connectors and, because fewer connections
are required, may help to reduce patient complications associated with
peritoneal dialysis therapy. The Premier bag system also includes new fill
volumes which offer the physician the ability to prescribe larger dosages
without requiring the patient to do more exchanges during the day. Fresenius USA
expects to begin its market launch of the Premier twin bag system during July
1996.
Fresenius USA introduced the first CCPD machine in 1980. Fresenius USA's
peritoneal dialysis cycling equipment incorporates microprocessor technology
that can be easily programmed by the patient, hospital or clinic staff to
perform specific, prescribed therapy for a given patient. Since all components
are monitored and programmable, these machines allow the physician to prescribe
any of a number of current therapy procedures, including CCPD, intermittent
peritoneal dialysis and tidal peritoneal dialysis.
In 1994, Fresenius USA introduced a new variant on CCPD therapy called
PD-Plus(R), which is now also being offered by Fresenius Worldwide Dialysis in
Europe. Normally, a CCPD patient undergoes five or six two-liter solution
exchanges at night, and carries no solution during the day. PD-Plus(R) therapy
provides a more tailored therapy using a simpler nighttime cycler, and, where
necessary, one exchange during the day. Compared with typical CCPD therapy,
Fresenius USA believes that PD-Plus(R) therapy will be less costly and easier to
administer. In addition, compared with CAPD therapy, Fresenius USA believes that
PD-Plus(R) therapy will improve toxin removal by more than 40% and therefore
will be attractive to patients and physicians alike. By increasing the
effectiveness of peritoneal dialysis treatments, at an acceptable increase in
cost over CAPD therapy, PD-Plus(R) therapy may also effectively prolong the time
period during which a patient will be able to remain on peritoneal dialysis
before requiring hemodialysis. PD-Plus(R) therapy, as developed by Fresenius
USA, can only be performed using Fresenius' Freedom Cycler and special tubing
using Safe-Lock(R) connectors.
MARKETING, DISTRIBUTION AND SERVICE
Fresenius USA maintains a national direct sales force of trained
salespersons, organized on a regional basis and engaged in the sale of both
hemodialysis and peritoneal dialysis products. Each member of Fresenius USA's
sales force has extensive sales experience. This sales force engages in direct
promotional efforts, including visits to physicians, clinical specialists,
hospitals, clinics and dialysis centers, and represents Fresenius USA at
industry trade shows. Fresenius USA also maintains a clinical support group
primarily composed of registered nurses to train and assist its customers and
facilitate the introduction of new products. Technical support is also available
to customers on a 24-hour basis through a toll-free telephone number.
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Fresenius USA's service department provides technical support, spare parts and
field service on a nationwide basis.
All of Fresenius USA's machines are shipped from its facilities in Walnut
Creek, California. Fresenius USA's dialyzers and other hemodialysis disposable
products are shipped to regional distribution centers from Fresenius USA's
facilities in Ogden, Utah and, until March 31, 1996, from Maumee, Ohio. At the
end of the first quarter of 1996, Fresenius USA closed the Maumee facility and
relocated its operations to Lewisberry, Pennsylvania. Fresenius USA's disposable
peritoneal dialysis products are shipped from its facility in Ogden, Utah or
from Abbott facilities to regional distribution centers, and, from these
regional distribution centers, the products are delivered directly to the
customer, in most cases the patient, by Fresenius USA's drivers. Fresenius USA's
drivers store deliveries in the location desired by the patient, rotate
disposable products so that the oldest products are used first, and generally
provide continuity of contact between Fresenius USA and patients who use
Fresenius USA's peritoneal dialysis products.
At the time of the Abbott Acquisition, Abbott had agreements with numerous
hospitals pursuant to which these hospitals could order the full line of Abbott
products, including renal dialysis products, from Abbott. Abbott has agreed to
act as Fresenius USA's distributor for the continued sale of Inpersol(R)
products to hospitals until 1998. Following the Abbott Acquisition, Fresenius
USA consolidated the distribution outlets used by Abbott with Fresenius USA's
distribution outlets, eliminating or consolidating certain locations and
introducing Fresenius USA's products into many of the public warehouses
previously used by Abbott.
Fresenius USA's products are distributed in Canada by a wholly owned
Canadian subsidiary. Fresenius USA acquired the remaining interest in this
subsidiary held by an unaffiliated third party during 1993 for consideration of
a convertible note which was subsequently converted to 434,000 shares of
Fresenius USA Common Stock. Fresenius USA currently distributes its products in
Mexico via independent distributors. Inpersol(R) products are not distributed by
Fresenius USA in Canada or Mexico, where a subsidiary of Abbott retains
exclusive rights to these products.
MANUFACTURING OPERATIONS AND SOURCES OF SUPPLY
Fresenius USA assembles equipment, including hemodialysis machines,
dialyzer reuse devices and peritoneal dialysis cyclers, at its facility in
Walnut Creek, California. Components of Fresenius USA's hemodialysis machines
are supplied by Fresenius AG as well as other suppliers, and Fresenius USA has
experienced no difficulties in obtaining sufficient quantities of such
components. In connection with the sale and installation of the machines,
Fresenius USA's technicians and engineers calibrate the machines and add
computer software for record keeping and monitoring.
Fresenius USA owns a 344,000 square-foot facility in Ogden, Utah for the
manufacture of disposable products, including polysulfone dialyzers, peritoneal
dialysis solutions, other sterile solutions, plastic tubing and medical devices.
This facility uses automated equipment for the production of polysulfone
dialyzers and sterile solutions in flexible plastic containers. The design of
Fresenius USA's Ogden facility is based on the design of the St. Wendel
Facility, and was constructed in consultation with Fresenius AG. While Fresenius
USA obtains the film used in the manufacture of its plastic bags from one
supplier located in The Netherlands, Fresenius USA believes that there are
readily available alternative sources of supply for which the FDA could grant
expedited approval. Fresenius USA also intends to manufacture its own plastic
film for peritoneal dialysis solution bags.
Prior to 1995, all polysulfone dialyzers sold by Fresenius USA were
manufactured by Fresenius AG in Germany. In April 1994, Fresenius AG granted
Fresenius USA an exclusive license in the U.S., Canada, Mexico and Puerto Rico
for the proprietary technology for the manufacture of polysulfone dialyzers and
agreed to provide required technical support and assistance in return for a 4.5%
royalty on sales of Fresenius USA-manufactured dialyzers for 10 years, beginning
January 1, 1996, at the conclusion of which Fresenius USA will have a paid-up
exclusive license in North America. Fresenius USA completed an expansion of its
Ogden facility for the manufacture of polysulfone dialyzers and commenced such
manufacturing in the second quarter of 1995. While Fresenius USA began
manufacturing dialyzers at that time, Fresenius USA has also
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continued to purchase dialyzers and polysulfone bundles from Fresenius AG.
Fresenius USA believes that it is the principal manufacturer of polysulfone
dialyzers in the U.S.
Over the next two years, Fresenius USA intends to transfer the production
of the products acquired from Abbott to Fresenius USA's facility in Ogden, Utah.
During this period, Fresenius USA has agreed to purchase products at
contractually-established prices, and Abbott has agreed to manufacture and sell
to Fresenius USA stated quantities of Inpersol(R) dialysis products. Fresenius
USA's license agreement with Abbott also provides Fresenius USA with access to
Abbott's manufacturing technology used in connection with Abbott's production of
peritoneal dialysis solution in plastic bags, related tubing assemblies and
other products used in the dialysis field (other than Abbott's Calcijex(R)
product line). Abbott will assist Fresenius USA in establishing Fresenius USA's
manufacturing capability for these products. Fresenius USA intends to use this
technology to develop the ability to manufacture several components that it now
purchases from third parties. In March 1996, Fresenius USA received FDA approval
to manufacture Abbott Inpersol(R) dialysis solutions with Safe-Lock(R)
connectors and twin-bag systems.
Each step in the manufacture of Fresenius USA's products, from the initial
processing of raw materials through the final packaging of the completed
product, is carried out under controlled quality assurance procedures and under
GMP mandated by the FDA. Incoming raw materials for solutions are subjected to
infrared, ultraviolet and physical and chemical analysis to assure quality and
consistency. During the production cycle, sampling and testing are done in
accordance with established quality assurance procedures. Pressure, temperature
and time for various processes are monitored to assure consistency of
semifinished goods. Environmental conditions are monitored to assure that
particulate and bacteriological levels do not exceed specified maximums.
Sampling and testing are done in accordance with physical and chemical
procedures required to insure sterility, safety and potency of finished
products. Fresenius USA maintains continuing quality control and GMP education
and training programs for its employees.
In 1992, Fresenius USA began producing liquid dialysate concentrate at a
facility in Maumee, Ohio. Fresenius USA moved this operation to its facility in
Lewisberry, Pennsylvania at the end of the first quarter of 1996. On March 26,
1996, Fresenius USA entered into a non-binding letter of intent with an
unaffiliated third party to sell its assets comprising the concentrate
production facility in Lewisberry, Pennsylvania. The letter of intent provides
that any obligation of Fresenius USA to sell the assets is contingent upon
consummation of the Reorganization.
Fresenius USA obtains its bloodlines under an agreement with Medisystems
Corporation ("MDS"), whose principal source of bloodlines is a single
FDA-approved plant located in Thailand. The agreement has an eight-year term
ending in September 1999 and is automatically extended thereafter for successive
three-year terms unless one-year's notice of termination is given prior to the
expiration of the term or any extension thereof. Fresenius USA is required to
make minimum annual purchase commitments (currently approximately 11.9 million
bloodline sets) which increase by a minimum of 8% per year. The agreement
includes guaranteed price provisions, subject to permitted increases reflecting
cost increases beyond the supplier's control. In March 1996, Fresenius USA and
MDS released each other from the exclusivity provisions of the supply agreement.
Such release was effective immediately, with exclusivity to be reinstated if the
Reorganization is not consummated, except that MDS will continue to have the
right to sell bloodlines to customers who became such prior to the termination
or abandonment of the Reorganization.
RESEARCH AND DEVELOPMENT
Fresenius USA's product development staff works closely with Fresenius AG's
research and development group to coordinate the development of new products and
product modifications for the U.S. market. In addition, Fresenius USA's research
and development staff coordinates its efforts with its sales force on an ongoing
basis. Fresenius USA relies primarily on the research and development efforts of
Fresenius AG, negotiating distribution arrangements for new products from
Fresenius AG when Fresenius AG and Fresenius USA believe that there is market
potential for these products in the U.S. and when the products fit Fresenius
USA's business strategy.
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During 1995, 1994 and 1993 and the three-month periods ended March 31, 1996
and 1995, Fresenius USA spent approximately $2.3 million, $1.8 million, $1.5
million, $600,000 and $500,000, respectively, on research and development
activities. Fresenius USA believes that, in the absence of its access to the
research and development efforts of Fresenius AG, Fresenius USA would have had
to spend significantly more on research and development. Fresenius USA and
Fresenius AG from time to time negotiate the basis on which Fresenius USA will
have access to these efforts on an arm's-length basis including, in some cases,
payment of royalties by Fresenius USA to Fresenius AG.
Fresenius USA maintains a product development group comprised of engineers
and other technical personnel. This group has created the operational software
for much of the equipment marketed by Fresenius USA, and currently has under
development a variety of new products and improvements to existing products
including: new monitoring devices for hemodialysis machines, methods to prevent
recirculation during hemodialysis, software programs to monitor therapy
delivery, further development of both the Safe-Lock(R) and the Inpersol(R)
peritoneal dialysis product lines, new peritoneal dialysis solution
formulations, and more environmentally compatible disposables and production
procedures. It is also conducting research on improved treatment delivery and
treatment modalities. Recent developments include the Fresenius Data System
FDS08(TM) ("FDS08") computerized treatment monitoring and documentation system.
The FDS08 can automatically monitor and record machine and treatment information
from as many as 32 hemodialysis machines. The FDS08 is a PC-based system which
has found many applications for improving record keeping and increasing staff
efficiency. The FDS08 system has been used to pioneer new therapies such as
remote monitoring of patients during nightly home hemodialysis, which enables a
patient to be dialyzed at home while a staff caregiver monitors the machine
performance via a modem link. Additionally the FDS08 system can be linked to
Fresenius USA's new Hypercare(TM) Medical Records System. The Hypercare(TM)
Medical Records System is a fully-integrated medical records system which can
record and analyze trends in medical outcome factors in hemodialysis patients.
PATENTS, TRADEMARKS AND LICENSES
As a subsidiary of Fresenius AG, Fresenius USA uses the tradename
"Fresenius," which is material to its business, and additionally has obtained
rights to certain patents, trademarks, know-how and other intellectual property
owned by Fresenius AG. Fresenius USA negotiates access to Fresenius AG's
technology, proprietary processes and know-how on a case-by-case basis. See "THE
REORGANIZATION -- Continuing Arrangements between Fresenius Medical Care and
Fresenius AG." In addition to the Fresenius AG intellectual property, Fresenius
USA's intellectual property includes the Inpersol(R) trademark and rights to
certain manufacturing know-how Fresenius USA obtained from Abbott, and a paid-up
non-exclusive global sublicense from Baxter to certain CAPD and connector
technology.
COMPETITION
The markets in which Fresenius USA sells its products are highly
competitive. Among Fresenius USA's competitors in the sale of hemodialysis
products are Baxter, CGH Medical (an affiliate of Gambro AB), NMC, Minntech
Corporation (Renal Systems) and Althin CD Medical, Inc. The major competitor in
the peritoneal dialysis field is Baxter. Many of Fresenius USA's competitors
possess greater financial, marketing and research and development resources than
Fresenius USA.
Fresenius USA believes that companies in the dialysis product market
compete primarily on the basis of product performance, cost-effectiveness,
reliability, assurance of supply and service and continued technological
innovation. Fresenius USA believes its products are competitive in all of these
areas.
EMPLOYEES
At March 31, 1996, Fresenius USA employed approximately 1,660 people.
Management believes that Fresenius USA's relations with its employees are
generally good. During the third quarter of 1995, certain of Fresenius USA's
employees at the Maumee, Ohio facility voted in favor of being represented by
the International Longshoremen's Association. Subsequent to that election, for
business reasons unrelated to the
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election, Fresenius USA decided to close the Maumee, Ohio facility and transfer
its production of dialysate concentrate to a facility in Lewisberry,
Pennsylvania. Fresenius USA entered into a settlement agreement with union
representatives with respect to the effect of the closing on the 35 employees
(of approximately 50 employees at the facility) represented by the union. The
amount of the settlement was not material. None of Fresenius USA's employees at
any other location is represented by labor unions.
PROPERTIES
The following table describes Fresenius USA's principal manufacturing
facilities:
<TABLE>
<CAPTION>
FLOOR AREA
(APPROXIMATE OWNED
LOCATION SQUARE FEET) OR LEASED USE
- ------------------------------ ------------ -------------- ---------------------------------
<S> <C> <C> <C>
Walnut Creek, California...... 85,000 Leased Corporate headquarters;
warehousing; machine manufacture
and assembly; and customer
service.
Ogden, Utah................... 334,000 Owned Production of disposable
products.
Lewisberry, Pennsylvania...... 64,000 Leased Production and warehousing of
dialysate concentrate.
</TABLE>
The lease on the Fresenius USA's Walnut Creek, California facility was
scheduled to expire in June 1996. During 1995, Fresenius USA exercised its
option to extend this lease for six years, with a rent adjustment. The lease on
the Lewisberry, Pennsylvania facility expires in November, 2000. On March 26,
1996, Fresenius USA entered into a non-binding letter of intent with an
unaffiliated third party to sell its assets comprising the concentrate
production facility in Lewisberry, Pennsylvania. The letter of intent provides
that any obligation of Fresenius USA to sell the assets is contingent upon
consummation of the Reorganization. Fresenius USA owns one warehouse and also
leases 14 warehouses in various locations throughout the U.S. These warehouses
are used as regional distribution centers for Fresenius USA's peritoneal
dialysis products. All such warehouses are subject to leases with remaining
terms not exceeding four years. As a result of the Abbott Acquisition, Fresenius
USA has added distribution capacity at an additional 22 public warehouses,
substantially all of which were formerly used by Abbott.
Fresenius USA's Ogden, Utah facility was subject to a mortgage securing
Fresenius USA's obligation under the industrial revenue bond which financed the
development of this facility. Fresenius USA prepaid this obligation in full
during 1994 with a portion of the proceeds of a public offering of Fresenius USA
Common Stock.
MATERIAL CONTRACTS BETWEEN FRESENIUS AG AND FRESENIUS USA
Fresenius AG and Fresenius USA are parties to numerous contracts and
transactions with each other, both in the ordinary course of business and
otherwise. Fresenius Medical Care will acquire all of Fresenius AG's rights
under such contracts and transactions. The following summarizes such contracts
and transactions during the three years ended December 31, 1995.
TECHNOLOGY
Fresenius AG and Fresenius USA are parties to a technology license and
know-how agreement, dated April 22, 1994, pursuant to which Fresenius AG granted
Fresenius USA an exclusive North American license for the technology, processes
and know-how for the manufacture of polysulfone dialyzers, and Fresenius USA
agreed to pay Fresenius AG royalties of 4.5% on Fresenius USA's net sales of
dialyzers produced by it for a 10-year period beginning January 1, 1996.
Fresenius USA also has the contractual right to Fresenius AG's know-how relating
to certain peritoneal dialysis products incorporating the Safe-Lock(R)
technology in the U.S., Canada and Mexico.
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PRODUCTS
During 1995, 1994 and 1993 Fresenius USA purchased $90.6 million, $63.5
million and $52.4 million, respectively, of hemodialysis equipment and supplies
from Fresenius AG. Such products were purchased pursuant to a distribution
agreement entered into in 1991 and under which Fresenius AG has confirmed that
Fresenius USA acts as sole North American distributor for Fresenius AG products
for treatment of ESRD by hemodialysis. Prices charged under that agreement are
negotiated each year by the parties based on Fresenius AG's estimated costs and
desired profit margins, taking into account the competitive environment in the
U.S. market, and are not to exceed the average of the prices charged to
Fresenius AG's other affiliated distributors. By its terms, this distribution
agreement terminates on the earlier of December 31, 2011 or the date Fresenius
AG loses the power to elect 51% of the Fresenius USA Board. Fresenius AG will
assign this distribution agreement to Fresenius Medical Care or terminate this
agreement in connection with the Reorganization. In 1994, Fresenius USA and
Fresenius AG entered into a distribution agreement for certain of Fresenius AG's
intensive care and diagnostic products, including the Fresenius AS 104 Cell
Separator. Fresenius AG and Fresenius USA intend to terminate this relationship
in connection with the Reorganization. Also during 1995 and 1994, Fresenius USA
sold products to Fresenius AG and certain of its subsidiaries having aggregate
sales prices of approximately $2.5 million and $4 million, respectively.
FINANCIAL SUPPORT
Fresenius AG has provided substantial financial support to Fresenius USA.
Fresenius AG provided support for a letter of credit obtained in connection with
the Abbott Acquisition, currently provides credit support to assist Fresenius
USA in obtaining short-term lines of credit and participates in and assists with
Fresenius USA's foreign exchange contracts. Fresenius AG also participated in
letters of credit in connection with Fresenius USA's industrial revenue bonds
until these bonds were prepaid in 1994.
As compensation for these services, Fresenius USA paid Fresenius AG an
aggregate fee of $336,000, the final installment of which was paid in 1994. In
addition, in February 1993, as consideration for certain past comfort letters
given in support of certain short-term borrowings and Fresenius AG's commitment
to provide up to $40 million of credit support in connection with the Abbott
Acquisition, Fresenius USA issued Fresenius AG a warrant to purchase 1,700,000
shares of Fresenius USA Common Stock at an exercise price of $8.00 per share,
and granted Fresenius AG a sublicense with respect to Abbott peritoneal dialysis
products for Europe, Central and South America, Australia and New Zealand. In
April 1994, in exchange for its agreement to provide support for a $25 million
long-term line of credit for use in completing and equipping Fresenius USA's
dialyzer manufacturing facility in Ogden, Utah, Fresenius USA issued to
Fresenius AG a 10-year warrant for the purchase of 50,000 shares of Fresenius
USA Common Stock at an exercise price of $10.57 per share. If Fresenius USA had
actually utilized this line of credit, this warrant would have become
exercisable for an additional 1,012,500 shares of Fresenius USA Common Stock at
the same price per share. This line of credit is no longer available to
Fresenius USA.
In June 1996, Fresenius AG exercised warrants it acquired in connection
with the Abbott Acquisition to purchase 1,515,221 shares of Fresenius USA Common
Stock at $8.00 per share, for an aggregate purchase price of $12,121,768. The
proceeds were used by Fresenius USA to repurchase options to purchase Fresenius
USA Common Stock and shares of Fresenius USA Common Stock from certain employees
and executive officers of Fresenius USA, including Dr. Ben Lipps, President and
Chief Executive Officer of Fresenius USA, and will be used to purchase up to
450,000 options granted to him subject to approval of the Fresenius USA Plan
Amendment. See "FRESENIUS USA EXECUTIVE COMPENSATION -- Securities Repurchases."
ELECTION OF DIRECTORS
Until June 26, 1996, Fresenius AG was the beneficial owner of all 200,000
outstanding shares of the Fresenius USA Series F Preferred Stock. Under the
terms of the 1987 agreement under which such stock was purchased and the
Restated Articles of Organization and By-laws of Fresenius USA, holders of the
Fresenius USA Series F Preferred Stock had certain special rights, including the
right to elect a majority of
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the Fresenius USA Board and the right reasonably to object to any nominee for
director to be elected by the holders of Fresenius USA Common Stock. Pursuant to
the rights granted to the holders of the Fresenius USA Series F Preferred Stock,
a majority of the directors of Fresenius USA have, since 1989, been elected
solely by Fresenius AG. Fresenius AG converted the Fresenius USA Series F
Preferred Stock into 3,129,883 shares of Fresenius USA Common Stock on June 26,
1996.
BUSINESS OF NMC
W. R. GRACE & CO.
As discussed under "THE REORGANIZATION," immediately prior to the
Reorganization, Grace will spin off New Grace, which will contain all of its
operations other than NMC, following which Grace's only remaining business
operations will be those conducted by NMC. In connection with the
Reorganization, Grace will be renamed "Fresenius National Medical Care, Inc."
and will issue the New Preferred Shares. See "RISK FACTORS -- Other
Risks -- Effects of Indebtedness," "THE REORGANIZATION -- The Distribution
Agreement" and "FINANCING."
OVERVIEW
NMC is primarily engaged in (a) providing kidney dialysis services, (b)
manufacturing and distributing products and equipment for dialysis treatment and
performing clinical laboratory testing and other medical services, and (c)
providing home infusion, home respiratory therapy and home health services. NMC
combines clinical quality and cost-effectiveness in providing specialized health
care services and products to targeted patient populations. NMC operates through
three principal units: DSD, MPG and NMC Homecare.
DSD is the largest provider in the U.S. of kidney dialysis and related
services to patients suffering from chronic kidney disease; and has dialysis
business operations overseas. At March 31, 1996, DSD owned or managed 693
outpatient dialysis centers in the U.S. and 14 foreign countries, treating
approximately 51,500 patients, and provided inpatient dialysis services
including acute dialysis treatments at approximately 525 hospitals. DSD includes
DSI, which provides diagnostic testing services to the outpatient market
(physicians, clinics and hospitals) and also serves dialysis facilities (DSD and
non-DSD). DSI testing services include ultrasound, nuclear medicine, magnetic
resonance imaging, computerized axial tomography, bone densitometry, nerve
conduction velocity, mammography and other tests. DSI conducts testing in 296
DSD dialysis facilities and provides outpatient testing to the non-dialysis
market in 25 states.
MPG is comprised of RPD and LifeChem. Through RPD, NMC manufactures
disposable bloodlines, dialysis concentrates and dialyzers, and distributes
dialysis supplies and equipment and other medical products manufactured by
others for use in its dialysis centers and for sale to unaffiliated dialysis
providers and home dialysis patients. LifeChem provides laboratory services for
dialysis patients in the U.S. and Puerto Rico. In addition, laboratory services
for dialysis and non-dialysis patients in Portugal are provided by DSD's
international division.
NMC Homecare is a provider of integrated homecare services, offering
comprehensive intravenous infusion (prescription medications and nutrition),
respiratory therapies and home health services (primarily skilled and unskilled
nursing and personal support services) in the U.S. At March 31, 1996, NMC
Homecare operated 105 locations in 37 states.
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The following table sets forth the approximate contribution to net revenues
(in dollars and as a percentage of total net revenues) attributable to each of
NMC's three business units for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------------------------------- ENDED
1993 1994 1995(1) MARCH 31, 1996
---------------- ---------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DSD....................... $1,010,984 69% $1,288,116 71% $1,471,148 73% $387,209 73%
MPG(2).................... 227,750 16 212,366 12 234,984 11 62,038 12
NMC Homecare.............. 216,861 15 317,722 17 326,606 16 78,444 15
---------- --- ---------- --- ---------- --- -------- ---
Total................ $1,455,595 100% $1,818,204 100% $2,032,738 100% $527,691 100%
========= === ========= === ========= === ======== ===
</TABLE>
- ---------------
(1) NMC estimates that, in 1995, Medicare, Medicaid and other governmental
health care programs accounted for approximately 62% of NMC's net revenues.
(2) Does not reflect intercompany sales. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC."
NMC commenced operations in 1970 with five dialysis centers. Grace acquired
a 49.9% common equity interest in NMC in 1984 and subsequently increased its
ownership interest over time, reaching 100% ownership in 1990. NMC's principal
executive offices are located at Reservoir Place, 1601 Trapelo Road, Waltham,
Massachusetts 02154, and its telephone number is (617) 466-9850.
DSD OPERATIONS
At March 31, 1996, NMC owned or managed 693 outpatient dialysis centers
located in 34 states, the District of Columbia, Puerto Rico and 14 foreign
countries. Thirty-five of such centers are managed by NMC, of which two are
located in the U.S. and 33 are located outside of the U.S. The centers are
generally concentrated in areas of high population density and their surrounding
areas. Substantially all of these centers are leased, and they average
approximately 5,600 square feet in size. From January 1, 1993 through December
31, 1995, NMC acquired 187 existing centers, developed 115 new centers and
closed or sold 28 centers. The number of patients treated at DSD centers has
increased from approximately 30,400 at December 31, 1991 to approximately 51,500
at March 31, 1996.
At NMC's centers, hemodialysis treatments are provided at individual
"stations" through the use of dialysis machines. A registered nurse or dialysis
technician attaches the necessary tubing to the patient and monitors the
dialysis equipment and the patient's vital signs. The capacity of a center is a
function of the number of stations and such factors as the type of treatment,
patient requirements, length of time per treatment, and local operating
practices and ordinances regulating hours of operation. Most of NMC's centers
operate two or three patient shifts per day.
Each of NMC's dialysis centers is under the general supervision of a
Medical Director and, in some cases, one or more associate Medical Directors,
who are physicians. See "-- Physician and Other Relationships." Each dialysis
center also has an administrator who supervises the day-to-day operations of the
facility and the staff. The staff typically consists of registered nurses,
licensed practical nurses, patient care technicians, a social worker, a
registered dietician, a unit clerk and bio-medical technicians.
NMC engages in systematic efforts to measure, maintain and improve the
quality of the services that it delivers at its dialysis centers. Each center
collects and analyzes quality assurance and patient data, which in turn is
regularly reviewed by division and corporate management. At each center, a
quality assurance committee is responsible for reviewing quality of care reports
generated by NMC's PSP system, setting goals for quality enhancement and
monitoring the progress of quality assurance initiatives. NMC believes that it
enjoys a reputation of providing high quality care to dialysis patients.
DSD's centers also offer services for home dialysis patients, the majority
of whom are treated with peritoneal dialysis. For such patients, DSD's centers
provide certain materials, training and patient support services, including
clinical monitoring, supply of EPO and follow-up assistance. Supplies for
peritoneal dialysis
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patients are supplied by RPD, which is also responsible for delivery of the
supplies to the patient's residence. See "-- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings" and "-- Reimbursement -- U.S." for
a discussion of NMC's billing for such products and services.
The manner in which each center conducts its business is dependent, in
large part, upon applicable laws, rules and regulations of the jurisdiction in
which the center is located, as well as NMC's clinical policies. However, a
patient's attending physician (who may be the center's Medical Director or an
unaffiliated physician with staff privileges at the center) has medical
discretion as to the particular treatment modality and medications to be
prescribed for that patient. Similarly, the attending physician has discretion
in selecting the particular medical products prescribed for a patient, although
equipment and supplies, regardless of brand, are typically purchased by the
center through MPG.
NMC also provides dialysis services under contract to over 525 hospitals on
an "as needed" basis for patients suffering from acute kidney failure and for
ESRD patients who are hospitalized. NMC services these patients either at their
bedside, using portable dialysis equipment, or at a dialysis site maintained by
the hospital. Contracts with hospitals provide for payment at negotiated rates
that generally are higher than the Medicare reimbursement rates for chronic
in-center treatments.
NMC provides various ancillary medications and services to ESRD patients at
its dialysis centers, the most significant of which is the administration of
EPO, a bioengineered protein that stimulates the production of red blood cells.
EPO is used to treat anemia, a medical complication frequently experienced by
ESRD patients, and is administered to most of DSD's patients. Revenues from EPO
(the substantial majority of which are reimbursed through the Medicare and
Medicaid programs) accounted for approximately 21% of DSD's total net revenues
in 1995 and materially contribute to DSD's operating earnings in the U.S. EPO is
produced by a single source manufacturer, Amgen Inc., and any interruption of
supply could materially adversely affect NMC's business and results of
operations. NMC has entered into a long-term supply relationship with Amgen Inc.
covering the period from 1996 to 1998 with price protection and volume
discounts.
Other ancillary services provided by NMC to ESRD patients include the
administration of Calcijex(R) (calcium), INFED(R) (iron) and hepatitis vaccine;
the provision, through NMC Homecare, of IDPN, in which nutrients are added to
the patient's blood during hemodialysis; the provision, through LifeChem, of
clinical laboratory testing; the provision by DSI of studies to test the degree
of bone deterioration; electrocardiograms; nerve conduction studies to test the
degree of deterioration of nerves; doppler flow testing of the effectiveness of
the patient's vascular access for dialysis; and blood transfusions. These tests
and other ancillary services are provided by specific prescription of the
patient's attending physician.
DSD employs a centralized approach with respect to certain administrative
functions common to its operations. For example, DSD has standardized operating
and billing procedures which are contained in proprietary manuals used by each
dialysis center. In addition, DSD has developed a billing management system
pursuant to which bills are generated from regional billing centers. NMC
believes that the centralization and standardization of these functions enhance
its ability to perform services on a cost-effective basis.
DIAGNOSTIC SERVICES
NMC's Diagnostic Services Division ("DSI") provides diagnostic testing
services to the primary care market and is the largest dialysis diagnostic
testing supplier in the U.S. DSI provides diagnostic testing services to
patients at DSD centers and unaffiliated dialysis facilities and provides
outpatient diagnostic services at physicians' offices, clinics and hospitals
through mobile equipment and DSI imaging centers. DSI conducts testing at 296
DSD facilities and provides outpatient testing to the non-dialysis market in 25
states. DSI's range of services include: nerve conduction velocity testing, bone
densitometry, holter monitoring, sleep apnea studies, and imaging studies that
include color flow doppler, arterial scans, carotids, peripheral studies,
echocardiography, obstetrical and gynecological ultrasound, nuclear medicine,
nuclear magnetic resonance, computerized axial tomography, mammography and
x-ray. Of DSI's approximately $24 million of revenues for the quarter ended
March 31, 1996, approximately $21 million was related to patients other than
dialysis
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patients. DSI has grown recently through its acquisitions of the diagnostic
services businesses of Mediq Imaging Services, Inc., MedAlliance, Inc. and PML,
Inc. (a Park Medical company).
Growth in the outpatient diagnostic industry is expected to continue as a
result of cost-containment pressures accelerating the shift from expensive
inpatient testing to lower cost outpatient testing, and managed care's interest
in prevention and early diagnosis. Limiting factors on growth include increased
utilization management by managed care organizations and continued downward
pressure on reimbursement rates.
INTERNATIONAL DIALYSIS SERVICES
At March 31, 1996, NMC operated and/or managed 112 dialysis centers in 14
countries outside of the U.S. (Portugal, Spain, Brazil, Taiwan, Argentina,
Hungary, Venezuela, Czech Republic, Germany, United Kingdom, South Korea, China,
Colombia and Thailand), an increase from 35 dialysis centers in six countries at
the end of 1993, as well as 12 clinical testing laboratories in Portugal.
Approximately 8% of DSD's 1995 net revenues were attributable to foreign
operations. NMC's first renal care program outside the U.S. was established in
Portugal in 1980, and Portugal is NMC's largest non-U.S. market.
Fresenius Medical Care's ability to expand internationally will be
dependent, in large part, on the availability and level of local governmental
funding of dialysis treatment. See "-- Regulatory and Legal
Matters -- Reimbursement -- Non-U.S." While in certain countries, government
reimbursement or payment for dialysis services is higher than the U.S.
reimbursement rate, in other countries, it is at a level significantly below the
U.S. reimbursement rate. In addition, the legal and regulatory framework in
certain countries is more restrictive and cumbersome than U.S. regulations. For
example, in some countries, foreign companies are not permitted to own dialysis
centers, but are limited to operating centers for local owners or developing
alternative operational methodologies, such as joint ventures, partnerships or
servicing arrangements.
International revenues are expected to account for an increasing portion of
revenues in the future. Revenues generated from international markets are
subject to a number of risks, including the following: fluctuations in exchange
rates could adversely affect profitability; agreements may be difficult to
enforce and receivables difficult to collect through a local country's legal
system; local regulations may restrict Fresenius Medical Care's ability to
obtain a direct ownership interest in dialysis centers or other operations
located overseas; lack of governmental funding for services provided by
Fresenius Medical Care may limit the demand for Fresenius Medical Care's
services; certain customers and governments may have longer payment cycles; and
some countries could impose additional withholding taxes or otherwise tax
Fresenius Medical Care's income, impose tariffs or adopt other restrictions on
foreign trade. There can be no assurance that these risks will not have a
material adverse effect on Fresenius Medical Care's business and results of
operations. See "RISK FACTORS -- Risks Relating to the Business of Fresenius
Medical Care -- International Operations."
PHYSICIAN AND OTHER RELATIONSHIPS
NMC believes that its success in establishing and maintaining dialysis
centers, both in the U.S. and in other countries, depends in significant part
upon its ability to obtain the acceptance of and referrals from local
physicians, hospitals and managed care plans. As is generally true in the
dialysis industry, at many DSD centers, a small number of physicians account for
all or a significant portion of the patient referral base. The impairment of
NMC's relationships with any particular group of physicians in a local market
could adversely affect its centers in such local market. In this regard, NMC is
and will be dependent upon the relationships established with the medical
community and its own Medical Directors by its clinical and operations staff.
Financial relationships between referral sources and NMC in the U.S. are subject
to extensive regulation. See "-- Regulatory and Legal Matters -- Anti-kickback
Statute, False Claims Act, Stark Law and Fraud and Abuse Laws."
A dialysis patient generally seeks treatment at a center that is convenient
to the patient and at which the patient's nephrologist has staff privileges.
Virtually all of NMC's clinics maintain open staff privileges for local
nephrologists. NMC's ability to provide quality dialysis care and otherwise to
meet the needs of local
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physicians is central to its ability to attract nephrologists to NMC's centers
and to receive referrals from such physicians.
Fresenius Medical Care's continued growth in the provider business will
depend upon its ability to attract and retain skilled employees, such as highly
skilled nurses and other medical personnel, for whom competition is intense, and
the ability of its officers and key employees to manage growth successfully.
Moreover, Fresenius Medical Care believes that future success in the provider
business will be significantly dependent on its ability to attract and retain
qualified physicians to serve as Medical Directors of its dialysis centers. The
inability of Fresenius Medical Care to obtain the services of key personnel
could impair its operations and thereby adversely affect its business and
results of operations.
The conditions for coverage under the Medicare ESRD program require that
treatment at a dialysis center be under the general supervision of a Medical
Director. Generally, the Medical Director must be board certified or board
eligible in internal medicine and have at least 12 months of training or
experience in the care of patients at ESRD centers. Virtually all of NMC's
Medical Directors maintain their own active private practices.
NMC has written agreements with qualified nephrologists or groups of
qualified nephrologists to serve as Medical Directors (and associate Medical
Directors) for its centers. The U.S. Medical Director agreements entered into by
NMC generally have terms of three years, although some have terms of as long as
five to ten years. The compensation of Medical Directors and other physicians
under contract with NMC is individually negotiated and generally depends upon
competitive factors in the local market, the physician's professional
qualifications, experience and responsibilities and the size of and services
provided by the center. Until January 1, 1995, Medical Director compensation
typically included a component based on some measure of the financial
performance of the clinics under supervision. See "-- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Investigation." Since 1995,
NMC has entered into new agreements, or amended existing agreements, for
substantially all of its Medical Directors. Under the new arrangements, the
aggregate compensation of the Medical Directors and other physicians under
contract is fixed in advance for a period of one year or more and is based in
part on various efficiency and quality incentives. In certain countries other
than the U.S., Medical Director and physician compensation may include a
component based on some measure of the center's financial performance.
Virtually all of the U.S. Medical Director agreements, as well as the
typical contract under which NMC acquires existing dialysis centers, include
noncompetition covenants covering specified activities within specified
geographic areas for specified periods of time, although they do not prohibit
the physicians from providing direct patient care services at other locations
and, consistent with law, do not require a physician to refer patients to NMC or
particular centers or to buy or use specific medical products. In certain
states, non-competition covenants may not be enforceable.
SOURCES OF NET REVENUES
The following table provides information for the periods indicated
regarding the percentage of DSD's U.S. dialysis services net revenues (excluding
net revenues from DSI) provided by (a) the Medicare ESRD program, (b)
private/alternative payors, such as commercial insurance and private funds, (c)
Medicaid and other government sources and (d) hospitals.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------- ENDED
1993 1994 1995 MARCH 31, 1996
----- ----- ----- --------------
<S> <C> <C> <C> <C>
Medicare ESRD program........................ 65.4% 56.7% 58.1% 62.4%
Private/alternative payors................... 24.7 34.2 32.7 28.3
Medicaid and other government sources........ 5.2 4.5 4.2 4.2
Hospitals.................................... 4.7 4.6 5.0 5.1
----- ----- ----- -----
Total................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
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Under the Medicare ESRD program, Medicare reimburses dialysis providers for
the treatment of certain individuals who are diagnosed as having ESRD,
regardless of age or financial circumstances. When Medicare assumes
responsibility as the primary payor, it pays for dialysis and certain specified
related services at 80% of the Composite Rate. In addition, subject to various
restrictions and co-payment limitations, Medicare pays separately for certain
dialysis-related diagnostic and therapeutic services not included in the
Composite Rate. A secondary payor, usually a Medicare supplemental insurer, a
state Medicaid program or, to a lesser extent, the patient or the patient's
private insurer, is responsible for paying any co-payment (typically 20%), other
approved services not paid by Medicare and the annual deductible. Most of the
states in which NMC currently operates dialysis centers provide Medicaid
benefits to qualified recipients to supplement their Medicare entitlement.
Prior to the time at which Medicare becomes the primary payor, most
dialysis treatments are paid for by another third-party payor, such as the
patient's private insurer, or by the patient. Each third-party payor makes
payments under contractual or regulatory reimbursement arrangements. These
arrangements generally provide for higher reimbursement levels from
non-governmental payors than from governmental payors, such as Medicare. See
"-- Regulatory and Legal Matters -- Reimbursement -- U.S."
NMC derives a significant portion of its revenues from reimbursement
provided by non-governmental third-party payors. A substantial portion of
third-party health insurance in the U.S. is now furnished through some type of
managed care plan, including HMOs. Managed care plans are increasing their
market share, and this trend may accelerate as a result of the merger and
consolidation of providers and payors in the health care industry, as well as
the discussions among members of Congress and the executive branch regarding
ways to increase the number of Medicare and Medicaid beneficiaries served
through managed care plans. NMC estimates that approximately 9% of DSD's net
revenues for the year ended December 31, 1995 was attributable to managed care
plans.
NMC generally is reimbursed for dialysis treatments at higher rates by
non-governmental payors than by governmental payors such as Medicare. However,
managed care plans are becoming more aggressive in selectively contracting with
a smaller number of providers willing to furnish services for lower rates and
subject to a variety of service restrictions. For example, managed care plans
and traditional indemnity third-party payors increasingly are demanding
alternative fee structures, such as capitation arrangements whereby a provider
receives a fixed payment per month per enrollee and bears the risk of loss if
the costs of treating such enrollee exceed the capitation payment. These market
forces are creating downward pressure on the reimbursements NMC receives for its
services and products.
NMC's ability to secure favorable rates with indemnity and managed care
plans has largely been due to the relatively small number of ESRD patients which
any single HMO has enrolled. By regulation, ESRD patients have been prohibited
from joining an HMO unless they are otherwise eligible for Medicare coverage,
due to age or disability, and are members of a managed care plan when they first
experience kidney failure. HCFA has recently announced a pilot project pursuant
to which approximately four managed care companies will be allowed to recruit
ESRD patients beginning in 1997 which, if successful, could result in the
opening of the ESRD treatment market to many managed care companies thereafter.
As Medicare HMO enrollments increase and the number of ESRD patients in managed
care plans also increases, managed care plans' leverage to negotiate lower rates
may become greater. In addition, the HMO may have contracted with another
provider, or may have tighter utilization controls with respect to, certain
ancillary services typically provided by NMC to ESRD patients, which could limit
NMC's future payments for such services.
As managed care programs expand market share and gain greater bargaining
power vis-a-vis health care providers, there will be increasing pressure to
reduce the amounts paid for services and products furnished by NMC. These trends
would be accelerated if future changes to the Medicare ESRD program require
private payors to assume a greater percentage of the cost of care given to
dialysis patients. NMC is presently seeking to expand the portion of its
revenues attributable to non-governmental private payors. However, NMC believes
that the historically higher rates of reimbursement paid by non-governmental
payors may not be maintained at such levels. If substantially more patients of
NMC join managed care plans or such plans reduce reimbursements to NMC, NMC's
business and results of operations could be adversely affected,
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possibly materially. See "-- Regulatory and Legal Matters -- Reimbursement," and
"-- Changes in the Health Care Industry" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC."
ACQUISITIONS
NMC's growth in revenues and operating earnings in prior years has
resulted, in significant part, from NMC's ability to effect acquisitions of
health care businesses, particularly dialysis centers, on reasonable terms. The
health care industry has experienced significant consolidation in recent years,
particularly in the dialysis and homecare service sectors in which NMC competes,
resulting, in some cases, in increased costs of acquisitions in these sectors.
The entrance into the acquisition arena of new, smaller public dialysis
companies, which can make acquisitions using their stock as consideration, has
accelerated the increase in costs of acquisitions. Moreover, because of the
ongoing consolidation in the dialysis services industry, the availability of
acquisitions may decrease. NMC's ability to make acquisitions also will depend,
in part, on NMC's available financial resources and the limitations imposed
under the NMC Credit Agreement. See "RISK FACTORS -- Risks Relating to the
Business of Fresenius Medical Care -- Dependence on Acquisitions." The inability
of Fresenius Medical Care to continue to effect acquisitions in the provider
business on reasonable terms could have an adverse impact on growth in its
business and on its results of operations.
NMC regularly evaluates and holds discussions with various other health
care companies and other businesses regarding acquisitions and joint business
ventures. Other than the Reorganization, NMC currently does not have any
specific plans, understandings or agreements with respect to any material
acquisition.
MEDICAL PRODUCTS GROUP
RENAL PRODUCTS DIVISION
General. RPD distributes disposable products, including its own
manufactured products, for hemodialysis and peritoneal dialysis. Most of RPD's
customers are kidney dialysis centers. From 1993 to 1995, approximately 41%, 50%
and 49%, respectively, of RPD's net revenues were generated through sales to DSD
centers. In 1995, sales in the U.S. accounted for approximately 83% of RPD's
total net revenues.
The principal products manufactured by RPD are hemodialysis concentrate
solutions, dialyzers, bloodlines and accessories. RPD distributes peritoneal
dialysis products, which accounted for approximately 28% of RPD's 1995 net
revenues, under distribution arrangements with third-party manufacturers,
including Fresenius USA. Other products manufactured by third parties and
distributed by RPD include dialyzers, hemodialysis machines, special blood
access needles, heparin (used to prevent blood clotting) and commodity supplies
such as bandages, clamps and syringes. In 1995 and the first three months of
1996, approximately 32% and 50%, respectively, of RPD's net revenues were
attributable to sales of products manufactured by RPD, and approximately 68% and
50%, respectively, of RPD's net revenues were attributable to sales of products
manufactured by third parties. All DSD centers purchase their medical products
through RPD. However, DSD centers are not required to order RPD-manufactured
products.
Sales and Distribution. RPD markets its products and services in the U.S.
through an experienced direct selling organization consisting of 24 sales
representatives and four regional managers. A staff of 10 clinical nurses
assists in RPD's sales activities and provides clinical support to customers.
Outside the U.S., RPD markets its products through a combination of its own
personnel and outside distributors. At March 31, 1996, RPD had direct sales
operations in ten countries, with a total of 23 field sales representatives.
RPD's network of 31 non-U.S. distributors provides sales coverage in 34 other
countries.
At March 31, 1996, RPD distributed its products through 17 warehouse
facilities (11 in the U.S., three in Europe, two in Latin America and one in
Asia). RPD delivers its products to dialysis providers and, in the U.S. and
United Kingdom, directly to home patients.
Manufacturing. RPD manufactures dialysis products at 12 plants (five in
the U.S., four in Europe and three located in Latin America). Dialyzers are
produced at NMC's facility in Dublin, Ireland; bloodlines are produced at NMC's
plants in Reynosa, Mexico, McAllen, Texas and Bremervorde, Germany; and concen-
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trates are produced at three facilities in the U.S. and one plant in each of
Brazil, the United Kingdom, Argentina and Germany.
In the third quarter of 1995, NMC recorded nonrecurring charges of
approximately $16.6 million relating to the termination of a dialyzer
development project at its Dublin, Ireland facility. These charges related to a
research project that had previously been supported by Grace. This project was
terminated in connection with the proposed spin-off of NMC by Grace in 1995
because no commercially viable product had been developed by such time. Also in
the third quarter of 1995, NMC recorded nonrecurring charges of approximately
$12.3 million relating to the termination of RPD's German dialysis machine
manufacturing operation when it was determined that such operations could not
produce commercially viable machines. See Note 9 to the Special-Purpose,
Consolidated Financial Statements of Grace.
Raw Materials. Raw materials used in RPD's manufacturing operations and
medical supplies are purchased worldwide from numerous suppliers. Certain raw
materials used in the production of dialyzers at RPD's Dublin plant are
purchased from a single source. In the U.S., certain raw materials used to
manufacture products distributed by RPD are purchased from single source
suppliers. NMC believes that alternative sources of these raw materials are
generally available. However, an interruption in supply from any such single
source supplier could have an adverse effect on NMC's business or results of
operations.
Quality Systems. All of RPD's manufactured products are considered medical
devices by the FDA and, as such, are subject to stringent regulatory standards.
Technically trained RPD professionals have developed and implemented quality
assurance procedures that impose stringent specifications for raw materials,
sterilization procedures and manufacturing process control.
LIFECHEM LABORATORY SERVICES
LifeChem is a leading U.S. dialysis clinical laboratory providing blood,
urine and other bodily fluid testing services to assist physicians in
determining whether a dialysis patient's therapy regimen, diet and medicines
remain optimal. LifeChem operates two laboratories, one in New Jersey and one in
southern California. In 1995, LifeChem performed over 16 million tests for more
than 56,000 dialysis patients across the U.S. LifeChem also provides testing
services to clinical research projects and others. LifeChem plans to expand into
related markets, including servicing physician (particularly nephrologist)
office practices. LifeChem markets its services through RPD's domestic sales
organization. In 1995, approximately 29% of LifeChem's patient base was
receiving treatment at dialysis centers not owned or operated by NMC.
LifeChem's clinical laboratory results have been a critical element in
enabling NMC to develop its proprietary PSP database, which contains clinical,
laboratory and demographic data on over 40,000 dialysis patients and laboratory
results and demographic data on an additional 16,000 patients. NMC uses PSP to
assist physicians in providing cost-effective quality care to dialysis patients.
In addition, PSP is a key resource in ongoing research, both within NMC and at
outside research institutions, to decrease mortality rates among dialysis
patients and improve their quality of life.
In 1995, LifeChem represented approximately 4% of NMC's net revenues and
10% of NMC's operating earnings. Approximately 78% of LifeChem's 1995 net
revenues were derived from Medicare. See "-- Regulatory and Legal
Matters -- Reimbursement" for a description of certain billing problems relating
to LifeChem.
NMC HOMECARE
GENERAL
NMC Homecare is a leading U.S. provider of homecare services, offering
comprehensive intravenous infusion (prescription medications and nutrition),
respiratory therapies and home health services (primarily skilled and unskilled
nursing and personal support services). NMC believes that by providing all three
of these key components of home patient care (either directly or through
subcontractors), NMC Homecare offers quality care on a cost-effective and
integrated basis. NMC Homecare plans to increase, through internal growth, the
number of locations at which it offers all three of these components of
homecare. At March 31, 1996, NMC Homecare operated from 105 locations in 37
states, providing infusion services from 90 of these
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locations, home respiratory services from 79 locations and home health services
from 20 locations. In 1995, NMC Homecare derived approximately 78% of its net
revenues from home infusion therapies, approximately 15% from home respiratory
therapies and approximately 7% from home health services.
NMC entered the homecare market in 1978 through the acquisition of a
respiratory therapy services business that NMC purchased as part of a
diversification strategy. During the 1980s, NMC Homecare expanded into the home
infusion market through a series of acquisitions and internal growth. In 1993
and 1994, NMC Homecare significantly expanded its position in the home infusion
market through the acquisitions of Home Intensive Care, Inc. ("HIC"), a dialysis
clinic business with a large infusion division, and Home Nutritional Services,
Inc., ("HNS"). NMC entered the home health services market in 1993 through the
acquisition of Personal Care Health Services, Inc. ("PCHS") described below.
In all three of its areas of service, NMC Homecare provides patients with a
variety of services and related products and supplies prescribed by a physician
as part of, or pursuant to, a patient treatment plan. In addition to patient
care, these services include pharmacy compounding of prescription medications
and nutritional solutions, training patients and their care givers as to the
proper administration of therapies and products in the home, monitoring
compliance with the patient's individualized treatment plan, reporting patient
status and clinical outcome to the patient's physician and/or managed care
organization, maintaining equipment and supplies and processing claims to
third-party payors.
A typical NMC Homecare infusion and respiratory therapy location has a
fully-equipped pharmacy, offices for administrative, clinical and sales
personnel and a small storage warehouse. Location staffs generally include a
general manager, licensed pharmacists, registered and licensed nurses,
respiratory therapists and sales and administrative personnel. NMC Homecare
purchases or leases the products and equipment needed to support the provision
of its clinical services.
The homecare industry has experienced rapid growth in recent years as a
result of the cost-effectiveness of home treatment as compared to hospital
inpatient treatment, continued advances in medical technology that have
facilitated the provision of sophisticated care in a home setting, increased
acceptance of homecare by the medical community, patients and payors, and the
significant increase in the over-65 population. NMC believes that the homecare
industry will continue to benefit from health care cost-containment measures
that encourage reduced hospital admissions and reduced lengths of stay in
hospitals. Additionally, the advent of managed care in the U.S. is transforming
the health care delivery system from a fragmented system of providers of
discrete services to an integrated continuum of care delivery system. This
evolution encourages therapy planning across places of service and levels of
care, and is intended to achieve efficiency and cost savings through use of
lower cost, less intensive treatment settings. NMC believes that home delivery
of services will increasingly become an important component of the evolving
integrated health care delivery system.
The evolving homecare marketplace is increasingly requiring the
coordination of all homecare clinical services (infusion, respiratory therapy
and home health services) under one management. In response, NMC plans to
increase, through internal growth, the number of existing locations that can
provide infusion, respiratory and home health services. In 1996, NMC plans to
add respiratory services to 15 existing locations while introducing home health
services in 20 markets and expanding such services in six existing locations.
NMC plans to be able ultimately to provide infusion, respiratory and home health
services from all locations.
NMC HOMECARE SERVICES
Infusion Therapy. Home infusion therapy principally involves pharmacy
compounding and intravenous administration of an expanding range of medications
and nutritional preparations, such as chemotherapy, total parenteral nutrition,
antibiotic therapy and drugs for pain management. It usually is a continuation
of treatment initiated in an inpatient setting and provides a means of
delivering quality patient care more efficiently and in a patient-friendly
environment. NMC Homecare's clinical employees include licensed pharmacists and
registered and licensed nurses who have specialized skills in home infusion
therapy.
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One form of infusion therapy is IDPN, which is furnished at a dialysis
clinic during dialysis treatment. NMC Homecare derived approximately 33% of its
infusion net revenues in 1995 from the provision of IDPN. Approximately 60% of
such IDPN net revenues were derived from patients treated in DSD centers. In
recent quarters, the provision of IDPN has accounted for substantially all of
NMC Homecare's operating profits. Certain regulatory changes may materially
restrict NMC Homecare's ability to continue to obtain reimbursement for the
provision of IDPN to dialysis patients. For a discussion of reimbursement issues
relating to IDPN, see "-- Regulatory and Legal Matters -- Reimbursement" and
"-- Legal and Regulatory Proceedings -- OIG Investigation," and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- NMC."
Respiratory Therapy. Respiratory therapy involves the provision of an
array of equipment, products and clinical services to treat breathing disorders,
including the delivery of oxygen and aerosolized drugs and the use of monitors,
nebulizers and ventilators. NMC provides home respiratory services to patients
with a variety of conditions, including chronic obstructive pulmonary diseases
(such as emphysema, chronic bronchitis and asthma), cystic fibrosis and
neurologically related respiratory problems. NMC Homecare employs a clinical
staff of respiratory therapy professionals to provide support to its home
respiratory therapy patients in accordance with physician-directed treatment
plans.
Home Health Services. Home health services consist of a wide range of
clinical care and personal support services, primarily registered and licensed
practical nursing, home health aides, physical therapists, speech therapists and
occupational therapists and homemaker services. NMC Homecare entered the home
health services business in late 1993 through its acquisition of PCHS, which
operated nine home health service locations in California. NMC Homecare has
internally developed eight additional locations outside of California from which
it offers home health services. In 1996, NMC Homecare plans to develop
internally a home health care capability in 20 additional U.S. markets.
MARKETING
NMC Homecare markets its services through its own sales force to a wide
range of patient referral sources, such as physicians, medical groups, hospital
discharge planners, managed care organizations, nursing agencies and case
managers for third-party payors. As a result of escalating pressures to contain
health care costs, third-party payors are participating to a greater extent in
decisions regarding health care alternatives and playing an important role in
the homecare referral process. In particular, managed care plans are becoming
more aggressive in selectively contracting with a smaller number of providers
willing to furnish services for lower rates and subject to a variety of service
restrictions. NMC Homecare has implemented a number of initiatives directed at
the managed care market, including broadening the range of homecare services
provided to facilitate patient management and ease of contracting, creating
flexible pricing formulas to meet payor needs for capitation and risk sharing
and developing clinical data and outcome reporting systems to support quality
assurance and patient management goals. However, managed care plans have been
increasingly successful at lowering the number of reimburseable days of
treatment and price levels, in certain instances to levels which NMC Homecare
believes are below the cost of providing such services. The cost pressures
applied by managed care plans have affected NMC Homecare's recent operating
performance and are expected to continue at least through 1996. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- NMC."
SOURCES OF NET REVENUES
Virtually all of the net revenues of NMC Homecare are derived from
third-party payors, including private insurers, managed care organizations such
as HMOs, and governmental payors such as Medicare and Medicaid. Similar to other
homecare service providers, NMC Homecare experiences lengthy payment collection
periods, typically of up to 150 days, as a result of third-party payment
procedures.
Medicare has developed a national fee schedule for certain home infusion
therapies and home respiratory therapies that provides reimbursement for 80% of
the amount of the scheduled fee. The remaining 20% not paid by Medicare is the
responsibility of the patient or third-party insurance payors (including
Medicaid).
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Medicare reimburses certified home health agencies for 100% of the lesser of (a)
the provider's reasonable charges or (b) preestablished regional Medicare rates,
subject to local market cost limitations. See "-- Regulatory and Legal
Matters -- Reimbursement."
Historically, private payors have reimbursed providers a greater amount for
a given service and offered a broader range of benefits than governmental
payors. In order to control costs, however, private payors have established case
management and utilization protocols to control the number of services provided.
At the same time, a highly fragmented homecare industry has facilitated payor
efforts to competitively bid for contracts and reduce payment rates. An
increasing percentage of NMC's private payor revenue has been derived in recent
years from contracts with HMO's and other managed care plans, which provide for
reimbursement at negotiated rates. In many markets, NMC has had to accept
reimbursement rate decreases to preserve current market share.
As a result of managed care pricing pressures, which have resulted in
reimbursement rate decreases and reduced margins in infusion and other therapies
(other than those covered by Medicare), IDPN has accounted for substantially all
of NMC Homecare's operating profit in recent quarters because IDPN is
predominantly reimbursed by Medicare and has not been as prone to managed care
pricing pressures.
The following table sets forth the approximate percentages of NMC
Homecare's 1995 net revenues attributable to Medicare, Medicaid and other
governmental sources, private insurers and other payors and managed care
organizations:
<TABLE>
<S> <C>
Medicare, Medicaid and other governmental sources................... 50%
Private insurance and other payors.................................. 26
Managed care organizations.......................................... 24
----
Total.......................................................... 100%
====
</TABLE>
COMPETITION
DSD
The dialysis industry is highly competitive. Ownership of dialysis centers
in the U.S. is fragmented, with a large number of operators owning 25 or fewer
centers and a small number of larger multi-center providers, the largest of
which is NMC. In urban areas, where many of NMC's dialysis centers are located,
there frequently are many competing centers in close proximity to NMC's centers.
NMC experiences direct competition from time to time from former Medical
Directors or referring physicians who establish their own centers. A number of
health care providers, some of which have significant operations, may decide to
enter the dialysis business in the future.
Because in most cases the prices of dialysis services and products in the
U.S. are directly or indirectly regulated by Medicare, competition for patients
is based primarily on quality and accessibility of service and obtaining
referrals from physicians and hospitals. However, the growth of managed care has
placed greater emphasis on service costs for patients insured by
non-governmental payors. NMC believes that DSD competes effectively in all of
these areas. In particular, based upon NMC's knowledge and understanding of
other providers of kidney dialysis, as well as from information obtained from
publicly available sources, NMC believes that DSD is among the most
cost-efficient providers of kidney dialysis services. In addition, as a result
of its large size relative to most other dialysis service providers, NMC enjoys
economies of scale in areas such as purchasing, billing, collections and data
processing.
Competition in the dialysis industry is particularly intense in acquiring
existing dialysis centers, which has resulted in an increase in the cost of such
acquisitions, and in enlisting and retaining qualified physicians to act as
Medical Directors.
In most countries other than the U.S., DSD primarily competes against
individual centers and hospitals. In many of these countries, especially the
developed countries, prices and the opening of new centers are directly or
indirectly regulated by governments. Competition in all countries is based
primarily on the quality and availability of service and the development and
maintenance of relationships with referring physicians.
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The diagnostic imaging industry is highly fragmented. No single participant
has dominant market share beyond a local or regional market. DSI's competition
includes mobile diagnostic companies, hospital radiology departments, and
independent imaging centers. Key factors for success in this market include
convenience for the patient, cost-effectiveness for the payor, breadth of
services, and technological and professional expertise in test administration
and result interpretation.
Growth in the outpatient diagnostic industry is expected to continue as a
result of cost-containment pressures accelerating the shift from expensive
inpatient testing to lower cost outpatient testing, and managed care's interest
in cost-effective prevention and early diagnosis. Limiting factors on growth
include increased utilization management by managed care organizations and
continued downward pressure on reimbursement rates.
MPG
The markets in which MPG sells its products and laboratory services are
highly competitive in both technology scope and pricing. Among MPG's competitors
in the sale of hemodialysis products are Baxter, CGH Medical (an affiliate of
Gambro AB), Minntech Corporation (Renal Systems), Althin CD Medical, Inc.,
Fresenius USA and MediSystems. The dominant competitor in the peritoneal
dialysis products field is Baxter. Many of MPG's competitors possess greater
financial, marketing and research and development resources than MPG.
In the dialysis product market, companies compete on the basis of product
performance, cost-effectiveness, product quality, product features, specialized
service and technological innovation. NMC believes that most of RPD's products
are competitive in these areas.
LifeChem's competitors include large national laboratories, dedicated
dialysis laboratories and numerous local and regional laboratories, including
hospital laboratories. In the laboratory services market, companies compete on
the basis of performance, including quality of laboratory testing, timeliness of
reporting test results and cost-effectiveness. NMC believes that LifeChem's
services are competitive in these areas. LifeChem's ability to compete has been
affected by the ongoing consolidation in the dialysis services marketplace.
NMC HOMECARE
NMC Homecare competes with a large number of companies in all of the
geographic areas in which its facilities are located. While the U.S. homecare
market is fragmented, consisting of thousands of local providers and a limited
number of regional and national providers, several of NMC Homecare's major
competitors have recently expanded through acquisition. NMC expects this trend
toward consolidation among national providers to continue as providers attempt
to provide a greater range of services, to cover a greater number of geographic
markets and to increase volumes in each market. To the extent that NMC Homecare
is unable to offer the scope of services and cover the range of markets covered
by competitors, such inability could represent a competitive disadvantage in the
managed care environment.
NMC Homecare's principal competitors include major national and regional
infusion and respiratory therapy and home health service companies,
hospital-owned programs, physician groups and networks and numerous local
companies. In addition, other companies, hospitals and health care organizations
that have not serviced the homecare market, historically, have entered the
market and expanded the variety of therapies offered. There are relatively few
barriers to entry in the homecare markets that NMC Homecare serves. Principal
national competitors for home infusion services include Apria Healthcare, Inc.
("Apria") and Coram Healthcare Corporation, principal national competitors in
home respiratory therapy include Apria and Lincare Holdings Inc., and the
largest national provider of home health services is Olsten Corporation. Several
of NMC Homecare's major competitors are larger and some have greater financial
resources than NMC Homecare. Certain of these integrated national competitors
have used lower pricing on infusion services as a means of obtaining contracts
to provide a full range of homecare services. Such a trend, if it continues,
could have a material adverse effect on NMC Homecare's business and results of
operations.
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NMC Homecare competes on the basis of a number of factors, including
quality of care and service, reputation within the medical community,
geographical scope and, particularly as a result of the growth of managed care,
cost-effectiveness. NMC Homecare believes that the ability to develop and
maintain contractual relationships with managed care organizations also is an
important competitive factor.
EMPLOYEES
As of March 31, 1996, NMC had approximately 23,400 full-time, part-time or
per diem employees, of which approximately 200 full-time employees were employed
in corporate and administrative functions. The remaining employees are employed
by NMC's three principal business units as follows: DSD -- approximately 14,300
full-time, 2,000 part-time and 1,300 per diem employees; MPG -- approximately
2,000 full-time; and NMC Homecare -- approximately 2,000 full-time, 100
part-time and 1,500 per diem employees. Medical Directors of NMC's dialysis
centers are generally retained as independent contractors. Approximately 1,700
of NMC's employees are covered by union agreements. NMC considers its employee
relations to be good.
PROPERTIES
NMC leases its executive offices in Waltham, Massachusetts under a lease
covering approximately 120,000 square feet of space. The lease expires on
December 31, 1996. NMC has entered into a new lease with respect to a new
corporate headquarters in Lowell, Massachusetts. The Lowell, Massachusetts lease
expires on December 31, 2006 and has two five-year renewal options, and certain
expansion options. Upon consummation of the Reorganization, NMC may consolidate
its headquarters with Fresenius USA at a new site in Lexington, Massachusetts,
with respect to which Fresenius USA has entered into a lease contingent upon
consummation of the Reorganization. In such event, NMC would attempt to sublet
the Lowell, Massachusetts space.
NMC leases most of the dialysis centers, NMC Homecare locations and
manufacturing, laboratory, distribution and administrative and sales facilities
in the U.S. and foreign countries on terms which NMC believes are customary in
the industry. NMC owns those dialysis centers and manufacturing facilities that
it does not lease.
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REGULATORY AND LEGAL MATTERS
REGULATORY OVERVIEW
The operations of Fresenius Worldwide Dialysis, Fresenius USA and NMC are
subject to extensive governmental regulation by virtually every nation in which
those companies operate, including, most notably for NMC and Fresenius USA, in
the U.S. at the federal, state and local levels. Although such regulations
differ from country to country, in general, non-U.S. regulations are designed to
accomplish the same objectives as U.S. regulations regarding the operation of
dialysis centers, laboratories and manufacturing facilities, the provision of
quality health care for patients, the maintenance of occupational, health,
safety and environmental standards and the provision of accurate reporting and
billing for governmental payments and/or reimbursement. In addition, each
country has its own payment and reimbursement rules and procedures, and some
countries prohibit ownership of health care providers by foreign interests or
establish other regulatory barriers to direct ownership by foreign companies. In
those countries, Fresenius Worldwide Dialysis and NMC work within the framework
of local laws to establish alternative contractual arrangements for the
management of facilities.
Any failure by Fresenius Worldwide Dialysis, Fresenius USA or NMC to
receive required licenses, certifications or other approvals, significant delays
in such receipt, loss by NMC of its various federal certifications in the U.S.,
termination of NMC's licenses under the laws of any state or other governmental
authority or changes resulting from health care reform or other government
actions that reduce reimbursement or reduce or eliminate coverage for particular
services rendered by NMC or Fresenius USA could have a material adverse effect
on the business and results of operations of Fresenius Medical Care, Fresenius
Worldwide Dialysis or NMC.
Fresenius Worldwide Dialysis, Fresenius USA and NMC must comply with all
U.S. and non-U.S. legal and regulatory requirements under which they operate,
including the illegal remuneration provisions of the Social Security Act of
1935, as amended (sometimes referred to as the "anti-kickback statute"), the
federal restrictions on certain physician referrals (commonly known as the
"Stark Law") and other fraud and abuse laws and similar state statutes, as well
as similar laws in other countries. Certain of NMC's activities are subject to
the OIG Investigation. See " -- Legal and Regulatory Proceedings" for
information about the OIG Investigation and about additional regulatory,
investigatory and legal proceedings with respect to NMC and Fresenius USA.
Moreover, there can be no assurance that applicable laws, or the regulations
thereunder, will not be amended, or that enforcement agencies or the courts will
not make interpretations inconsistent with those of Fresenius Worldwide
Dialysis, Fresenius USA or NMC, any one of which could have a material adverse
effect on their (and Fresenius Medical Care's) businesses, reputations and
results of operations. Sanctions for violations of these statutes may include
criminal or civil penalties, such as imprisonment or fines, or denial of
payments, or suspension or exclusion from the Medicare and Medicaid programs. In
the U.S., these laws have been broadly interpreted by a number of courts, and
significant government funds have been devoted to their enforcement because such
enforcement has become a high priority for the federal government and some
states. Fresenius Medical Care, Fresenius Worldwide Dialysis, Fresenius USA, NMC
and the health care industry in general will continue to be subject to extensive
federal, state and foreign regulation, the scope of which cannot be predicted.
NMC historically has employed certain mechanisms to monitor its compliance
with relevant laws, rules, regulations and business standards. Such
compliance-related policies and activities have included periodic reaffirmations
of business ethics standards, internal audit reviews and legal reviews.
Additionally, a hotline accessible to NMC employees has been maintained by Grace
to report violations or suspected violations of applicable laws or NMC policies.
NMC intends to establish its own hotline following the Reorganization. To
increase its compliance program's effectiveness, NMC has undertaken a program to
review and enhance its compliance systems and has secured the services of a
nationally recognized consulting firm to review and enhance its existing
compliance program and policies.
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PRODUCT REGULATION
U.S.
In the U.S., the FDA and comparable state regulatory agencies impose
requirements on Fresenius Worldwide Dialysis, Fresenius USA and NMC as
manufacturers and sellers of medical products and supplies under its
jurisdiction. These require that products be manufactured in accordance with GMP
and that NMC and Fresenius USA comply with FDA requirements regarding the
design, safety, advertising, labeling, recordkeeping and reporting of adverse
events related to the use of their products. In addition, in order to clinically
test, produce and market certain medical products and supplies (including
hemodialysis and peritoneal dialysis equipment and solutions, dialyzers,
bloodlines and cell separators) for human use, NMC and Fresenius USA must
satisfy mandatory procedures and safety and efficacy requirements established by
the FDA or comparable state and foreign governmental agencies. Such rules
generally require that products be approved by the FDA as safe and effective for
their intended use prior to being marketed.
A "510(k)" pre-market notification or pre-market approval application is
required before any new FDA-regulated device may be sold or marketed in the U.S.
The FDA generally classifies medical devices as class I devices, which are
subject to general controls (e.g., labeling, pre-marketing notification and
adherence to GMP); class II devices, which are subject to special controls
(e.g., performance standards, post-marketing surveillance, patient registries
and FDA guidelines); and class III devices, which include life-sustaining, life-
supporting and implantable devices, or new devices which are not substantially
equivalent to devices in interstate commerce prior to 1976 and which require
pre-market approvals. The FDA will generally grant 510(k) clearance if the
submitted data establish that the proposed device is "substantially equivalent"
to a legally marketed class I or class II medical device, or a class III medical
device for which the FDA does not require pre-marketing approval. The FDA may
request additional data or require pre-marketing approval for any device. The
approval process is expensive, time consuming and subject to unanticipated
delays. There can be no assurance that NMC or Fresenius USA will obtain
necessary regulatory approvals or clearances within reasonable time frames, if
at all. Any such delay or failure to obtain regulatory approval or clearances
could have a materially adverse effect on the business, financial condition and
results of operation of Fresenius Medical Care, Fresenius USA or NMC.
Fresenius USA's peritoneal dialysis solutions have been designated as drugs
by the FDA and, as such, are subject to additional FDA regulation under the
Food, Drug and Cosmetic Act of 1938 ("FDC Act"). In order for a new drug to
receive marketing approval in the U.S., Fresenius USA must follow a series of
steps which may include: (a) pre-clinical laboratory and animal tests in
accordance with good laboratory practices, (b) an Investigational New Drug
application which must become effective before human clinical trials may begin,
(c) well-controlled human clinical trials to establish the safety and efficacy
of the new drug product, (d) a New Drug Application ("NDA") or an Abbreviated
New Drug Application ("ANDA") and (e) approval of the NDA or ANDA prior to any
commercial sale or shipment of the drug. FDA approval must be obtained for each
product designated as a drug. Generally, approval of an NDA, if obtained, takes
one and a half or more years and may take longer should the FDA raise questions
or have concerns about a new drug.
The FDA may also prohibit the sale or importation of products, order
product recalls or require post-marketing testing and surveillance programs to
monitor a product's effects. Fresenius Worldwide Dialysis, Fresenius USA and NMC
believe that they have filed for or obtained all necessary approvals for the
manufacture and sale of their products in jurisdictions in which those products
are currently produced or sold.
See "-- Legal and Regulatory Proceedings -- FDA Matters" for information
about certain FDA matters, including warning letters and import alerts that the
FDA issued from 1991 through 1993 with respect to certain products assembled by
NMC and the Consent Decree entered into thereafter; 1994 and 1995 FDA audits of
certain of Fresenius USA's manufacturing facilities; and a District of New
Jersey federal grand jury investigation into NMC's activities in connection with
the lifting of a 1991 import hold with respect to its Dublin, Ireland
manufacturing facility.
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NON-U.S.
Most countries maintain different regulatory regimes for pharmaceutical
products and for medical devices. In each regime, there are regulations
governing manufacturers and distributors, as well as regulations governing the
final products manufactured and distributed. Individual country regulations may
be supplemented or superceded by treaties or other international law and by
standards and guidelines issued thereunder.
Some of Fresenius Worldwide Dialysis' products, such as peritoneal dialysis
solutions, are considered pharmaceuticals. The European Union ("EU") has issued
a directive on pharmaceuticals, No. 65/65/EWG (26 January 1965), as amended.
Each member of the EU is responsible for conforming local law to comply with
this directive. In Germany, pharmaceutical products are primarily regulated by
the German Drug Law, as amended (Arzneimittelgesetz) (the "Drug Law") which
implements EU requirements.
The provisions of the Drug Law are typical of the legal standards in other
European countries. The Drug Law sets forth the requirements for the
authorization of a company to manufacture pharmaceuticals. One such requirement
is that a manufacturer appoint pharmacists or physicians to be responsible for
the manufacture of the pharmaceuticals. At least three such responsible persons
must be appointed: a quality assurance manager, a head of the manufacturing
department and a person responsible for notifying authorities of any reported
side effects and authorized to recall the products in question. Each such person
may be held personally liable under German criminal laws for violations of the
Drug Law.
International guidelines also govern the manufacture of pharmaceuticals
and, in many cases, overlap with national requirements. In particular, the
Pharmaceutical Inspection Convention, an international treaty ("PIC"), sets
forth rules which are binding on most countries in which pharmaceuticals are
manufactured. Among other things, PIC establishes requirements for GMP which are
then adopted at the national level. Another international guideline, which is
non-binding, is the ISO 9000-9004 system for assuring quality control. This
system is more detailed than GMP. Compliance entitles the manufacturer to a
certification of quality control. As of July 1993, the first Fresenius Worldwide
Dialysis plants obtained certificates for successfully running full quality
management systems (ISO 9001).
In addition to the regulation of the manufacture of pharmaceuticals,
countries directly regulate the pharmaceuticals produced. A drug needs to be
registered and authorized in every country in which it is distributed. EU rules
govern the conditions for a registration, such as pre-clinical and clinical
testing.
Historically, medical devices have not been regulated as strictly as
pharmaceuticals, but more stringent regulatory schemes are now being adopted.
The EU began to harmonize national regulations comprehensively for the control
of medical products in Europe in 1993, when it adopted Medical Devices Directive
(93/42/EEC, 12 July 1993). In 1995, Germany implemented this directive when it
adopted the Medical Devices Act (Medizinproduktegesetz) (the "Medical Devices
Act"), which is similar in many ways to the Drug Law. The EU directive applies
to both the manufacturer's quality control system and the products' technical
design. Depending on the class of medical devices, there are alternative
regulatory modules to be chosen by a manufacturer to demonstrate compliance with
EU provisions. To assure and demonstrate the high quality standards and
performance of its operations, Fresenius Worldwide Dialysis has subjected its
plants to the most comprehensive procedural module, which is also the fastest
way to launch a new product in the EU. This module requires the certification of
a full quality management system by a "notified body" (i.e., a group accredited
and monitored by governmental agencies that inspects manufacturing facilities
and quality control systems at regular intervals and is authorized to carry out
unannounced inspections) charged with supervising the quality management system.
Upon receipt of an EU certificate for the quality management system of a
particular facility, a company is permitted to assess if products developed and
manufactured in the facility satisfy EU requirements. EU requirements for
products are laid down in harmonized EU standards and include conformity to
safety requirements, physical and biological properties, construction and
environmental properties, and information supplied by the manufacturer.
Conformity to these requirements must be demonstrated by pre-clinical tests,
biocompatibility tests, qualification of products and packaging, risk analysis
and well-conducted clinical evaluations approved by ethics committees.
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A manufacturer having an EU-certified full quality management system has to
declare and document conformity of its products to the harmonized standards and,
if able to do so, to put a "CE" mark on the products. The "CE" mark demonstrates
compliance with the relevant EU requirements. Products subject to these
provisions that do not bear the "CE" mark cannot be imported, sold or
distributed within the EU.
The Medical Device Directive became effective on June 29, 1993. However,
for a period of five years after the adoption of the Medical Device Directive,
member states may authorize the distribution of products which comply with the
legal provisions applicable within their territory as in effect on December 31,
1994. The latest generations of Fresenius Worldwide Dialysis machines (Series
4008, 4008B, 4008E and its therapy modifications, and PD-NIGHT(TM)), as well as
dialysis filters and dialysis tubing systems, already bear the "CE" mark.
Fresenius Worldwide Dialysis expects to continue to obtain additional
certificates as they are required. MPG's manufacturing facilities have been
awarded a "CE" mark and have received ISO certifications, and it is anticipated
that all NMC products will be labelled with a "CE" mark by the end of 1996.
FACILITIES AND OPERATIONAL REGULATION
U.S.
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") subject
virtually all clinical laboratory testing facilities, including those of NMC, to
the jurisdiction of HHS. CLIA establishes national standards for assuring the
quality of laboratories based upon the complexity of testing performed by a
laboratory. The operations of NMC and Fresenius USA are also subject to federal
laws governing the repackaging and dispensing of drugs (including oxygen) and
the maintenance and tracking of certain life-sustaining and life-supporting
equipment.
The U.S. operations of NMC and Fresenius USA are subject to various U.S.
Department of Transportation, Nuclear Regulatory Commission and Environmental
Protection Agency requirements and other federal, state and local hazardous
waste disposal laws. As currently in effect, laws governing the disposal of
hazardous waste do not classify most of the waste produced in connection with
the provision of dialysis, laboratory or homecare services as hazardous,
although disposal of nonhazardous medical waste is subject to specific state
regulation. LifeChem and DSI both generate hazardous waste which is subject to
specific disposal requirements. In addition, certain chemotherapy services
provided by NMC Homecare are subject to specific disposal requirements. The
operations of NMC and Fresenius USA are also subject to various air emission and
wastewater discharge regulations.
Federal, state and local regulations require NMC and Fresenius USA to meet
various standards relating to, among other things, the management of facilities,
personnel qualifications and licensing, maintenance of proper records,
equipment, quality assurance programs, the operation of pharmacies, and
dispensing of controlled substances. All of the operations of NMC and Fresenius
USA are subject to periodic inspection by federal and state agencies and other
governmental authorities to determine if the operations, premises, equipment,
personnel and patient care meet applicable standards. To receive Medicare
reimbursement, NMC's dialysis centers, home health services locations and
laboratories must be certified by HCFA. All of NMC's dialysis centers, home
health services locations and laboratories that furnish Medicare services are so
certified. In addition, all of the locations operated by NMC Homecare are
accredited by the Joint Commission for the Accreditation of Health Care
Organizations.
Certain facilities of NMC and Fresenius USA and certain of their employees
are also subject to state licensing statutes and regulations. These statutes and
regulations are in addition to federal and state rules and standards that must
be met to qualify for payments under Medicare, Medicaid and other government
reimbursement programs. Licenses and approvals to operate these centers and
conduct certain professional activities are customarily subject to periodic
renewal and to revocation upon failure to comply with the conditions under which
they were granted. See "-- Legal and Regulatory Proceedings -- FDA Matters" for
information about 1995 FDA audits of Fresenius USA's facilities.
The Occupational Safety and Health Administration ("OSHA") regulations
require employers to provide employees who work with blood or other potentially
infectious materials with prescribed protections
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against blood-borne pathogens. The regulatory requirements apply to all health
care facilities, including dialysis centers, laboratories and homecare
providers, and require employers to make a determination as to which employees
may be exposed to blood or other potentially infectious materials and to have in
effect a written exposure control plan. In addition, employers are required to
provide hepatitis B vaccinations, personal protective equipment, blood-borne
pathogens training, post-exposure evaluation and follow-up, waste disposal
techniques and procedures, engineering and work practice controls and other
OSHA-mandated programs.
Some states in which NMC operates have Certificate of Need ("CON") laws
that require any person or entity seeking to establish a new health care service
or to expand an existing service to apply for and receive an administrative
determination that the service is needed. NMC currently operates in 13 states
and the District of Columbia and Puerto Rico that have CON laws applicable to
dialysis centers. These requirements may provide a barrier to entry to new
companies seeking to provide services in these states, but also may constrain
NMC's ability to expand its operations in these states.
NON-U.S.
Countries outside of the U.S. possess a wide variety of operational
regulation at disparate levels. Accordingly, NMC's and Fresenius Worldwide
Dialysis' operations are subject to very different regulations in different
countries. Most countries regulate the conditions under which manufacturing is
conducted and dialysis centers are operated.
Fresenius Worldwide Dialysis and NMC are subject to a broad spectrum of
regulation. Their operations must comply with various environmental and
transportation regulations in the various countries in which they operate. Their
manufacturing facilities and dialysis centers are also subject to various
standards relating to, among other things, the management of facilities,
personnel qualifications and licensing, maintenance of proper records,
equipment, quality assurance programs, the operation of pharmacies, the
protection of workers from blood-borne diseases and the dispensing of controlled
substances. All of the operations of Fresenius Worldwide Dialysis and NMC are
subject to periodic inspection by various governmental authorities to determine
if the operations, premises, equipment, personnel and patient care meet
applicable standards. The operation of dialysis centers and conduct of related
activities by Fresenius Worldwide Dialysis and its subsidiaries and joint
ventures and by NMC generally requires licenses, which are subject to periodic
renewal and the possibility of revocation for violation of applicable regulatory
requirements.
In addition, many countries impose various investment restrictions on
foreign companies. For instance, China requires government approval to enter
into a joint venture with a local partner. Certain countries do not permit
foreign investors to own a majority interest in local companies or require that
companies organized under their laws have at least one local shareholder.
Investment restrictions therefore impact the corporate structure, operating
procedures and other characteristics of Fresenius Worldwide Dialysis'
subsidiaries and joint ventures in these and other countries.
Fresenius Worldwide Dialysis and NMC believe their respective facilities
are currently in compliance in all material respects with the applicable
national and local requirements in the jurisdictions in which they operate.
REIMBURSEMENT
U.S.
Dialysis Services. NMC's dialysis centers provide outpatient hemodialysis
treatment for ESRD patients. In addition, some of NMC's centers offer services
for the provision of peritoneal dialysis treatment at home. Neither Fresenius
Worldwide Dialysis nor Fresenius USA provides dialysis treatment in the U.S.
The Medicare program is the primary source of DSD's revenues from dialysis
treatment. For example, in 1995, approximately 58% of DSD's revenues resulted
from Medicare's ESRD program. As described below, DSD is reimbursed by the
Medicare program in accordance with the Composite Rate for certain products and
services rendered at NMC's dialysis centers, as described in the next paragraph,
other payment methodologies apply to Medicare reimbursement for other products
and services provided at NMC's dialysis centers and for products (such as those
sold by Fresenius USA and by MPG) and support services furnished to ESRD
patients receiving dialysis treatment at home (such as those of RPD). Medicare
reimbursement rates are fixed
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in advance and are subject to adjustment from time to time by the U.S. Congress.
Although this form of reimbursement limits the allowable charge per treatment,
it provides NMC with predictable and recurring per treatment revenues and allows
NMC to retain any profit earned.
When Medicare assumes responsibility as primary payor (see "-- Coordination
of Benefits"), Medicare is responsible for payment of 80% of the Composite Rate
set by HCFA for dialysis treatments. The Composite Rate governs the Medicare
reimbursement available for a designated group of dialysis services, including
the dialysis treatment, supplies used for such treatment, certain laboratory
tests and certain medications. The Composite Rate consists of labor and
non-labor components with adjustments made for regional wage costs, subject to a
national payment floor and ceiling currently ranging from $117 to $139 per
treatment, with exceptions based on specified criteria. In certain instances,
products sold by Fresenius USA and RPD are included in the non-labor component
of the Composite Rate as described below.
The method under which NMC is reimbursed for home dialysis is based on
which supplier is selected to provide dialysis supplies and equipment. If the
center is designated as the supplier ("Method I") the center provides all
dialysis treatment related services, including equipment and supplies, and is
reimbursed using a methodology based on the Composite Rate. If RPD is designated
as the direct supplier ("Method II"), RPD provides the patient directly with all
necessary equipment and supplies and is reimbursed by Medicare at a monthly
capitated rate. Clinics provide home support services to Method II patients and
these services are reimbursed at a monthly fee for service basis subject to a
capitated ceiling. The reimbursement rates under Method I and Method II differ,
although both are prospectively determined and are subject to adjustment from
time to time by Congress. Approximately 3% of Fresenius USA's peritoneal
dialysis product sales (approximately 1% of total sales) are billed to Medicare
pursuant to Method II reimbursement.
Certain items and services that NMC furnishes at its dialysis centers are
not included in the Composite Rate and are eligible for separate Medicare
reimbursement, typically on the basis of established fee schedule amounts. Such
items and services include certain drugs (such as EPO), blood transfusions and
certain diagnostic tests. The rate of utilization by NMC facilities of items and
services that are not included in the Composite Rate is a subject of the OIG
Investigation. See "-- Legal and Regulatory Proceedings -- OIG Investigation."
Medicare payments are subject to change by legislation and pursuant to
deficit reduction measures. The Composite Rate was unchanged from commencement
of the ESRD program in 1972 until 1983. From 1983 through December 1990,
numerous congressional actions resulted in a net reduction of the average
reimbursement rate from $138 per treatment in 1983 to approximately $125 per
treatment in 1990. Congress increased the ESRD reimbursement rate, effective
January 1, 1991, to an average rate of $126 per treatment.
In 1990, Congress required that the Prospective Payment Assessment
Commission ("PROPAC") study dialysis costs and reimbursement and make reports
annually to Congress with a recommendation as to the appropriateness of changes
to the ESRD reimbursement rates. In 1993, PROPAC recommended a 2.5% increase in
the Composite Rate for independent freestanding dialysis facilities, which was
not implemented by Congress. In March 1994 and again in 1995, PROPAC recommended
that no changes be made in the reimbursement rate. In March 1996, PROPAC
recommended a 2% increase in the Composite Rate for independent freestanding
dialysis facilities. However, Congress is not required to implement PROPAC
recommendations and could establish a different reimbursement rate. NMC is
unable to predict what, if any, future changes may occur in the rate of Medicare
reimbursement. Any significant decreases in the Medicare reimbursement rates
could have a material adverse effect on NMC and, because the demand for
Fresenius USA's products is affected by Medicare reimbursement, on Fresenius
USA. Increases in operating costs that are affected by inflation, such as labor
and supply costs, without a compensating increase in reimbursement rates, also
may adversely affect NMC's and Fresenius Worldwide Dialysis' businesses and
results of operations.
The patient or third-party insurance payors, including employer-sponsored
health insurance plans, commercial insurance carriers and the Medicaid program,
are responsible for paying any co-payment amounts for approved services not paid
by Medicare (typically the annual deductible and 20% co-insurance), subject to
the specific coverage policies of such payors. The extent to which NMC is
actually paid the full co-payment
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amounts depends on the particular responsible party. Each third-party payor,
including Medicaid, makes payment under contractual or regulatory reimbursement
provisions which may or may not cover the full 20% co-payment or annual
deductible. Where the patient has no third-party insurance and is not eligible
for Medicaid, the patient is responsible for paying the co-payments, which NMC
frequently does not collect fully despite reasonable collection efforts. In
certain cases, NMC pays, or provides loans for the payment of, premiums for
supplemental medical insurance (under which Medicare Part B coverage is
provided) and/or for Medigap insurance (which covers co-payment amounts) on
behalf of financially needy patients. NMC believes that this practice is lawful.
The practice of providing loans or grants for the payment of supplemental
medical insurance premiums is one of the subjects of review by the government as
part of the OIG Investigation. See "-- Legal and Regulatory Proceedings -- OIG
Investigation." Private payors reimburse NMC for dialysis and dialysis-related
services not covered by Medicare, Medicaid or other government programs at
contractually set amounts or at NMC's usual and customary rates.
Laboratory Tests. A substantial portion of LifeChem's net revenues (78% in
1995) are derived from Medicare, which pays for clinical laboratory services
provided to dialysis patients in two ways. Payment for certain routine tests is
included in the Composite Rate paid to the centers. As to such services, the
dialysis centers obtain the services from a laboratory and pay the laboratory
for such services. In accordance with industry practice, LifeChem usually
provides such testing services under capitation agreements with its customers
pursuant to which LifeChem bills a fixed amount per patient per month
irrespective of the amount of testing actually furnished. In October 1994, the
OIG issued a special fraud alert in which it stated its view that the industry
practice of providing tests covered by the Composite Rate at below fair market
value coupled with an agreement by an ESRD facility to refer all or most of its
non-Composite Rate tests to the laboratory violated the anti-kickback statute.
See "-- Anti-kickback Statute, False Claims Act, Stark Law and Fraud and Abuse
Laws" for a description of this statute. LifeChem's use of capitation rates in
billing for tests in the Composite Rate is a subject of the OIG Investigation.
See "-- Legal and Regulatory Proceedings -- OIG Investigation."
Most laboratory tests performed by LifeChem for Medicare beneficiaries that
are not included in the Composite Rate are separately billable directly to
Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts,
which are limited by national ceilings on payment rates, called National
Limitation Amounts ("NLAs"). Congress has periodically reduced the fee schedule
rates and the NLAs, with the most recent reductions in the NLAs occurring in
January 1996. It cannot be predicted whether or to what extent Congress will
further reduce the NLAs or make other reimbursement changes that could have an
adverse effect on LifeChem's business and results of operations.
A Medicare carrier has recently proposed a new policy for diagnostic coding
of certain clinical laboratory services for dialysis patients. The proposed
policy would restrict coverage for certain tests based on medical necessity
criteria, and subject other tests to additional payment review. If implemented
in its proposed form, the policy would reduce the number of covered services
and, as a result, could materially adversely affect LifeChem's revenues.
See "-- Legal and Regulatory Proceedings -- OIG Investigation" for
information relating to LifeChem's voluntary disclosure of, and repayments
associated with, certain billing problems and related proceedings.
IDPN. Among its other services, NMC Homecare administers IDPN to chronic
dialysis patients who suffer from severe gastrointestinal malfunctions. These
services are covered by the Medicare program under the PEN benefit, which
requires extensive documentation and individual physician certification of
medical necessity for each patient. Treatment by IDPN has been shown to increase
the body content of vital, high biologic value proteins like albumin. Deficiency
of such proteins has been shown to be associated with substantially higher risk
of death, both long-term and short-term (one year), among dialysis patients.
NMC has continued to provide IDPN therapy to severely malnourished dialysis
patients because NMC believes that to be the only clinically and ethically
responsible course of action. Analyses of data from NMC's PSP database, both
internal and as published in peer-reviewed medical journals, indicates that
malnutrition measured by a serum albumin value of 3.4 g/dl or less is associated
with significantly increased mortality risk in the chronic dialysis population
and that IDPN is effective in increasing serum albumin and moderating
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mortality risk for such malnourished patients. These studies show that when
these initial albumin levels were 3.0 g/dl or less, IDPN treatment was
accompanied by a 70% improvement in survival. Similarly, when the initial
albumin was 3.4 g/dl or less, survival with IDPN treatment was improved by about
15%. IDPN treatment is therefore associated with improved odds of survival at
albumin concentration lower than 3.4 g/dl and the amount of improvement
increases as albumin concentrates falls. Recent statistics (March 1996) suggest
that about 5% of dialysis patients suffer from albumin concentration that is 3.0
g/dl or less.
Because the management of NMC has believed that the obligation of medical
professionals and companies that support medical care to ESRD patients extends
beyond the mere provision of paid-for-service to advocacy for needed treatment,
NMC has accepted increasing financial risk by continuing to offer IDPN.
Prior to September 1993, IDPN claims were processed by two regional
Medicare specialty PEN carriers, which are private companies under contract with
HCFA responsible for processing claims and implementing certain Medicare
benefits. In late 1993, administration of Medicare PEN claims was transferred to
four newly created regional Durable Medical Equipment Regional Carriers
("DMERCs"). The DMERCs implemented policies for IDPN reimbursement that resulted
in a sharp reduction in the number of IDPN claims approved for payment. As a
result of these payment reductions, several competitors of NMC Homecare have
ceased providing IDPN. Some of these competitors' patients have subsequently
become NMC Homecare patients for IDPN.
NMC believes that the reduction in IDPN claims paid by Medicare represents
an unauthorized policy coverage change. Accordingly, NMC, along with certain
other IDPN providers, is pursuing various administrative and legal avenues,
including administrative appeals and a declaratory judgment action, to address
this problem. Although NMC contends that its IDPN claims are consistent with
published Medicare coverage guidelines and ultimately will be approved for
payment, there can be no assurance that the claims on appeal will be approved
for payment. See "-- Legal and Regulatory Proceedings" for information about a
declaratory judgment action filed by NMC challenging the legality of these
restrictions on reimbursement.
In April 1996, HCFA published new medical review policies which restrict
substantially the number of patients for whom IDPN would be reimbursed by
Medicare. The new policies are final and effective for claims submitted on or
after July 1, 1996. NMC and other PEN providers continue to review whether and
to what extent possible modifications to the new policies might be obtained in
legislative, judicial or administrative forums.
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 will make 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. The new policy also eliminates all reimbursement for
infusion pumps. NMC, together with other interested parties, may seek to effect
certain changes in the new policy (other than with respect to the elimination of
pump revenues), and NMC has developed changes to its patient qualification
procedures in order to comply with the policy. However, if NMC is unable to
achieve meaningful change 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. The new DMERC
policy eliminates reimbursement for infusion pumps, which may adversely impact
revenue by approximately $11 million on an annualized basis. For purposes of
financial and operational planning, NMC estimates that as much as 50% of NMC's
current patient level may no longer qualify for continued IDPN coverage under
the new policies, which would adversely impact revenues by up to $42 million
annually.
If NMC is unable to collect its IDPN accounts receivable or if IDPN/PEN
coverage is reduced or eliminated, Fresenius Medical Care's business, financial
position and results of operations could be materially adversely affected.
See "-- Legal and Regulatory Proceedings -- OIG Investigation" for
information on issues raised by the OIG with respect to the provision of IDPN by
NMC Homecare and related billing practices.
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EPO. Since June 1, 1989, the Medicare program has provided coverage for
the administration of EPO to dialysis patients, with reimbursement made
separately from the Composite Rate. Medicare reimbursement for EPO was reduced
from $11.00 to $10.00 per 1,000 units, effective January 1, 1994. Future changes
in the EPO reimbursement rate, inclusion of EPO in the Composite Rate, changes
in the typical dosage per administration or increases in the cost of EPO
purchased by NMC could adversely affect NMC's business and results of
operations, possibly materially. See "-- Business of NMC -- DSD Operations."
Non-Dialysis-Related Services. NMC Homecare and DSI provide a variety of
non-dialysis-related services. Subject to various restrictions and co-payment
limitations, Medicare typically pays for such non-dialysis-related services on
the basis of established fee schedule amounts or, with respect to home health
services, on the basis of reasonable costs. Private payors reimburse NMC for
such non-dialysis-related services at contractually established amounts or at
NMC's usual and customary rates. Certain Medicare carriers are imposing or
considering the imposition of restrictions on diagnostic providers, such as DSI,
that limit the category of tests they can perform or require direct personal
physician supervision of technicians performing certain tests.
Coordination of Benefits. The commencement date of Medicare benefits for
eligible ESRD patients is determined by several factors. In general, Medicare
entitlement begins three months after the initiation of chronic dialysis
treatments at a dialysis center. During this three-month period (the
"entitlement waiting period"), the patient, Medicaid and/or the patient's
private insurer are responsible for payment.
For dual eligible ESRD patients, Medicare benefits commence, and Medicare
assumes primary payor responsibility, at the beginning of the fourth month. ESRD
patients under age 65 who are covered by an employer health plan must wait 21
months (consisting of the three-month entitlement waiting period described above
and an additional 18-month "coordination of benefits period") before Medicare
becomes the primary payor. During this 21-month period, the employer health plan
is responsible for payment as primary payor at its negotiated rate or, in the
absence of such a rate, at NMC's usual and customary rates (which generally are
higher than the Composite Rate), and Medicare is the secondary payor. For
patients beginning dialysis at age 65 or over who are not covered by an employer
health plan, Medicare coverage under the age entitlement program is already in
place, and there is no coordination of benefits period for coverage of dialysis
services.
In the case of ESRD patients age 65 and over who are dual eligible ESRD
patients, OBRA 93 amended the MSP provisions affecting the coordination of
benefits between Medicare and the employer health plans. The vast majority of
NMC's patients affected by this amendment were retirees eligible for Medicare on
the basis of age, whose employer group health plan had been the supplemental
payor to Medicare, and who subsequently became eligible for Medicare on the
basis of ESRD. HCFA's initial implementation of OBRA 93, confirmed in a Program
Memorandum dated July 15, 1994, was that all employer health plans must
recognize an 18-month coordination of benefits period during which the employer
health plans are the primary payor, regardless of prior Medicare eligibility on
account of age and even if the employer health plan covered the enrollee as a
retiree, rather than as an active employee. This implementation of the MSP
provision of OBRA 93 for such dual eligible ESRD patients had a positive impact
on DSD's revenues because during the 18-month coordination of benefits period,
the employer health plan was responsible for payment at its negotiated rate or,
in the absence of such a rate, at NMC's usual and customary rate (which, as
noted above, is generally higher than the Composite Rate). Upon implementation
of the OBRA 93 provisions with respect to dual eligible ESRD patients, NMC
adopted a procedure for rebilling private payors for certain amounts previously
billed to Medicare and for crediting Medicare for overpayments. The process by
which NMC notified Medicare intermediaries with respect to overpayments received
as a result of amounts rebilled to employer health plans is a subject of the OIG
Investigation. See "-- Legal and Regulatory Proceedings -- OIG Investigation."
In a second Program Memorandum dated April 24, 1995, HCFA reversed its
implementation of the OBRA 93 MSP change in a manner which would substantially
diminish the positive revenue effect on DSD of the original implementation.
Under the new policy, no new 18-month coordination of benefits period would
arise for an individual who was already age-eligible for Medicare when ESRD
entitlement arose and who was
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covered under the employer health plan as a retiree, rather than as an active
employee. HCFA further proposed that its new policy be effective retroactive to
August 10, 1993, the effective date of OBRA 93. See "-- Legal and Regulatory
Proceedings -- OBRA 93" for information about a complaint filed by NMC seeking
to preclude HCFA from enforcing its new policy. If HCFA's revised interpretation
is upheld, NMC's business, financial position and results of operations would be
materially adversely affected, particularly if the revised interpretation is
applied retroactively. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- NMC."
Possible Changes in Medicare. Because the Medicare program represents a
substantial portion of the federal budget, in order to reduce the federal
government deficit, and for other reasons, the U.S. Congress takes action in
almost every legislative session to modify the Medicare program by refining the
amounts payable to health care providers. Legislation or regulations may be
enacted in the future that could substantially modify or reduce the amounts paid
for services and products offered by Fresenius Medical Care and its
subsidiaries. In this regard, both the executive branch and members of Congress
from both parties have recently proposed significant reductions in the Medicare
program as part of initiatives to reduce the federal government deficit. It is
also possible that statutes may be adopted or regulations may be promulgated in
the future that impose additional eligibility requirements for participation in
the federal and state health care programs. Such new legislation or regulations
may adversely affect Fresenius Medical Care's, Fresenius USA's and NMC's
business and results of operations.
NON-U.S.
Reimbursement arrangements outside the U.S. vary significantly from country
to country. In developed areas, such as Western Europe, national health
insurance programs frequently provide coverage for dialysis treatments and, in
some cases, provide reimbursement at rates higher than those available in the
U.S. In less developed countries, reimbursement programs often do not exist, and
patients then bear the entire cost of dialysis treatment. Some developing
countries, especially in the Asia/Pacific region and South America, are moving
toward national health insurance programs modelled after those in Europe.
ANTI-KICKBACK STATUTE, FALSE CLAIMS ACT, STARK LAW AND FRAUD AND ABUSE LAWS
Various operations of Fresenius USA and NMC are subject to federal and
state statutes and regulations governing financial relationships between health
care providers and potential referral sources and reimbursement for services and
items provided to Medicare and Medicaid patients. Such laws include the
anti-kickback statute, the False Claims Act, the Stark Law, other federal fraud
and abuse laws and similar state laws. These laws may apply because NMC's
Medical Directors and other physicians with whom NMC has financial relationships
refer patients to, and order diagnostic and therapeutic services from, NMC's
dialysis centers and other operations. As is generally true in the dialysis
industry, at each DSD center a small number of physicians account for all or a
significant portion of the patient referral base. An ESRD patient generally
seeks treatment at a center that is convenient to the patient and at which the
patient's nephrologist has staff privileges. Virtually all of NMC's centers
maintain open staff privileges for local nephrologists. The ability of NMC to
provide quality dialysis care and to otherwise meet the needs of patients and
local physicians is central to its ability to attract nephrologists to DSD
centers and to receive referrals from such physicians.
The federal government, many states and private third-party insurance
payors have made combating health care fraud and abuse one of their highest
enforcement priorities, resulting in increasing resources devoted to this
problem. Consequently, the OIG and other enforcement authorities are increasing
scrutiny of arrangements between physicians and health care providers for
possible violations of the anti-kickback statute or other federal laws. Certain
competitors of NMC who have faced federal criminal charges under these statutes
have entered into settlement agreements under which they have agreed to pay
substantial fines and penalties. See "-- Legal and Regulatory Proceedings -- OIG
Investigation" for information concerning the OIG Investigation of NMC's
activities under these provisions.
NMC has undertaken a program to review and enhance its compliance system.
The review is multifaceted and includes internal review of current practices
company-wide to determine whether any
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changes in existing policies are advisable and use of a nationally recognized
consulting firm to review and enhance existing compliance programs and policies.
NMC expects that such review efforts will be ongoing as part of NMC's compliance
efforts. NMC took measures to review internally certain matters addressed in the
OIG Investigation before the investigation was announced as part of its ongoing
compliance efforts. Such efforts included a review of contractual arrangements
prior to and in anticipation of the Stark Law in January 1995 and periodic
reviews of other contractual arrangements and policies. NMC does not expect
these changes to have a material impact on its financial position or results of
operations.
ANTI-KICKBACK STATUTE
The anti-kickback statute generally prohibits the knowing and willful
solicitation, receipt, offer or payment of any remuneration, whether direct or
indirect, in return for or to induce the referral of patients or the ordering or
purchasing of items or services payable in whole or in part under Medicare,
Medicaid or state health care programs. Certain federal courts have interpreted
the anti-kickback statute broadly, for example as prohibiting payments to induce
the referral of Medicare business, irrespective of any other legitimate motives.
However, one federal appellate court has found that a violation of the
anti-kickback statute requires specific knowledge of the anti-kickback statute
and specific intent to disobey the law. Sanctions for violations of the
anti-kickback statute include criminal and civil penalties, such as imprisonment
or fines of up to $25,000 per violation, and exclusion from the Medicare or
Medicaid programs. In addition, certain provisions of federal criminal law that
may be applicable provide that if a corporation is found guilty of a criminal
offense it may be fined no more than twice any pecuniary gain to the
corporation, or, in the alternative, no more than $500,000 per offense.
Because of the breadth of the anti-kickback statute, substantial
uncertainty has resulted regarding which practices violate the statute and which
practices are legitimate. Two methods the OIG uses periodically to give guidance
to providers about the anti-kickback statute are "safe harbor" regulations and
special fraud alerts. The safe harbor regulations, which were first promulgated
in final form on July 29, 1991 and have subsequently been amended, create
exceptions or safe harbors, in addition to the statutory exceptions, for certain
business arrangements that would otherwise be prohibited by the anti-kickback
statute. An arrangement that satisfies all of the standards of the applicable
safe harbors is deemed not to violate the anti-kickback statute. Arrangements
that fall outside of the safe harbors do not necessarily violate the
anti-kickback statute; rather, such arrangements are not afforded protection
from prosecution and may be subject to scrutiny by enforcement agencies. Special
fraud alerts are intended to inform providers of the OIG's enforcement
priorities and to identify suspect practices the OIG believes violate the
anti-kickback statute. See "-- Legal and Regulatory Proceedings -- OIG
Investigation" for information concerning the OIG Investigation of certain of
NMC's activities, including Medical Director contracts and compensation.
Some states also have enacted statutes similar to the anti-kickback
statute, which may include criminal penalties, apply to referrals of patients
regardless of payor source or contain exceptions different from each other and
from those contained in the anti-kickback statute.
FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS
The U.S. federal False Claims Act (the "False Claims Act") imposes civil
penalties for making false claims with respect to governmental programs, such as
Medicare and Medicaid, for services not rendered, or for misrepresenting actual
services rendered, in order to obtain higher reimbursement. Moreover, private
individuals may bring qui tam or "whistle blower" suits against providers under
the False Claims Act, which authorizes the payment of a portion of any recovery
to the individual bringing suit. Such actions are initially required to be filed
under seal pending their review by the DOJ. A few federal district courts have
recently interpreted the False Claims Act as applying to claims for
reimbursement that violate the anti-kickback statute under certain
circumstances. The False Claims Act generally provides for the imposition of
civil penalties of $5,000 to $10,000 per claim and for treble damages, resulting
in the possibility of substantial financial penalties for small billing errors
that are replicated in a large number of claims, as each individual claim could
be deemed to be a separate violation of the False Claims Act. Criminal
provisions that are similar to the False Claims Act provide that if a
corporation is convicted of presenting a claim or making a statement
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that it knows to be false, fictitious or fraudulent to any federal agency it may
be fined not more than twice any pecuniary gain to the corporation, or, in the
alternative, no more than $500,000 per offense.
Some states also have enacted statutes similar to the False Claims Act
which may include criminal penalties, substantial fines, and treble damages.
STARK LAW
The original Stark Law, known as "Stark I" and enacted as part of the
Omnibus Budget Reconciliation Act of 1989, prohibits a physician from referring
Medicare patients for clinical laboratory services to entities with which the
physician (or an immediate family member) has a prohibited financial
relationship, unless certain exceptions apply. A financial relationship is
defined as an ownership or investment interest in the entity or a compensation
arrangement between the physician and the entity. The statutory exceptions in
many cases are similar to the OIG's safe harbors applicable to the anti-kickback
statute. For example, a provider may not bill for clinical laboratory services
referred by a physician with a prohibited financial relationship. Sanctions for
violations of the Stark Law may include denial of payment, refund obligations,
civil monetary penalties or exclusion of the provider from the Medicare or
Medicaid program.
Provisions of OBRA 93, known as "Stark II," amended Stark I to revise and
expand upon various statutory exceptions, to expand the services regulated by
the statute to a list of "Designated Health Services", and to prohibit Medicaid
referrals where a prohibited financial relationship exists. The additional
Designated Health Services include: physical therapy services; occupational
therapy services; radiology services, including magnetic resonance imaging,
computer axial tomography scans and ultrasound services; durable medical
equipment and supplies; parenteral and enteral nutrients, equipment and
supplies; home health services; outpatient prescription drugs; and inpatient and
outpatient hospital services. Although dialysis services are not listed as a
Designated Health Service, NMC has determined that the Stark Law may apply to
dialysis-related Designated Health Services not paid for under the Composite
Rate as well as to certain services provided by DSI, LifeChem and NMC Homecare.
Fresenius USA believes that the Stark Law may apply to Fresenius USA's sales of
peritoneal dialysis products for home use.
The provisions of Stark II generally became effective on January 1, 1995.
Prior to the effective date of Stark II, NMC had reimbursed the substantial
majority of its Medical Directors on the basis of a percentage of net pre-tax
earnings of the facilities. In response to Stark II, since January 1, 1995, DSD
has compensated its Medical Directors on a fixed fee arrangement to comply with
the requirements of Stark II. As part of such arrangement, approximately 25% of
the Medical Director's compensation is held back and earned by the Medical
Director on the basis of the Medical Director's achievement of quality and cost
containment goals. The compensation of Medical Directors is a subject of the OIG
Investigation. See "-- Legal and Regulatory Proceedings -- OIG Investigation."
On August 14, 1995, HCFA promulgated a final regulation implementing Stark
I and the restrictions on referrals for clinical laboratory services. One of the
provisions of the regulation significantly affecting dialysis providers is
HCFA's interpretation that the Stark Law applies to dialysis-related laboratory
services. However, HCFA promulgated a regulatory exception for clinical
laboratory services paid for as part of the Composite Rate. Although this
regulation did not implement the provisions of Stark II applicable to the
additional list of Designated Health Services, which would be subject to a
separate yet to be issued Stark II regulation, HCFA indicated that a majority of
its interpretations in the Stark I regulation would apply to the Stark II
regulation. HCFA has not formally stated when it plans to issue the Stark II
regulation.
Several states in which NMC operates have enacted self-referral statutes
similar to the Stark Law. Such state self-referral laws typically apply to
referrals of patients regardless of payor source and may contain exceptions
different from each other and from those contained in the Stark Law.
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OTHER FRAUD AND ABUSE LAWS
NMC's and Fresenius USA's operations are also subject to a variety of other
federal and state fraud and abuse laws, principally designed to ensure that
claims for payment to be made with public funds are complete, accurate and fully
comply with all applicable program rules.
The civil monetary provisions of the anti-kickback statute are triggered by
violations of numerous rules under the statute, including the filing of a false
or fraudulent claim and billing in excess of the amount permitted to be charged
for a particular item or service. Monetary penalties of up to $2,000 plus twice
the amount of the claim for each item or service for which an improper claim for
payment was made, may be imposed, resulting in the possibility of substantial
financial penalties for small billing errors that are replicated in a large
number of claims. Violations may also result in suspension of payments or
exclusion from the Medicare and Medicaid programs.
In addition to the statutes described above, other criminal statutes may be
applicable to conduct that is found to violate any of the statutes described
above.
LEGAL AND REGULATORY PROCEEDINGS
As discussed in greater detail below, NMC is the subject of investigations
by several federal agencies and authorities, the outcome of which cannot be
predicted. If the government were successfully to pursue claims arising from any
of these investigations, NMC or one or more of its subsidiaries could be subject
to civil or criminal penalties, including substantial fines, suspension of
payments or exclusion from the Medicare program. Any such result could have a
material adverse effect on NMC's business, financial condition and results of
operation. In addition, as discussed below, NMC has become aware that it is the
subject of a qui tam or "whistleblower" action with respect to some or all of
the issues raised by the government investigations; and NMC may be the subject
of other "whistleblower" actions.
OIG INVESTIGATION
On October 17, 1995, NMC received five investigative subpoenas from 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.
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 relating to its Medical Director contracts and compensation; (c)
NMC's treatment of credit balances resulting from overpayments received under
the Medicare ESRD program, its billing for home dialysis services, and its
payment of supplemental medical insurance premiums on behalf of indigent
patients; (d) LifeChem's laboratory business, including documents relating to
testing procedures, marketing, customers, competition and certain over-payments
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 Homecare and, in particular, information concerning IDPN
billing practices related to various services, equipment and supplies and
payments made to third parties as compensation for administering IDPN therapy.
NMC is cooperating with the OIG investigation and has made, and is expected
to continue to make, extensive document production in response to the subpoenas.
Because of the breadth of the subpoenas, the government has identified and is
continuing to identify specific categories of documents that it is requiring NMC
to produce and has deferred compliance with substantial portions of the
subpoenas at this time. NMC has received another OIG subpoena requiring the
production of limited categories of additional documents relating to subject
matters covered by the original subpoenas and may receive additional such
subpoenas from time to time.
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The government has identified a number of particular areas of its inquiry.
The government has indicated that the areas identified are not exclusive, and
that it may pursue additional areas. As noted, the penalties applicable under
the anti-kickback statute, the False Claims Act and other federal and state
statutes and regulations applicable to NMC's business can be substantial. See
"-- Anti-Kickback Statute, False Claims Act, Stark Law and Fraud and Abuse
Laws." While NMC asserts that it is able to offer legal and/or factual defenses
with respect to the areas the government has identified, there can be no
assurance that the federal government and/or one or more state agencies will not
claim that NMC has violated statutory or regulatory provisions. Additionally, it
is possible that one or more qui tam actions alleging that NMC submitted false
claims to the government may have been filed under seal by former or current NMC
employees or other individuals who may have familiarity with one or more of the
issues under investigation. As noted, under the False Claims Act, any such
private plaintiff could pursue an action against NMC in the name of the U.S. at
his or her own expense if the government declines to do so. It is also possible
that one or more private payors will claim that NMC received excess payments and
will seek reimbursement and other damages from NMC.
An adverse determination with respect to any of the issues addressed by the
subpoenas, or any of the other issues that have been or may be identified by the
government, could have a material adverse impact on NMC and could result in the
payment of substantial fines, penalties and reimbursements or the suspension of
payments or exclusion of NMC or one or more of its subsidiaries from the
Medicare program. Under the terms of the Reorganization, any potential resulting
liability will be retained by NMC, and New Grace will be indemnified by FNMC
against all potential liability arising from or relating to the OIG
Investigation. See "THE REORGANIZATION -- The Distribution Agreement." The
particular areas identified by the government to date are as follows.
Medical Director Compensation
The government is investigating whether DSD's compensation arrangements
with its Medical Directors constitute payments to induce referrals, which would
be illegal under the anti-kickback statute, rather than payment for services
rendered. DSD compensated the substantial majority of its Medical Directors on
the basis of a percentage of the earnings of the dialysis center for which the
Medical Director was responsible from the inception of NMC's predecessor in 1972
until January 1, 1995, the effective date of Stark II. Under the arrangements in
effect prior to January 1, 1995, the compensation paid to Medical Directors was
adjusted to include "add backs," which represented a portion of the profit
earned by MPG on products purchased by the Medical Director's facility from MPG
and (until January 1, 1992) a portion of the profit earned by LifeChem on
laboratory services provided to patients at the Medical Director's facility.
These adjustments were designed to allocate a profit factor to each dialysis
center relating to the profits that could have been realized by the center if it
had provided the items and services directly rather than through a subsidiary of
NMC. The percentage of profits paid to any specific Medical Director was reached
through negotiation, and was typically a provision of a multi-year consulting
agreement.
Since January 1, 1995, DSD has compensated its Medical Directors on a fixed
fee arrangement to comply with the requirements of Stark II. As part of the
arrangement, approximately 25% of the Medical Director's compensation is held
back and earned by the Medical Director on the basis of the Medical Director's
achievement of quality and cost containment goals. In renegotiating its Medical
Director compensation arrangements in connection with Stark II, DSD took account
of the compensation levels paid to its Medical Directors in prior years.
Certain government representatives have expressed the view in meetings with
counsel for NMC that arrangements where the Medical Director was or is paid
amounts in excess of the "fair market value" of the services rendered may
evidence illegal payments to induce referrals, and that hourly compensation is a
relevant measure for evaluating the "fair market value" of the services. DSD
does not compensate its Medical Directors on an hourly basis and has asserted to
the government that hourly compensation and "fair market value" are not relevant
factors in determining whether the anti-kickback statute has been violated.
Because of the wide variation in the profitability of its facilities, and the
variation in the profit percentage contractually negotiated between DSD and its
Medical Directors, there is a wide variation in the amounts that have been
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paid to Medical Directors. The Medical Director contracts negotiated in
connection with the requirements of Stark II also have a wide variation in
Medical Director compensation.
The compensation that DSD has paid and is continuing to pay to a material
number of its Medical Directors could be viewed as being in excess of "fair
market value," both in absolute terms and in terms of hourly compensation. NMC
has asserted to the government that its compensation arrangements do not
constitute illegal payments to induce referrals. NMC has also asserted to the
government that OIG auditors repeatedly reviewed NMC's compensation arrangements
with its Medical Directors in connection with their audits of the costs claimed
by DSD; that the OIG stated in its audit reports that, with the exception of
certain technical issues, NMC had complied with applicable Medicare laws and
regulations pertaining to the ESRD program; and that NMC reasonably relied on
these audit reports in concluding that its program for compensating Medical
Directors was lawful. There has been no indication that the government will
accept NMC's assertions concerning the legality of its arrangements generally or
NMC's assertion that it reasonably relied on OIG audits, or that the government
will not focus on specific arrangements that DSD has made with one or more
Medical Directors and claim that those specific arrangements were or are
unlawful.
The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them to order unnecessary
ancillary services and items. NMC has asserted to the government that the rate
of utilization of ancillary services and items by its Medical Directors is
reasonable and that it did not provide illegal inducements to Medical Directors
to order ancillary services and items.
Credit Balances
In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare patients. Medicare intermediaries commonly direct such providers to
notify them of the overpayment and not remit such amounts to the intermediary by
check or otherwise unless specifically requested to do so. In 1992, HCFA adopted
a regulation requiring certain Medicare providers, including dialysis centers,
to file a quarterly form listing unrecouped overpayments with the Medicare
intermediary responsible for reimbursing the provider. The first such filing was
required to be made as of June 30, 1992 for the period beginning with the
initial date that the provider participated in the Medicare program and ending
on June 30, 1992.
The government is investigating whether DSD intentionally understated the
Medicare credit balance reflected on its books and records for the period ending
June 30, 1992 by reversing entries out of its credit balance account and taking
overpayments into income in anticipation of the institution of the new filing
requirement. DSD's policy was to notify Medicare intermediaries in writing of
overpayments upon receipt and to maintain unrecouped Medicare overpayments as
credit balances on the books and records of DSD for four years; overpayments not
recouped by Medicare within four years would be reversed from the credit balance
account and would be available to be taken into income. NMC asserts that
Medicare overpayments that have not been recouped by Medicare within four years
are not subject to recovery under applicable regulations. NMC also asserts that
its initial filing with the intermediaries disclosed the credit balance on the
books and records of DSD as shown in accordance with its policy.
The government is also investigating whether DSD failed to disclose
Medicare overpayments that resulted from DSD's obligation to rebill commercial
payors for amounts originally billed to Medicare under HCFA's initial
implementation of the OBRA 93 amendments to the secondary payor provisions of
the Medicare Act. See "-- OBRA 93." DSD experienced delays in reporting a
material amount of overpayments after the implementation of the OBRA 93
amendments. NMC asserts that most of these delays were the result of the
substantial administrative burdens placed on DSD as a consequence of the
changing and inconsistent instructions issued by HCFA with respect to the OBRA
93 amendments and were not intentional. Substantially all overpayments resulting
from the rebilling effort associated with the OBRA 93 amendments have now been
reported. Procedures are in place that are designed to ensure that subsequent
overpayments resulting from the OBRA 93 amendments will be reported on a timely
basis.
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Supplemental Medical Insurance
DSD provides grants or loans for the payment of premiums for supplemental
medical insurance (under which Medicare Part B coverage is provided) on behalf
of a small percentage of its patients who are financially needy. The government
is investigating this practice. NMC asserts that the practice is lawful.
Overpayments for Home Dialysis Services
NMC acquired HIC, an in-center and home dialysis service provider, in 1993.
At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC
had received payments for home dialysis services in excess of the Medicare
reasonable charge for services rendered prior to February 1, 1990. NMC settled
the HCFA claim against HIC in 1994. The government is investigating whether the
settlement concerning the alleged overpayments made to HIC resolved all issues
relating to such alleged overpayments. The government is also investigating
whether an NMC subsidiary, Home Dialysis Services, Inc. ("HDS"), received
payments similar to the payments that HIC received, and whether HDS improperly
billed for home dialysis services in excess of the monthly cost cap for services
rendered on or after February 1, 1990. The government is investigating whether
NMC was overpaid for services rendered. NMC asserts that the billings by HDS
were proper.
LifeChem
Overpayments. On September 22, 1995, LifeChem voluntarily disclosed
certain billing problems to the government that had resulted in LifeChem's
receipt of approximately $4.9 million in overpayments from the Medicare program
for laboratory services rendered between 1989 and 1993. LifeChem asserts that
most of these overpayments relate to errors caused by a change in LifeChem's
computer systems and that the remainder of the overpayments were the result of
the incorrect practice of billing for a complete blood count with differential
when only a complete blood count was ordered and performed, and of the incorrect
practice of billing for a complete blood count when only a hemoglobin or
hematocrit test was ordered. LifeChem asserts that the overpayments it received
were not caused by fraudulent activity.
LifeChem made these disclosures to the government as part of an application
to be admitted to a voluntary disclosure program begun by the government in
mid-1995. At the time of the disclosures, LifeChem tendered repayment to the
government of the $4.9 million in overpayments. After the OIG investigation was
announced, the government indicated that LifeChem had not been accepted into its
voluntary disclosure program. The government has deposited the $4.9 million
check with NMC's approval. The matters disclosed in LifeChem's September 22,
1995 voluntary disclosure are a subject of the OIG Investigation.
On June 7, 1996, LifeChem voluntarily disclosed an additional billing
problem to the government that had resulted in LifeChem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
LifeChem advised the government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the composite rate and that were not
eligible for separate reimbursement. LifeChem also advised the government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, LifeChem advised the government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also
advised the government that certain records suggest instances in July 1990 and
August 31 through September 11, 1990, when billing tapes may have been processed
without rules processing. LifeChem is continuing its effort to determine whether
any other overpayments occurred.
Capitation for routine tests and panel design. In October 1994, the OIG
issued a special fraud alert in which it stated its view that the industry
practice of offering to perform or performing the routine tests covered by the
Composite Rate at a price below fair market value, coupled with an agreement by
a dialysis center to refer all or most of its non-Composite Rate tests to the
laboratory, violates the anti-kickback statute. See "-- Reimbursement." In
response to this alert, LifeChem changed its practices with respect to testing
covered
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by the Composite Rate to increase the amount charged to both DSD and third-party
dialysis centers and reduce the number of tests provided for the fixed rate. The
government is investigating LifeChem's practices with respect to these tests.
Benefits provided to dialysis centers and persons associated with dialysis
centers. The government is investigating whether any DSD or third-party
dialysis center or any person associated with any such center was provided with
benefits in order to induce them to use LifeChem services. Such benefits could
include, for example, discounts on RPD supplies, the provision of computer
equipment, the provision of money for the purchase of computer equipment, and
the provision of research grants. NMC has identified certain instances in which
benefits were provided to MPG customers who purchased medical products from RPD
and used LifeChem's laboratory services. The government may claim that the
provision of such benefits violates, among other things, the anti-kickback
statute.
Business and testing practices. As noted above, the government has
identified a number of specific categories of documents that it is requiring NMC
to produce at this time. In addition to documents relating to the areas
discussed above, the government has also required LifeChem to produce at this
time documents relating to the equipment and systems used by LifeChem in
performing and billing for clinical laboratory blood tests, the design of the
test panels offered and requisition forms used by LifeChem, the utilization rate
for certain tests performed by LifeChem, recommendations concerning diagnostic
codes to be used in ordering tests for patients with given illnesses or
conditions, and internal and external audits and investigations relating to
LifeChem's billing and testing. These areas of inquiry are similar to inquiries
that the OIG has made to other Medicare and Medicaid providers in the clinical
laboratory industry within the past several years.
IDPN
Administration kits. As discussed above, one of the principal activities
of NMC Homecare is to provide IDPN therapy to dialysis patients at both
NMC-owned facilities and at facilities owned by other providers. See
"-- Business of NMC -- NMC Homecare." IDPN therapy is typically provided to the
patient 12-13 times per month during dialysis treatment. Bills are submitted to
Medicare on a monthly basis and include separate claims for reimbursement for
supplies, including, among other things, nutritional solutions, administration
kits and infusion pumps. In February 1991, the Medicare carrier responsible for
processing NMC Homecare's IDPN claims issued a Medicare advisory to all
parenteral and enteral nutrition suppliers announcing a coding change for
reimbursement of administration kits provided in connection with IDPN therapy
for claims filed for items provided on or after April 1, 1991. The Medicare
allowance for administration kits during this period was approximately $625 per
month per patient. The advisory stated that IDPN providers were to indicate the
"total number of actual days" when administration kits were "used," instead of
indicating that a one-month supply of administration kits had been provided. In
response, NMC Homecare billed for administration kits on the basis of the number
of days that the patient was on an IDPN treatment program during the billing
period, which typically represented the entire month, as opposed to the number
of days the treatment was actually administered. During the period from April
1991 to June 1992, NMC Homecare had an average of approximately 1,200 IDPN
patients on service.
In May 1992, the carrier issued another Medicare advisory to all PEN
suppliers in which it stated that it had come to the carrier's attention that
some IDPN suppliers had not been prorating their billing for administration kits
used by IDPN patients and that providers should not bill for administration kits
on the basis of the number of days that the patient was on an IDPN treatment
program during the billing period. The advisory stated further that the carrier
would be conducting "a special study to determine whether or not overpayments
have occurred as a result of incorrect billing" and that "[i]f overpayments have
resulted, providers that have incorrectly billed" would "be contacted so that
refunds can be recovered." NMC Homecare revised its billing practices in
response to this advisory for claims filed for items provided on or after July
1, 1992. NMC Homecare was not asked to refund any amounts relating to its
billings for administration kits following the issuance of the second advisory.
The government is investigating whether NMC submitted false claims for
administration kits during the period from April 1, 1991 to June 30, 1992. NMC
asserts that the claims submitted in connection with billing
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for administration kits were proper. The government may claim that NMC
Homecare's billing for administration kits during this period violates, among
other things, the False Claims Act.
Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
the infusion pumps and, until 1992, for IV poles provided to IDPN patients in
connection with the administration of IDPN treatments. These regulations do not
expressly specify that a particular pump and IV pole be dedicated to a specific
patient, and NMC asserts that these regulations permitted NMC Homecare to bill
Medicare for an infusion pump and IV pole so long as the patient was infused
using a pump and IV pole. Despite the absence of an express regulatory
specification, NMC Homecare developed a policy to deliver to a dialysis center a
dedicated infusion pump and IV pole for each patient, although NMC cannot
represent that it followed this policy in every instance. The government is
investigating the propriety of NMC Homecare's billings for infusion pumps and IV
poles.
As noted above, under the new policies published by HCFA with respect to
IDPN therapy, NMC will not be able to bill for infusion pumps after July 1,
1996. The government discontinued reimbursement for IV poles in 1992.
"Hang fees" and other payments. IDPN therapy is typically provided to the
patient during dialysis by personnel employed by the dialysis center treating
the patient with supplies provided and billed to Medicare by NMC Homecare in
accordance with the Medicare parenteral nutrition supplier rules. In order to
compensate dialysis centers for the costs incurred in administering IDPN therapy
and monitoring the patient during therapy, NMC Homecare followed the
industry-wide practice of paying a "hang fee" to the center. Dialysis centers
are responsible for reporting such fees to HCFA on their cost reports. For DSD
dialysis centers, the fee was $30 per administration, based upon internal DSD
cost calculations. For third-party dialysis centers, the fee was negotiated with
each center, typically pursuant to a written contract, and ranged from $15 to
$65 per administration. NMC has identified instances in which other payments and
amounts beyond that reflected in a contract were paid to these third-party
centers.
In July 1993, the OIG issued a management advisory alert to HCFA in which
it stated that "hang fees" and other payments made by suppliers of IDPN to
dialysis centers "appear to be illegal as well as unreasonably high." The
government is investigating the nature and extent of the "hang fees" and other
payments made by NMC Homecare as well as payments by NMC Homecare to physicians
whose patients have received IDPN therapy. The government may claim that the
payments by NMC Homecare to dialysis centers violate, among other things, the
anti-kickback statute.
Utilization of IDPN. Since 1984, when HCFA determined that Medicare should
cover IDPN and other parenteral nutrition therapies, NMC has been an industry
leader in identifying situations in which IDPN therapy is beneficial to ESRD
patients. It is the policy of NMC Homecare to seek Medicare reimbursement for
IDPN therapy only when it is prescribed by a patient's treating physician and
when it believes that the circumstances satisfy the requirements published by
HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for
payment more than 90% of the IDPN claims submitted by NMC Homecare. Since 1994,
the rate of approval for Medicare reimbursement for IDPN claims submitted by NMC
Homecare for new patients, and by the infusion industry in general, has fallen
to approximately 9%. NMC contends that the reduction in rates of approval has
occurred because HCFA and its carriers have implemented an unauthorized change
in coverage policy without giving notice to providers. See "-- IDPN Coverage
Issues." While NMC Homecare has continued to offer IDPN to patients pursuant to
the prescription of the patients' treating physicians and to submit claims for
Medicare reimbursement when it believes the requirements stated in HCFA's
published regulations are satisfied, other providers have responded to the drop
in the approval rate for new Medicare IDPN patients by abandoning the Medicare
IDPN business, cutting back on the number of Medicare patients to whom they
provide IDPN, or declining to add new Medicare patients. The number of patients
to whom NMC Homecare provides IDPN has thus increased.
The government is investigating the utilization rate of IDPN therapy among
NMC patients and whether NMC submitted IDPN claims to Medicare for patients who
were not eligible for coverage or with inadequate documentation of eligibility.
NMC asserts that the utilization rate of IDPN therapy among its dialysis
patients, which, in 1995, averaged less than 3.5%, is the result of the factors
discussed above and that it is the policy of NMC Homecare to seek Medicare
reimbursement for IDPN therapy prescribed by the patient's
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treating physician in accordance with the requirements published by HCFA and its
carrier agents. There can be no assurance that the government will accept NMC's
view or that the government will not claim that NMC Homecare submitted IDPN
claims for individuals who were not eligible for coverage or with inadequate
documentation of eligibility.
QUI TAM ACTION
Grace and NMC have recently 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 "Florida Action"). The original complaint in the Florida
Action was filed under seal in 1994. 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
Grace and NMC with a copy of the Amended Complaint. Grace 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 Grace to provide
copies of the Amended Complaint to Fresenius AG, lenders involved in the NMC
credit facility and their respective counsel and to permit Grace and NMC to
describe the allegations of the Amended Complaint in its securities filings with
respect to the Reorganization.
The Amended Complaint alleges, among other things, that Grace, 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. As
noted under "-- OIG Agreements," the United States has agreed to release any
such claim.
OIG AGREEMENTS
As a result of discussions with representatives of the United States in
connection with the OIG investigation, certain agreements (the "OIG Agreements")
have been entered into to guarantee the payment of any obligations of NMC to the
United States relating to or arising out of the OIG investigation and the
Florida Action (the "Government Claims"). For the purposes of the OIG
Agreements, an Obligation is (a) a liability or obligation of NMC to the United
States in respect of a Government Claim pursuant to a court order (i) which is
final and nonappealable or (ii) the enforcement of which has not been stayed
pending appeal or (b) a liability or obligation agreed to be an Obligation in a
settlement agreement executed by Fresenius Medical Care, Grace or NMC, on the
one hand, and the United States, on the other hand. As stated elsewhere herein,
the outcome of the OIG investigation cannot be predicted. The entering into of
the OIG Agreements is not an admission of liability by any party with respect to
the OIG investigation, nor does it indicate the liability, if any, which may
result therefrom.
Under the OIG Agreements, effective upon consummation of the
Reorganization, the United States will be provided by Fresenius Medical Care and
Grace with a joint and several guarantee of payment when due of all Obligations
(the "Primary Guarantee"). As credit support for this guarantee, NMC will
deliver, on or prior to the Effective Date, an irrevocable standby letter of
credit in the amount of $150 million. The United States will return such letter
of credit (or any renewal or replacement) for cancellation when all Obligations
have been paid in full or it is determined that NMC has no liability in respect
of the Government Claims. In addition, under the OIG Agreements, effective upon
consummation of the Reorganization, the United States will be provided with a
guarantee by Grace Chemicals of the obligations of Fresenius Medical Care under
the Primary Guarantee in respect of Government Claims for acts and transactions
that took place at any time up to the consummation of the Reorganization (the
"Secondary Guarantee"). Under the Secondary Guarantee, payment will be required
only if, and to the extent that, Obligations have become due and payable and
remain uncollected for 120 days. Grace Chemicals is a third party beneficiary of
the Primary Guarantee and may institute suit to enforce its terms.
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Under the OIG Agreements, the United States has agreed, solely in its
capacity as holder of the Government Claims: (a) to not take any action
whatsoever to impede, prohibit, enjoin, delay or otherwise interfere with
consummation of the Reorganization on grounds that the Reorganization
constitutes a fraudulent conveyance or other similarly avoidable transfer as to
the United States; (b) to represent to the court in the Florida Action or any
other court presented with an attempt by a relator in any qui tam action
relating in substantial part to matters that are the subject of the Florida
Action or the OIG investigation to impede, prohibit, enjoin, delay or otherwise
interfere with consummation of the Reorganization that the OIG Agreements
satisfy the concerns of the United States with respect to the Reorganization
and; (c) effective upon consummation of the Reorganization, to release and
discharge Grace Chemicals, Grace, NMC, Fresenius Medical Care, and certain other
parties (collectively, the "Releasees") from claims to the effect that the
Reorganization (or any transaction comprising a part thereof) constitutes a
fraudulent conveyance or other similarly avoidable transfer as to the United
States.
Fresenius Medical Care and the United States state in the OIG Agreements
that they will negotiate in good faith to attempt to arrive at a consensual
resolution of the Government Claims and, in the context of such negotiations,
will negotiate in good faith as to the need for any restructuring of the payment
of any obligations arising under such resolution, taking into account the
ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements
state that the foregoing statements shall not be construed to obligate any
person to enter into any settlement of the Government Claims or to agree to a
structured settlement. Moreover, the OIG Agreements state that the statements
described in the first sentence of this paragraph are precatory and statements
of intent only and that (a) compliance by the United States with such
provisions is not a condition or defense to the obligations of Fresenius
Medical Care, Grace or Grace Chemicals under the OIG Agreements and (b) breach
of such provisions by the United States cannot and will not be raised by
Fresenius Medical Care, Grace New York or Grace Chemicals to excuse performance
of their respective obligations under the OIG Agreements.
If the Reorganization in not consummated on or before October 1, 1996, the
OIG Agreements will terminate and be of no further force and effect unless all
parties thereto agree otherwise in writing. If the Reorganization Agreement is
amended, modified or supplemented after the date of this Joint Proxy
Statement-Prospectus, Fresenius Medical Care will provide the United States with
written notice describing the nature of such amendment, modification or
supplement. If the United States determines that such amendment, modification or
supplement is adverse to its interests, the United States will have the right to
terminate the OIG Agreements by delivering written notice of such termination
within 10 business days of its actual receipt of notice of such amendment,
modification or supplement.
The foregoing describes the material terms of the OIG Agreements, copies of
which have been filed as exhibits to the Registration Statements. The foregoing
description does not purport to be complete and is qualified in its entirety by
reference to such exhibits.
EASTERN DISTRICT OF VIRGINIA
In December 1994, a subsidiary of NMC received a subpoena from a federal
grand jury in the Eastern District of Virginia investigating the contractual
relationships between subsidiaries of NMC that provide dialysis services and
third parties that provide medical directorship and related services to those
subsidiaries. NMC cooperated with the grand jury and produced documents in
response to the subpoena, and there has been no further communication from the
government.
DISTRICT OF NEW JERSEY INVESTIGATION
NMC has received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
certain matters relating to the development of a new dialyzer product line. NMC
is cooperating with this investigation and has provided the grand jury with
extensive documents. On February 12, 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that it is the target of a
federal grand jury investigation into possible violations of criminal law in
connection with its efforts to persuade the FDA to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland
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manufacturing facility. 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 hold. 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 from the federal grand jury requesting certain documents
in connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to
November 1995. The outcome of this investigation and its impact, if any, on
NMC's business or results of operations cannot be predicted at this time.
FDA MATTERS
Since 1993, NMC has engaged in a number of voluntary recalls of products
that it manufactured or that were manufactured by third parties and distributed
by NMC. None of these product recalls has resulted in fines or penalties for
NMC. In 1995, Fresenius USA completed a voluntary action with respect to the
Optum(R) exchange device that Fresenius USA acquired from Abbott, which was
classified by the FDA as a recall. The FDA reviewed Fresenius USA's actions with
respect to this device and determined that they were adequate.
During the period from 1991 through 1993, the FDA issued warning letters
concerning four of the six RPD facilities in the U.S., as well as import alerts
concerning hemodialysis bloodlines manufactured at NMC's Reynosa, Mexico
facility and Focus(R) brand hemodialyzers manufactured at NMC's Dublin, Ireland
facility. As a result of the import alerts, NMC was prohibited from importing
the products covered by the alerts into the U.S. until the FDA confirmed
compliance with GMP requirements at the facilities where such products were
manufactured.
In January 1994, NMC and certain members of its senior management entered
into the Consent Decree providing that the importation of bloodlines and
hemodialyzers could resume upon certification by NMC that the relevant
manufacturing facility complied with GMP requirements and successful completion
of an FDA inspection at the relevant facility to confirm compliance. The Consent
Decree also required NMC to certify, and be inspected for, GMP compliance at all
of RPD's manufacturing facilities in the U.S. Under the Consent Decree, RPD
committed to maintaining ongoing compliance with GMP and related requirements at
both U.S. and non-U.S. manufacturing facilities. As a result of the Consent
Decree, NMC's U.S. facilities were required to undertake significant GMP
improvements.
NMC submitted all required certifications for its U.S. and non-U.S.
facilities in accordance with timetables specified in the Consent Decree, and
the bloodline import alert was lifted in March 1994. During the course of 1994
and 1995, NMC also worked with the FDA and demonstrated that its other
manufacturing facilities in the U.S. were in compliance with GMP requirements.
The hemodialyzer manufacturing facility in Dublin, Ireland was inspected by the
FDA in April and December 1994 but did not pass inspection. NMC completed all
remaining corrective actions, and in December 1995 the FDA determined that the
Dublin facility was in compliance with GMP requirements and lifted the import
alert. No fines or penalties have been imposed on NMC as a result of the FDA's
actions or in connection with the Consent Decree. By policy, however, the FDA
generally will undertake more frequent and more rigorous inspections of
facilities that have been subject to consent decrees. For a discussion of the
effects of the warning letters and import alerts issued by the FDA on NMC's
business, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- NMC."
On January 24, 1995, the FDA issued a warning letter and import alert
relating to NMC's manufacture of Diafilter(R) products at its Limerick, Ireland
facility. That facility was not expressly named in the Consent Decree described
above. Because NMC voluntarily ceased importing Diafilters(R) into the U.S. in
December 1994, and, for business reasons, decided to shut down the Diafilter(R)
business at the Limerick facility on January 23, 1995, no subsequent compliance
review was deemed necessary by the FDA. NMC was not restricted from importing
into the U.S. the other products manufactured at the Limerick facility.
In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing
facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each
location, violations of certain GMP were found. At the Walnut Creek facility,
violations of pre-market notification filing requirements were also found,
although these findings were subsequently reversed when the devices in question
were determined to be covered by
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appropriate filings. The FDA issued warning letters with respect to each
facility, as a result of which the issuance of new 510(k) notices and new export
clearances was placed on administrative hold. Fresenius USA responded to the
inspection findings at Maumee in a manner it believes addresses the FDA's
findings. Fresenius USA subsequently closed the Maumee facility in connection
with the relocation of production from that facility to a facility in
Lewisberry, Pennsylvania. Fresenius USA undertook an exhaustive review of the
FDA's findings relating to Walnut Creek and submitted a detailed response to
those findings. The Ogden plant was reinspected in 1995 and the administrative
holds have been lifted from both Ogden and Walnut Creek. The Walnut Creek
facility was inspected again in January and February of 1996 and Fresenius USA
was advised that all GMP issues raised by the FDA have been resolved. Fresenius
USA believes that its facilities are currently in compliance in all material
respects with applicable state, local and federal requirements.
In addition, the FDA may inspect facilities in the ordinary course of
business to ensure compliance with GMP and other applicable regulations.
INTERNATIONAL REGULATORY CLAIMS
As discussed above, as a general matter, licenses and certifications are
required in connection with the operation of dialysis clinics outside the United
States, and NMC is dependent upon its ability to obtain and maintain such
licenses and certifications. NMC lacks certain licenses and certifications
technically required to operate its facilities in Portugal. However, based on
discussions with regulatory officials in Portugal, NMC management does not
believe that the absence of such licenses will have a material adverse effect on
NMC or materially affect its ability to operate such facilities.
MEDICARE CERTIFICATION ISSUES
As discussed above, licenses and certification for participation in the
Medicare and Medicaid programs are regulated at the federal, state and local
levels. The Medicare carriers serving Florida, New Jersey and Pennsylvania have
implemented coverage policies that may restrict the ability of nuclear-imaging
providers, such as DSI, to qualify as a provider for this service. If DSI is not
permitted to bill for these services as a Medicare provider, it may be able to
bill physicians for the services DSI provides.
DSI participates as a provider under the Medicare Part B program in all
states where applicable, primarily as an independent physiological laboratory.
DSI's Medicare provider number is currently administratively suspended or
temporarily revoked in Rhode Island, Connecticut, and Colorado, due largely to
transitional issues related to the timely completion of applications in
connection with recent acquisitions. The Medicare carrier in Connecticut has
verbally advised DSI that the provider number will be reinstated and
applications are pending in Rhode Island and Colorado. If the provider numbers
are not reinstated retroactively, DSI may not be able to bill for services
rendered during the periods in which the numbers were administratively suspended
or temporarily revoked.
IDPN
In November 1995, NMC filed a complaint in the United States District Court
for the Middle District of Pennsylvania (NMC Homecare, Inc. v. Shalala) seeking
declaratory judgment and injunctive relief to prevent application of a 1993
interpretation of Medicare's coverage guidelines that results in a sharp
reduction in the reimbursement rate for IDPN services provided by NMC. On May
17, 1996, the Magistrate Judge assigned to the case issued a Report to the
District Court Judge recommending grant of the government's motion and dismissal
of the action. NMC has filed objections to the Report, and the government is
expected to respond to those objections in July 1996. The District Court Judge
will issue an order granting or denying the government's motion to dismiss
following completion of the briefing. See "-- Reimbursement -- U.S. -- IDPN."
NMC Homecare's unpaid IDPN claims represent substantial accounts receivable of
NMC Homecare (approximately $103 million as of March 31, 1996, currently
increasing at a rate of approximately $6 million per month). NMC believes that
the reduction in IDPN coverage by Medicare is an unauthorized policy coverage
change. The outcome of this proceeding cannot be predicted. If NMC is not
successful in its effort to obtain payment for its IDPN accounts receivable,
NMC's business, financial position and results of operations could be adversely
affected.
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OBRA 93
OBRA 93 affected the payment of benefits under Medicare and employer health
plans for certain eligible ESRD patients. In July 1994, 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, patients' employer health plans were responsible for payment, which was
generally at rates 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. HCFA further proposed that its new instruction be
effective retroactive to August 1993, the effective date of OBRA 93.
If HCFA's reversal of its original implementation of the provisions of OBRA
93 that relate to ESRD patients for whom Medicare is the secondary payor (see
"-- Reimbursement -- U.S. -- Coordination of Benefits") is upheld, NMC may be
required to refund the payments received from employer health plans for services
provided after August 10, 1993 under HCFA's original implementation, and to
re-bill Medicare for the same services, which would result in a net loss to DSD
of approximately $120 million as of June 30, 1995. NMC ceased to recognize the
incremental revenue realized under the original Program Memorandum as of July 1,
1995, but it continued to bill employer health plans as primary payors for
patients affected by OBRA 93 through December 31, 1995. As of January 1, 1996,
NMC commenced billing Medicare as primary payor for dual eligible ESRD patients
effected by OBRA 93, and has recently begun to rebill in compliance with the
revised policy for services rendered between April 24 and December 31, 1995.
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.
95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April
24, 1995 implementation of the OBRA 93 provisions relating to the coordination
of benefits for dual eligible ESRD patients. See "-- Reimbursement -- U.S. --
Coordination of Benefits." On May 9, 1995, NMC moved for a preliminary
injunction to preclude HCFA from enforcing its new policy retroactively, that
is, to billings for services provided between August 10, 1993 and April 23,
1995. On June 6, 1995, the court granted NMC's request for a preliminary
injunction. The litigation is continuing with respect to NMC's request to enjoin
HCFA's new policy, both retroactively and prospectively, on a permanent basis.
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 implementation of OBRA 93 was impermissible
under applicable law. Pending the outcome of the litigation, HCFA's new policy
remains effective for services provided after April 23, 1995. If HCFA's revised
interpretation is upheld, NMC's business, financial position and results of
operations would be materially adversely affected, particularly if the revised
interpretation is applied retroactively. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC."
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In April 1996, Grace received a formal order of investigation issued by the
Commission directing an investigation into, among other things, whether Grace
violated the federal securities laws by filing periodic reports with the
Commission that contained false and misleading financial information. Pursuant
to this formal order of investigation, Grace received a subpoena from the
Southeast Regional Office of the Commission requiring Grace to produce documents
relating to reserves (net of applicable taxes) established by Grace and NMC
during the period from January 1, 1990 to the date of the subpoena (the "Covered
Period"). Grace believes that all financial statements filed by Grace with the
Commission during the Covered Period, including the financial statements of NMC
included in the NMC Form 10 filed with the Commission on September 25, 1995, and
the consolidated financial statements of Grace filed in Grace's Annual Report on
Form 10-K for the year ended December 31, 1995 (all of which financial
statements, other than unaudited quarterly financial statements, were covered by
unqualified opinions issued by Price Waterhouse LLP,
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independent certified public accountants), have been fairly stated, in all
material respects, in conformity with US GAAP. Grace is cooperating with the
Commission. The outcome of this investigation and its impact, if any, on Grace
or NMC cannot be predicted at this time.
IDPN COVERAGE ISSUES
NMC Homecare 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. (National
Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). The government has filed a
motion to dismiss on grounds of failure to exhaust administrative remedies. NMC
has filed a cross-motion for summary judgment. The motions are pending. On May
17, 1996, the Magistrate Judge assigned to the case issued a Report to the
District Court Judge recommending grant of the government's motion and dismissal
of the action. NMC has filed objections to the Report, and the government is
expected to respond to those objections in July 1996. The District Court Judge
will issue an order granting or denying the government's motion to dismiss
following completion of the briefing.
NMC management believes that its IDPN claims are consistent with published
Medicare coverage guidelines and ultimately will be approved for payment. Such
claims represent substantial accounts receivable of NMC, amounting to
approximately $103 million as of March 31, 1996, respectively, and currently
increasing at the rate of approximately $6 million per month. 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.
SHAREHOLDER LITIGATION
In 1995, nine purported class action lawsuits were brought against Grace
and certain of its officers and directors in various federal courts. These
lawsuits have been consolidated in a case entitled Murphy, et al. v. W. R. Grace
& Co., et al. No. 95-CV-9003(JFK) (the "Murphy Action"), which is pending in the
U.S. District Court for the Southern District of New York. The first amended
class action complaint in this lawsuit, which purports to be a class action on
behalf of all persons and entities who purchased publicly traded securities of
Grace during the period from March 13, 1995 through October 17, 1995, generally
alleges that the defendants violated federal securities laws by concealing
information and issuing misleading public statements and reports concerning
NMC's financial position and business prospects, a proposed spin-off of NMC, and
the matters that are the subject of the OIG Investigation and the investigation
by the federal grand jury in the District of New Jersey. See "-- OIG
Investigation" and "-- District of New Jersey Investigation." The Murphy Action
seeks unspecified damages, attorneys' and experts' fees and costs and such other
relief as the court deems proper.
In October 1995, a purported derivative lawsuit was filed in the U.S.
District Court for the Southern District of Florida, Northern Division against
Grace, certain of its directors and its former President and Chief Executive
Officer, alleging that such individuals breached their fiduciary duties by
failing to properly supervise the activities of NMC in the conduct of its
business (Bennett v. Bolduc, et al. 95-8638-CIV-MORENO). In December 1995, the
plaintiff in this action filed a new action, based on similar allegations, in
the U.S. District Court for the Southern District of New York (Bennett v.
Bolduc, et al. 95-CV-10737 (AGS)) (the "Bennett Action"). The action in Florida
has been dismissed in favor of the Bennett Action. A second action making
similar allegations was filed in October 1995 in New York State Supreme Court,
New York County (Bauer v. Bolduc, et al. 95-125751). This action has been stayed
in favor of the Bennett Action, which has been
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consolidated, for discovery purposes only, with the Murphy Action described
above. The complaint in the Bennett Action seeks unspecified damages, attorneys'
and experts' fees and costs and such other relief as the court deems proper.
These actions are at early stages and their outcomes cannot be predicted,
although Grace, NMC and the individual defendants believe that they have
substantial defenses to the claims asserted.
In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against Grace and certain of its current and
former directors, alleging that the defendants breached their fiduciary duties,
principally by failing to provide internal financial data concerning NMC to
Vivra and by failing to negotiate with Baxter in connection with a business
combination involving NMC (Rosman v. W. R. Grace, et al. 96-102347). The lawsuit
seeks injunctive relief ordering defendants to carry out their fiduciary duties
and preventing or rescinding the Reorganization or any related transactions with
Fresenius AG, unspecified monetary damages, an award of plaintiff's attorneys'
and experts' fees and costs, and such other relief as the court may deem just
and proper. The plaintiff has not taken any steps to prosecute the action since
it was filed. The defendants believe this lawsuit is without merit.
OTHER LITIGATION AND EXPOSURES
In recent years, physicians, hospitals and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
professional negligence, malpractice, product liability, workers' compensation
or related claims, many of which involve large claims and significant defense
costs. Fresenius USA and NMC have been, and can be expected to continue from
time to time to be, subject to such suits due to the nature of their business.
Additionally, NMC, in connection with its diagnostics business, has been the
subject of a "wrongful life" lawsuit. Although Fresenius USA and NMC maintain
insurance at a level which they believe to be prudent, there can be no assurance
that the coverage limits will be adequate or that all asserted claims will be
covered by insurance. In addition, there can be no assurance that liability
insurance will continue to be available at acceptable costs. A successful claim
against Fresenius USA or NMC in excess of insurance coverage could have a
material adverse effect upon Fresenius Medical Care, Fresenius USA or NMC and
the results of their operations. Any claims, regardless of their merit or
eventual outcome, also may have a material adverse effect on the reputation and
business of Fresenius Medical Care, Fresenius USA or NMC. NMC has identified two
instances in which a low level employee and/or an agent engaged in illegal
billing practices. In such instances, NMC has terminated its affiliation with
such persons and advised the appropriate law enforcement authority. The illegal
actions of such persons may subject NMC to liability under the False Claims Act,
among other laws. In addition, Fresenius USA and NMC assert claims and suits
arising in the ordinary course of business, the ultimate resolution of which
would not, in the opinion of Fresenius Medical Care and NMC, have a material
adverse effect on their financial condition.
HEALTH CARE REFORM
Health care reform is considered by many in the U.S. to be a national
priority. In November 1993, the Clinton Administration proposed legislation that
would have effected sweeping changes in the health care industry. Although these
proposals were not enacted into law, members of Congress from both parties and
the executive branch are continuing to consider many health care proposals, some
of which are comprehensive and far-reaching in nature. Several states are
currently considering similar proposals. It cannot be predicted what action, if
any, the federal government or any state may ultimately take with respect to
health care reform or when any such action will be taken. Health care reform may
bring radical changes in the financing and regulation of the health care
industry, which could have a material adverse effect on the business of
Fresenius Medical Care or its subsidiaries and the results of their operations.
CHANGES IN THE HEALTH CARE INDUSTRY
Significant changes in the health care industry are occurring as a result
of market driven forces that are creating significant downward pressure on
reimbursement rates that Fresenius Medical Care and its subsidiaries will
receive for their services and products. A substantial portion of third-party
health insurance is now furnished through some type of managed care plan,
including HMOs.
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Managed care plans are increasing their market share, and this trend may
accelerate as a result of the merger and consolidation of providers and payors
in the health care industry and as a result of the discussions among members of
Congress and the executive branch regarding ways to increase the number of
Medicare and Medicaid beneficiaries served through such managed care plans. At
the same time, private purchasing cooperatives and the government are attempting
to limit premium increases for these plans. In such an environment, controlling
underlying medical costs is the only vehicle for ensuring satisfactory managed
care plan margins. Managed care plans have been aggressive in seeking lower
reimbursement levels for virtually all providers. For some populations, plans
have sought to limit their own financial risk by negotiating capitation
agreements under which providers assume responsibility for delivering a range of
services at a fixed payment amount. Capitation effectively "locks in" a base of
patients for providers who accept such arrangements. If substantially more
patients of NMC join managed care plans or if such plans reduce reimbursements
or capitate competitor companies, NMC's (and Fresenius Medical Care's) business
and results of operations could be adversely affected, possibly materially.
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GRACE SPECIAL-PURPOSE SELECTED FINANCIAL DATA
The following Selected Special-Purpose, Consolidated Financial Information
of Grace includes only the assets, liabilities, revenues and expenses of the
Grace health care business operated by NMC prior to the Reorganization. However,
certain health care-related assets owned or investments held in part by Grace
Chemicals and in part by NMC, and previously under the oversight of NMC, are
being retained by Grace Chemicals in the Reorganization and are excluded from
this Selected Special-Purpose, Consolidated Financial Information. The following
Selected Special-Purpose, Consolidated Financial Information of Grace should be
read in conjunction with the Special-Purpose, Consolidated Financial Statements
of Grace and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- NMC" included elsewhere in this Joint Proxy
Statement-Prospectus, as well as Grace's 1995 Annual Report on Form 10-K
incorporated herein by reference. The following Selected Special-Purpose,
Consolidated Financial Information for the years ended December 31, 1993, 1994
and 1995 has been derived from Special-Purpose, Consolidated Financial
Statements audited by Price Waterhouse LLP, independent accountants, except for
Balance Sheet Data at December 31, 1993. Special-Purpose, Consolidated Balance
Sheets at December 31, 1994 and 1995 and the related Special-Purpose,
Consolidated Statements of Earnings and of Cash Flows for the three years ended
December 31, 1995 and notes thereto appear elsewhere herein. The report of Price
Waterhouse LLP which also appears elsewhere herein contains an explanatory
paragraph relating to the basis of presentation described in Note 1 to such
Special-Purpose, Consolidated Financial Statements. The Selected
Special-Purpose, Consolidated Financial Information for the three months ended
March 31, 1995 and 1996, and the years ended December 31, 1991 and 1992 and the
Balance Sheet Data at December 31, 1993 has been derived from Grace's unaudited
Special-Purpose, Consolidated Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
DATA
Net revenues........... $1,010 $1,214 $1,456 $1,818 $2,033 $478 $528
Cost of health care
services and medical
supplies............. 592 700 840 1,027 1,176 277 315
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........... 418 514 616 791 857 201 213
Operating expenses..... 287 362 413 561 625 147 157
Interest expense,
net.................. 17 12 12 16 26 6 7
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings before income
taxes................ 114 140 191 214 206 48 49
Provision for income
taxes................ 51 60 87 112 109 22 23
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings........... $ 63 $ 80 $ 104 $ 102 $ 97 $ 26 $ 26
========== ========== ========== ========== ========== ========== ==========
Earnings per share..... $ 0.71 $ 0.89 $ 1.12 $ 1.08 $ 1.01 $ 0.27 $ 0.27
Weighted number of
shares of common
stock................ 87,236,000 89,543,000 91,974,000 93,936,000 95,822,000 94,137,000 97,888,000
BALANCE SHEET DATA (AT
PERIOD END DATE):
Total assets........... $853 $900 $1,245 $1,644 $1,998 $2,059
Total long-term debt
and capitalized lease
obligations.......... 7 6 14 17 35 28
Total liabilities...... 253 367 365 485 635 601
Total equity........... 600 533 880 1,159 1,363 1,458
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- NMC
For purposes of the following discussion, NMC has been treated as Grace's
sole continuing operation and Grace's packaging and specialty chemical
businesses have been excluded. The following is a discussion of the financial
condition and results of operations of NMC. The discussion should be read in
conjunction with the financial statements included elsewhere in this Joint Proxy
Statement-Prospectus.
This section contains certain forward-looking statements. These
forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting NMC, 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
NMC, government reimbursement, future plans and management's expectations
regarding future performance.
OVERVIEW
NMC is primarily engaged in (a) providing kidney dialysis services, (b)
manufacturing and distributing products and equipment for dialysis treatment and
performing clinical laboratory testing and other medical services, and (c)
providing home infusion therapy, home respiratory therapy and home health
services. Throughout NMC's history, a significant portion of NMC'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.
NMC derives a significant portion of its net revenues from Medicare,
Medicaid and other government health care programs (approximately 62% in 1995).
The reimbursement rates under these programs, including the Composite Rate, the
reimbursement rate for EPO (which accounted for approximately 21% of DSD's total
net revenues in 1995), 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. In connection with its
consideration of the fiscal year 1997 federal budget, Congress is considering
proposals to amend the Medicare ESRD legislation to extend the coordination of
benefits period during which a patient's employer health plan is the primary
payor and Medicare is the secondary payor. If enacted, such legislation could
favorably affect NMC's results of operations. For example, if a six-month
extension of the coordination of benefits period had been in effect for the full
1995 fiscal year, it would have resulted in an increase of DSD's annual revenues
and pretax profits by approximately $65 million, assuming no reduction in
reimbursement rates paid by non-government payors. There can be no assurance as
to whether or when any proposed legislation will be enacted. See "BUSINESS OF
FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters."
NMC's business, financial position and results of operations would 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. NMC's business, financial position and
results of operations also could be materially adversely affected by the
pendency of, or an adverse outcome in, the OIG Investigation, the pending
challenge by NMC 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. See "BUSINESS OF
FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters" and "RISK
FACTORS -- Risks Relating to Regulatory Matters -- Potential Loss of IDPN
Reimbursement" and "-- Risks Relating to OBRA 93 Dispute."
NMC also derives a significant portion of its net revenues from
reimbursement by non-government payors. Historically, reimbursement rates paid
by these non-government 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 NMC receives for its services and products. See "RISK FACTORS -- Risks
Relating to Regulatory Matters -- Health Care Reform."
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DSD operated or managed dialysis centers in 14 foreign countries at March
31, 1996. In certain countries, NMC experiences lower reimbursement rates per
treatment for dialysis services than are generally realized in the U.S. NMC'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.
RESULTS OF OPERATIONS
The following tables summarize certain operating results of NMC by
principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by MPG to DSD.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
(DOLLARS IN MILLIONS) MARCH 31,
------------------------------ --------------
1993 1994 1995 1995 1996
------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues:
DSD................................................. $1,027 $1,309 $1,496 $348 $394
MPG................................................. 345 354 387 91 105
NMC Homecare........................................ 217 318 327 82 78
Intercompany Eliminations........................... (133) (163) (177) (43) (49)
------ ------ ------ ---- ----
Total Net Revenues.................................... $1,456 $1,818 $2,033 $478 $528
====== ====== ====== ==== ====
Operating Earnings:
DSD................................................. $ 192 $ 250 $ 254 $ 62 $ 52
MPG................................................. 42 3 22 10 18
NMC Homecare........................................ 37 49 42 12 7
------ ------ ------ ---- ----
271 302 318 84 77
------ ------ ------ ---- ----
Other Expenses:
General Corporate, including Grace Allocations...... 40 48 66 23 20
Research and Development, including Grace
Allocations....................................... 28 24 20 7 1
Interest Expense, Net............................... 12 16 26 6 7
------ ------ ------ ---- ----
Total Other Expenses.................................. 80 88 112 36 28
------ ------ ------ ---- ----
Earnings Before Income Taxes.......................... 191 214 206 48 49
Provision for Income Taxes............................ 87 112 109 22 23
------ ------ ------ ---- ----
Net Earnings.......................................... $ 104 $ 102 $ 97 $ 26 $ 26
====== ====== ====== ==== ====
</TABLE>
1995 COMPARED TO 1994
Net revenues for 1995 increased by 12% ($215 million) over 1994, with DSD
accounting for most of the increase. Net earnings for 1995 decreased 5% ($5
million) as compared to 1994 as increased operating earnings were offset by
higher general corporate and interest expenses.
DSD. DSD's net revenues for 1995 increased by 14% ($187 million) over
1994, primarily as a result of a 15% increase in the number of treatments
provided worldwide and a $39 million increase in revenues in DSI. The treatment
increase was largely due to an increase in the number of dialysis centers (681
at December 31, 1995 as compared to 590 at December 31, 1994). The growth in DSI
was primarily due to three acquisitions consummated in 1995. DSD revenues were
adversely affected by the decision, effective July 1, 1995, to discontinue the
recognition of the incremental revenue that had been previously recorded
relating to certain dual eligible ESRD patients. See "RISK FACTORS -- Risks
Relating to Regulatory Matters -- Risks Relating to OBRA 93 Dispute."
DSD's operating earnings for 1995 increased by 2% ($4 million) over 1994,
primarily as a result of the increase in profits from international dialysis
operations and from DSI, due to the acquisitions consummated
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<PAGE> 159
in 1995, partially offset by a 6% decline in domestic dialysis profits due to
the aforementioned change in revenue recognition for certain dual eligible ESRD
patients.
MPG. MPG's net revenues for 1995 increased by 9% ($33 million) as compared
to 1994 due to increases at both RPD and LifeChem. RPD's net revenues for 1995
increased 6% ($17 million), primarily due to revenues from acquired businesses
in Brazil and Argentina as well as from greater revenues from other
international operations and domestic DSD facilities. Domestic revenues were
essentially unchanged from 1994. LifeChem net revenues increased as a result of
increased billable testing volume.
MPG's operating earnings improved by 633% ($19 million) as compared to
1994, due primarily to the increased net revenues at LifeChem and RPD in 1995,
improved capacity utilization at domestic manufacturing plants and decreased
compliance costs, primarily legal and consulting expenses, incurred in 1995
versus those incurred in 1994 in connection with FDA warning letters and import
alerts. See "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters
- -- Legal and Regulatory Proceedings" and "RISK FACTORS -- Risks Relating to
Regulatory Matters -- Operations Subject to and Potential Effects of
Governmental Regulation." This improvement was partially offset by a repayment
in 1995 by LifeChem to the government of $4.9 million in overpayments received
from Medicare during the period 1989 to 1993 and certain other related charges.
See "RISK FACTORS -- Risks Relating to Regulatory Matters -- Pending
Investigations" and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Investigation." In addition,
1994 operating earnings of MPG were adversely impacted by a charge of $27
million for the impairment of all of the goodwill recognized from the 1993
acquisition of a German renal products manufacturing and distribution operation.
In 1995, operating earnings were also adversely impacted by a charge of $29
million for the write-off of the German dialysis machine manufacturing operation
($12 million) acquired in the 1993 German acquisition and the write-off of the
carrying value of the assets used in developing a new dialyzer product line in
Ireland and other related charges ($17 million).
NMC Homecare. NMC Homecare's net revenues for 1995 increased by 3% ($9
million) over 1994, primarily as a result of the full-year effect of the April
1994 acquisition of HNS, and growth in the respiratory therapy and home health
care business.
NMC Homecare's operating earnings for 1995 decreased by 14% ($7 million)
from 1994, primarily as a result of a $5 million increase in the provision for
bad debts and increased managed care pricing pressure.
Other Expenses. NMC's other expenses for 1995 increased by 27% ($24
million) over 1994. General corporate expenses increased by 38% ($18 million)
over 1994 due to higher allocations of corporate expenses by the Grace
consolidated group, as well as increased NMC corporate expenses (reflecting the
growth of NMC), costs related to the OIG investigative subpoenas (discussed
above) and foreign exchange translation adjustments. Following the
Reorganization, NMC, as part of Fresenius Medical Care, will not be allocated
Grace consolidated group corporate expenses, but will incur corporate expenses
as part of Fresenius Medical Care; which may be higher or lower than those
allocated by Grace. Research and development expenses decreased by 17% ($4
million) in 1995 versus 1994 due primarily to a reduction in the allocation of
these expenses by the Grace consolidated group. NMC plans to discontinue most of
the ongoing research projects that resulted in these allocations from the Grace
consolidated group ($16 million) during 1996 and after the Reorganization,
thereby incurring significantly lower research and development expenses.
Interest expense increased by 63% ($10 million) in 1995 over 1994 due to higher
financing charges under NMC's accounts receivable securitization program and
increased borrowings used to finance growth in international operations, as well
as the interest charges associated with a temporary $100 million bank line of
credit which was in place during the last four months of 1995.
Income Tax Rate. The effective tax rate was 53% for 1995 as compared with
52% for 1994. The effective income tax rates for 1995 and 1994 were
significantly higher than the combined statutory rates due primarily to
nondeductible losses in a number of foreign countries. For 1995, the most
significant components were the costs associated with the discontinuance of the
Irish dialyzer manufacturing process, as well as continuing operating losses of
the German renal products manufacturing operation. The major portion of these
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losses for 1994 relates to the write-off of goodwill, as well as operating
losses of the German renal products manufacturing and distribution operation.
1994 COMPARED TO 1993
Net revenues for 1994 increased by 25% ($362 million) over 1993, with DSD
accounting for most of the increase. Net earnings for 1994 decreased by $2
million as compared to 1993, as increased operating earnings were offset by the
write-off of goodwill related to RPD's German renal products manufacturing
operation and higher general corporate and interest expenses.
DSD. DSD's net revenues for 1994 increased by 27% ($282 million) over
1993, primarily as a result of a 15% increase in the number of treatments
provided worldwide and the beneficial effect of the initial implementation of
HCFA's initial instruction under OBRA 93. The treatment increase was largely due
to an increase in the number of dialysis centers (590 at December 31, 1994 as
compared to 471 at December 31, 1993), reflecting both acquisitions and new
center openings. As a result of HCFA's initial instruction under OBRA 93, DSD
began to bill private insurance plans (which generally pay at a higher rate) in
January 1994 for treatment of certain patients previously billed to Medicare.
DSD's operating earnings for 1994 increased by 30% ($58 million) over 1993,
primarily as a result of the impact of OBRA 93 and the increased number of
treatments provided. The rate of operating earnings growth exceeded the rate of
net revenue growth because the effect of OBRA 93 was to increase net revenues
without a corresponding increase in associated costs and because of the increase
in treatment volume without a corresponding increase in fixed overhead expenses.
MPG. MPG's net revenues increased 3% ($9 million) in 1994 as compared to
1993, primarily due to an increase in LifeChem net revenues. RPD net revenues
for 1994 were essentially unchanged from the 1993 level, in significant part
because of the effects of the warning letters and import alerts issued by the
FDA in the second quarter of 1993. These actions by the FDA raised concerns in
the renal products market, particularly among unaffiliated customers, as to the
availability of products from RPD; however, in many cases, NMC was able to
substitute products manufactured by third parties for RPD products subject to
the FDA actions in order to fill orders from DSD and unaffiliated customers.
LifeChem net revenues increased as a result of increased billable testing
volumes.
MPG operating earnings for 1994 decreased by 93% ($39 million) as compared
to 1993, primarily due to legal and compliance costs arising as a result of the
FDA warning letters and import alerts coupled with related cutbacks in
production that were not accompanied by commensurate reductions in fixed costs.
During 1994, NMC reviewed its investment in its German renal products
manufacturing facilities and determined that goodwill resulting from this 1993
acquisition was permanently impaired. Accordingly, a charge of $27 million was
recorded to reflect this impairment.
NMC Homecare. NMC Homecare's net revenues for 1994 increased by 47% ($101
million) over 1993 primarily as a result of the full year effect of the June
1993 acquisition of the infusion therapy operations of HIC, the April 1994
acquisition of HNS and the full year effect of the December 1993 acquisition of
a home health services company, PCHS.
NMC Homecare's operating earnings for 1994 increased by 32% ($12 million)
over 1993, primarily as a result of the three acquisitions described above. The
rate of operating earnings growth lagged the rate of net revenue growth due
primarily to the effect of managed care pricing pressure.
Other Expenses. NMC's other expenses for 1994 increased by 10% ($8
million) over 1993. General corporate expenses increased by 20% ($8 million)
over 1993 due to higher allocations of corporate expenses from Grace and to the
growth of NMC. Interest expense increased by 33% ($4 million) over 1993 due to
increased borrowings for international operations and higher financing charges
under NMC's accounts receivable securitization program. The effective income tax
rate was 52% for 1994 as compared to 46% for 1993. The increase in the effective
income tax rate was due primarily to the write-off of goodwill and operating
losses associated with the German renal products manufacturing operation.
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THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Net revenues for the first three months of 1996 increased by 10% ($50
million) over the comparable period in 1995, with DSD accounting for 92% of the
increase. Net earnings for the first three months of 1996 remained the same as
the comparable period in 1995, primarily due to a reduction in the allocation of
expenses by the Grace group, partially offset by the absence of the comparable
profit contribution of DSD from OBRA 93 and continuing price competition from
managed care at NMC Homecare.
DSD. DSD's net revenues for the first three months of 1996 increased by
13% ($46 million) over the comparable period in 1995, primarily as a result of a
13% increase in the number of treatments provided worldwide and a $16 million
increase in revenues in DSI. The treatment increase was largely due to an
increase in the number of dialysis centers (693 at March 31, 1996 as compared to
610 at March 31, 1995). The growth of DSI was primarily due to a significant
increase in the number of primary care treatments resulting from acquisitions in
1995. DSD revenues were adversely affected by the decision, effective July 1,
1995, to discontinue the recognition of the incremental revenue that had been
previously recorded relating to certain dual eligible ESRD patients. See "RISK
FACTORS -- Risks Relating to Regulatory Matters -- Risks Relating to OBRA 93
Dispute."
DSD's operating earnings for the first three months of 1996 decreased by
16% ($10 million) over the comparable period in 1995, primarily as a result of
the absence of the comparable profit contribution from OBRA 93 ($17 million),
somewhat offset by profits on increased treatment volume.
MPG. MPG's net revenues for the first three months of 1996 increased by
15% ($14 million) over the comparable period in 1995, due to increases at both
RPD and LifeChem. RPD's net revenues for the first three months of 1996
increased by 17% ($12 million) over the comparable period in 1995, primarily as
a result of a 10% increase in sales of medical supplies to DSD as well as
greater revenues from international operations due to increased market
penetration in Europe. LifeChem net revenues increased as a result of increased
billable testing volume.
MPG's operating earnings for the first three months of 1996 increased by
80% ($8 million) over the comparable period in 1995, primarily due to higher
revenues, increased capacity utilization and lower manufacturing costs.
NMC Homecare. NMC Homecare's net revenues for the first three months of
1996 decreased by 5% ($4 million) over the comparable period in 1995, primarily
due to a 9% decrease in infusion therapy revenues ($6 million) and continued
price compression from managed care, partially offset by an increase in
respiratory therapy revenues ($2 million).
NMC Homecare's operating earnings for the first three months of 1996
decreased by 42% ($5 million) over the comparable period in 1995, primarily due
to a decline in base infusion revenue and margin pressures from continuing
managed care price competition.
Other Expenses. NMC's other expenses for the first three months of 1996
decreased by 22% ($8 million) over the comparable period in 1995, primarily due
to a reduction of allocations of corporate ($1 million) and research and
development expenses ($6 million) by the Grace consolidated group, partially
offset by OIG subpoena expenses ($5 million) and higher foreign exchange losses.
Following the Reorganization, NMC, as part of Fresenius Medical Care, will not
be allocated Grace consolidated group corporate expenses, but will incur
additional expenses of its own. Interest expense increased 17% ($1 million) for
the first three months of 1996 over the comparable period in 1995, primarily due
to increased bank borrowings.
LIQUIDITY AND CAPITAL RESOURCES
NMC requires significant capital resources to pursue its growth strategy of
developing new dialysis centers, acquiring existing dialysis centers, expanding
the number of facilities at which its homecare services are offered, making
other strategic acquisitions and expanding its international operations. NMC
made acquisitions totalling $25 million and $43 million in the first three
months of 1996 and 1995, respectively, and $253 million, $248 million, and $240
million in 1995, 1994 and 1993, respectively. NMC made capital expenditures for
internal expansion, improvements, new furnishings and equipment of $25 million
and $28
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million in the first three months of 1996 and 1995, respectively, and $103
million, $84 million and $78 million in 1995, 1994 and 1993, respectively.
NMC also requires capital resources for working capital purposes. NMC used
cash to fund increases in accounts receivable of $43 million and $20 million in
the first three months of 1996 and 1995, respectively, and $176 million, $140
million and $86 million in 1995, 1994 and 1993, 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. NMC's accounts
receivable also increased in 1995 because many of the private third-party payors
billed by NMC in respect of dual eligible ESRD patients are withholding payment
pending the outcome of the litigation over OBRA 93.
NMC has historically funded its acquisitions and capital expenditures with
cash advances from the Grace consolidated group and cash from operations
supplemented by financing programs, including the accounts receivable
securitization program. NMC generated net cash from operations of $11 million in
the first three months of 1996 and $129 million, $177 million and $89 million in
1995, 1994 and 1993, respectively. There were no significant cash flows
generated from operations in the first three months of 1995. NMC received net
cash advances from Grace of $69 million and $44 million in the first three
months of 1996 and 1995, respectively, and $107 million, $177 million and $245
million for 1995, 1994 and 1993, respectively.
Effective July 1, 1995, NMC 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 NMC'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 December
31, 1995. The amount of the potential net loss for financial reporting purposes
is not expected to increase subsequent to June 30, 1995 because, as described
above, NMC did not recognize the incremental OBRA 93 revenue; the amount of the
potential cash loss subsequent to June 30, 1995 is not significantly increasing
because many of the private payors are withholding payment pending the outcome
of the litigation. NMC began billing Medicare as the primary payor for the dual
eligible ESRD patients affected by OBRA 93 effective January 1, 1996 and has
begun to rebill Medicare as the primary payor for services rendered to dual
eligible ESRD patients from April 23, 1995 through December 31, 1995 for whom
payment had not yet been rendered by their third-party insurance payors. 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, NMC may be able to rebill such
services to third-party payors and, as a result, NMC's future results of
operations and financial position would be favorably affected by the incremental
revenue that NMC would recognize.
NMC plans to enter into the NMC Credit Agreement, with an available
aggregate principal amount of approximately $2.50 billion. The NMC Credit
Agreement will be used to fund a payment to Grace Chemicals, refinance existing
outstanding debt, finance existing and future letters of credit and for general
corporate purposes, future capital requirements and acquisitions. It is expected
that NMC will have significant indebtedness under the NMC Credit Agreement. See
"RISK FACTORS -- Other Risks -- Effects of Indebtedness."
NMC is party to a $180 million receivables financing arrangement. At March
31, 1996, $179 million was outstanding under this agreement.
NMC also is a party to various international loan arrangements, most of
which are short-term in nature. At March 31, 1996, an aggregate of $172 million
was outstanding under these arrangements. Some or all of these arrangements may
be refinanced through borrowings under the NMC Credit Agreement.
Beginning in 1995, NMC financed working capital requirements for certain
overseas operations by means of borrowings denominated in currencies other than
the operational currency. NMC hedges its exposure to the foreign exchange risk
associated with these borrowings through the use of forward purchase contracts,
whereby NMC contracts with the same counterparty as the original borrowing to
purchase the currency in
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which the loan is denominated and sell the operational currency with a maturity
date equivalent to the maturity date of the underlying borrowings. The value of
these borrowings and associated forward exchange contracts at December 31, 1995
and 1994 amounted to approximately $48 million and $14 million, respectively.
NMC estimates that these transactions had a favorable impact on NMC's net
interest expense for the year ended December 31, 1995 and 1994 of $0.3 million
and $0.0 million, respectively. Forward purchases of foreign currency are used
solely to manage exposure to fluctuations in foreign currency exchange rates.
The liquidity of NMC is contingent upon a number of factors, principally
NMC's future operating results and the contingencies referred to below. If
existing sources of funds are not sufficient to provide liquidity, NMC may need
to sell assets or obtain debt or equity financing from additional external
sources. There can be no assurance that NMC will be able to do so on
satisfactory terms, if at all.
IMPACT OF INFLATION
A substantial portion of NMC'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 NMC's business and results of
operations, possibly materially.
CONTINGENCIES
NMC 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. See "BUSINESS
OF FRESENIUS MEDICAL CARE -- Legal and Regulatory Proceedings." An adverse
outcome in any of these matters could have a material adverse effect on NMC's
business, financial condition and results of operations.
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SELECTED FINANCIAL DATA OF FRESENIUS WORLDWIDE DIALYSIS
The following selected combined financial data of Fresenius Worldwide
Dialysis should be read in conjunction with the combined financial statements of
Fresenius Worldwide Dialysis and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FRESENIUS WORLDWIDE DIALYSIS"
included elsewhere in this Joint Proxy Statement-Prospectus. The U.S. GAAP
selected financial information as of and for the years ended December 31, 1994
and 1995 has been derived from combined financial statements prepared in
accordance with US GAAP and audited by KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprufungsgesellschaft, independent accountants. The
US GAAP selected combined financial data as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 have been derived from the Fresenius
Worldwide Dialysis unaudited interim combined financial statements, prepared in
accordance with US GAAP, and, in the opinion of management of Fresenius AG have
been prepared on a basis substantially consistent with that of the audited US
GAAP financial statements of Fresenius Worldwide Dialysis as of and for the
years ended December 31, 1994 and 1995. The German GAAP selected combined
financial data as of and for each of the years in the five-year period ended
December 31, 1995 have been derived from the Fresenius Worldwide Dialysis
unaudited combined financial statements, prepared in accordance with German GAAP
and, in the opinion of management of Fresenius AG have been prepared on a basis
substantially consistent with that of the audited German GAAP financial
statements of Fresenius AG as of and for such periods. US GAAP information for
Fresenius Worldwide Dialysis as of and for the years ended December 31, 1991,
1992 and 1993 is not available. German GAAP differs in certain significant
respects from US GAAP. For a description of certain of these significant
differences, see "SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND
U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------ -------------
1991 1992 1993 1994 1995 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
GERMAN GAAP U.S. GAAP
-------------------------------- -----------------------------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Net sales....................... $377 $519 $611 $719 $895 $720 $897 $208 $235
Cost of sales................... 223 311 357 423 516 419 514 116 133
Gross profit.................... 154 208 254 296 379 300 382 92 102
Selling, general and
administrative............... 112 159 165 195 241 195 243 54 60
Research and development........ 14 15 16 17 17 17 17 3 4
Operating income................ 28 34 73 84 121 88 122 35 38
Net income...................... 7 11 41 51 72 52 70 19 22
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets.................... 284 356 452 481 568 543 644 679
Total long-term debt and
capitalized lease
obligations.................. 21 20 51 33 35 37 40 22
Net assets...................... 88 133 200 231 267 261 306 340
</TABLE>
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SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN
GERMAN AND U.S. GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Certain of the Fresenius Worldwide Dialysis summary and selected financial
data as of and for each of the years in the five-year period ended December 31,
1995, included in this Joint Proxy Statement-Prospectus, have been prepared in
accordance with the German Commercial Code which represents German GAAP. German
GAAP differs in certain significant respects from US GAAP. Fresenius Worldwide
Dialysis has not determined its financial position or results of operations for
such periods under US GAAP.
The following represents a summary of certain of the significant
differences between German GAAP and US GAAP. The summary has been prepared to
assist a reader in understanding the nature of the differences between German
GAAP and US GAAP as they would relate to a multinational corporation. This
summary may not provide a description of all of the significant differences
between German GAAP and US GAAP which would arise when preparing the financial
statements of a multinational corporation. Further, the following differences
may not represent differences or all of the differences which would affect the
financial position or results of operations of Fresenius Worldwide Dialysis as
of and for such periods referred to above.
GOODWILL AND BUSINESS ACQUISITIONS
In accordance with German GAAP, the difference between the purchase price
and fair value of net assets acquired as part of a business combination
(goodwill) may be charged directly to additional paid in capital or retained
earnings or capitalized and amortized through the statement of operations over
its useful life, generally ranging from 5 to 15 years. Under US GAAP, goodwill
must be capitalized and amortized through the statement of operations over its
useful life not to exceed 40 years.
CAPITALIZATION OF INTEREST
Under German GAAP only under limited circumstances is the capitalization of
interest on capital expenditures permitted. Under US GAAP, interest incurred as
part of the cost of constructing fixed assets is required to be capitalized and
amortized over the life of the assets.
LEASING
Under German GAAP, lease transactions are generally, in practice, recorded
as operating leases without balance sheet impact. Under US GAAP, leases which
meet certain prescriptive criteria designed to determine whether substantially
all of the risks and rewards of ownership of the leased assets are transferred
to the lessee are accounted for as capital leases. Under a capital lease, the
leased assets and obligations of the lessee are recorded on the lessee's balance
sheet. Conversely, on a lessor's balance sheet assets under capital lease are
not recorded as leased assets but as capital lease receivables.
RECORDING OF PROVISIONS, RESERVES, VALUATION ADJUSTMENTS
Since under German law a company's financial statements prepared for
commercial purpose are also the basis of its tax accounts, tax considerations
heavily influence their preparation. Companies therefore may tend to apply more
conservative valuation methods in their financial statements than they might
otherwise report. German GAAP permits the recognition of accruals or provisions
for uncertain liabilities and loss contingencies. The amount of such accruals or
provisions represents the anticipated expense to the group. Accruals for losses
on open production orders take into consideration all internal costs, including
indirect selling and administrative expenses. Restructuring accruals for
obligations to third parties are recorded at the earliest time that an expense
is known and reasonably possible. In addition, accruals may also be established
for expenses which are known by type of expense and are reasonably possible at
the balance sheet date but uncertain in respect of the amount or the timing of
when this accrual will be paid. Under US GAAP, an accrual for loss contingency
is recorded by a charge to income if it is both probable that an asset has been
impaired or a liability has been incurred and the minimum amount of loss can be
reasonably estimated. Unspecified liability reserves for future losses, costs or
risks do not meet the condition for accrual under US GAAP. Application of
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German GAAP may lead to higher accrual balances and reserves for possible risks
than allowed under US GAAP. However, under German GAAP, provisions, reserves and
valuation adjustments previously established may also be released in subsequent
periods with a resultant increase in reported profits in the period released.
PENSIONS AND SIMILAR OBLIGATIONS
Under German GAAP, pension costs and similar obligations including
post-retirement benefits are accrued over the service lives of the employees
based upon actuarial studies using the entry age method as defined in the German
tax code. US GAAP is more prescriptive particularly as to the use of actuarial
assumptions and requires that a different actuarial method (the projected unit
credit method) be used.
FOREIGN CURRENCY
Under German GAAP, receivables and payables stated in foreign currency are
translated at each balance sheet date into the respective local currency at the
lower of the currency exchange rate on the transaction date or the balance sheet
date, in the case of receivables, and the higher of the currency exchange rate
on the transaction date or the balance sheet date, in the case of payables.
Under US GAAP, assets and liabilities denominated in a foreign currency are
recorded at balance sheet rates with any resulting gain or loss recognized in
the income statement.
DEFERRED TAXES
Under German GAAP, deferred tax assets and liabilities are generally
recognized on a net basis and to the extent that the entity is in a net deferred
tax asset position the deferred tax asset is not required to be recognized.
Under US GAAP, deferred taxes are provided in the period of origination for all
temporary differences, including net operating loss carryforwards where it is
more likely than not that the tax benefit will be realized in future periods,
based upon enacted tax rates.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FRESENIUS WORLDWIDE DIALYSIS
Certain sections of this Joint Proxy Statement-Prospectus contain
forward-looking statements. These forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting
Fresenius Worldwide Dialysis, but no assurance can be given that such events
will occur or that the results will be as anticipated. Such sections include,
without limitation, discussions concerning the outlook of Fresenius Worldwide
Dialysis, future plans and management's expectations regarding future
performance.
OVERVIEW
BASIS OF PRESENTATION OF FRESENIUS WORLDWIDE DIALYSIS FINANCIAL INFORMATION
Fresenius Worldwide Dialysis currently operates as a business unit of
Fresenius AG. In connection with the Reorganization Agreement, Fresenius AG
intends to contribute Fresenius Worldwide Dialysis, including Fresenius USA, to
a wholly owned inactive subsidiary which will, thereafter, change its name to
"Fresenius Medical Care AG." The combined historical financial statements of
Fresenius Worldwide Dialysis included elsewhere in this Joint Proxy
Statement-Prospectus have been prepared on a basis which reflects the combined
historical financial statements of Fresenius Worldwide Dialysis assuming that it
was organized as a separate legal entity, owning certain net assets and certain
subsidiaries and associated companies of Fresenius AG for all periods presented.
Fresenius Worldwide Dialysis' combined financial information has been prepared
in accordance with US GAAP.
SHARED PRODUCTION AND SERVICES
Fresenius Worldwide Dialysis shares certain manufacturing facilities with
Fresenius AG's other businesses. In connection with the Reorganization
Agreement, in each situation where facilities are currently shared,
post-Reorganization Agreement ownership of the location or manufacturing
facility (collectively, the "Facilities") will be retained by Fresenius AG or
contributed to Fresenius Worldwide Dialysis as described under "THE
REORGANIZATION -- Continuing Arrangements between Fresenius Medical Care and
Fresenius AG."
The combined balance sheets included elsewhere in this Joint Proxy
Statement-Prospectus include, for those Facilities which will be retained by
Fresenius Worldwide Dialysis, land, buildings, related manufacturing assets; raw
materials and work-in-process inventories; and accounts payable and accrued
expenses related to those fixed assets and inventory. In addition, the balance
sheets exclude the land, buildings, related manufacturing assets; raw materials
and work-in-process inventories; and accounts payable and accrued expenses
related to those fixed assets and inventory for Facilities which will be
retained by Fresenius AG.
Production and related services rendered by Fresenius Worldwide Dialysis at
shared Facilities to Fresenius AG are effectively allocated to Fresenius AG at
fully absorbed cost and, accordingly, are accounted for as an inventory transfer
through the statement of operations. Such production rendered by Fresenius AG at
shared Facilities on behalf of Fresenius Worldwide Dialysis are also effectively
allocated to Fresenius Worldwide Dialysis at fully absorbed cost.
Prior to the Reorganization, Fresenius Medical Care and Fresenius AG will
negotiate and enter into the Supply Agreements for the purchase and sale of
products from the Retained Facilities and the Transferred Facilities. See "THE
REORGANIZATION -- Continuing Arrangements between Fresenius Medical Care and
Fresenius AG."
As a division of Fresenius AG, Fresenius Worldwide Dialysis has obtained
administrative and other services from Fresenius AG headquarters and from other
divisions and subsidiaries of Fresenius AG. Conversely, Fresenius Worldwide
Dialysis has provided certain services to other divisions and subsidiaries of
Fresenius AG. Prior to the Reorganization, Fresenius Medical Care and Fresenius
AG intend to enter into transitional agreements for continuation of many of such
services. For a discussion of allocation of such costs
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and arrangements for such services in the future, see "THE
REORGANIZATION -- Continuing Arrangements between Fresenius Medical Care and
Fresenius AG."
REAL ESTATE LOCATED IN GERMANY
Certain land and manufacturing and office buildings located in Germany will
be retained by Fresenius AG and leased by Fresenius AG (or an affiliate) to
Fresenius Worldwide Dialysis (or an affiliate) under operating lease agreements.
Accordingly, such land and buildings have been excluded from the combined
balance sheets included elsewhere in this Joint Proxy Statement-Prospectus. The
combined statements of operations included elsewhere in this Joint Proxy
Statement-Prospectus include, for the years ended December 31, 1994 and 1995,
$1,025,000 and $1,575,000, respectively, and for the three months ended March
31, 1995 and 1996, include $383,518 and $365,468, respectively, of depreciation
expense related to such facilities representing an assumed charge to Fresenius
Worldwide Dialysis from Fresenius AG for the use of the land and buildings.
Under such Lease, subsequent to consummation of the transaction contemplated by
the Reorganization Agreement, Fresenius Worldwide Dialysis will pay Fresenius AG
DM 16.8 million per year, escalated annually based upon German commercial
practices. See "THE REORGANIZATION -- Continuing Arrangements between Fresenius
Medical Care and Fresenius AG -- Real Property Lease."
CURRENCY EXCHANGE RATES
Fresenius Worldwide Dialysis conducts its business internationally,
although its principal operations are located in Germany and the United States.
For financial reporting purposes, Fresenius Worldwide Dialysis has chosen the
U.S. dollar as its reporting currency. Therefore, changes in the rate of
exchange between the U.S. dollar and the local currencies in which the financial
statements of its international operations, including those in Germany, are
maintained affect Fresenius Worldwide Dialysis' results of operations and
financial position as reported in its financial statements. Fresenius Worldwide
Dialysis has combined the balance sheets of its non-U.S. dollar denominated
operations into U.S. dollars at the exchange rates prevailing at the balance
sheet date. Revenues and expenses are translated at the average exchange rates
for the period.
The Deutschemark accounted for approximately 41.3% of Fresenius Worldwide
Dialysis' revenues in 1995 and approximately 41.8% in the three months ended
March 31, 1996. During 1994 and 1995 the dollar generally depreciated against
the Deutschemark and certain other currencies. This resulted in increased
reported sales, translated into dollars, for sales which are denominated
Deutschemarks or other currencies that appreciated against the U.S. dollar. For
example, if Fresenius Worldwide Dialysis had computed its 1995 sales using
average 1994 rather than 1995 exchange rates, net sales would have increased
16.6% as compared to a reported increase of 24.5%. A strengthening of the dollar
against other currencies would have had an opposite effect on Fresenius
Worldwide Dialysis' net sales.
MANAGEMENT OF CURRENCY RISK
Fresenius Worldwide Dialysis sells significant amounts of products from its
manufacturing facilities in Germany to its other international operations. In
general, Fresenius Worldwide Dialysis' intercompany sales are denominated in
Deutschemarks. Accordingly, Fresenius Worldwide Dialysis' subsidiaries are
exposed to fluctuations in the rate of exchange between the Deutschemark and the
currency in which its local operations are conducted. A decrease in the value of
the local currency relative to the Deutschemark will increase a subsidiary's
costs for products and supplies from Fresenius Worldwide Dialysis. Fresenius
Worldwide Dialysis' subsidiaries employ, to a limited extent, forward contracts
and currency options to hedge their currency exposures when they arise,
typically at the time that product is purchased. Fresenius Worldwide Dialysis'
policy, which has been consistently followed, is that forward currency contracts
and options be utilized only for purposes of hedging foreign currency exposures.
Fresenius Worldwide Dialysis has not used such instruments for purposes other
than hedging. On average, during each of the years ended December 31, 1995 and
1994, the currencies in which Fresenius Worldwide Dialysis' local operations
were conducted depreciated relative to the Deutschemark. Accordingly, Fresenius
Worldwide Dialysis subsidiaries' costs for products and supplies were favorably
affected by its hedging activities. At December 31, 1995, Fresenius Worldwide
Dialysis had purchased forward exchange contracts for the sale of currencies for
Deutschemarks of $67 million and the
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purchase of U.S. dollars for Deutschemarks of $10 million. At March 31, 1996,
Fresenius Worldwide Dialysis had purchased forward exchange contracts for the
sale of currencies for Deutschemarks of $66 million and the purchase of dollars
for Deutschemarks of $7 million. Fresenius Worldwide Dialysis' average level of
purchases of derivative financial instruments during 1995 and 1994 was not
materially different than the amounts held as of the end of those years. A
summary of the high and low exchange rates for Deutschemarks to U.S. dollars and
the average exchange rates for the last five years is set forth below:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, YEAR'S HIGH YEAR'S LOW YEAR'S AVERAGE YEAR'S CLOSE
- ------------ ----------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
1991 0.6925 0.5449 0.6051 0.6586
1992 0.7185 0.5959 0.6421 0.6176
1993 0.6377 0.5736 0.6051 0.5759
1994 0.6703 0.5663 0.6182 0.6452
1995 0.7384 0.6415 0.6989 0.6987
</TABLE>
INFLATION
The effects of inflation during the periods covered by the combined
financial statements have not been significant to Fresenius Worldwide Dialysis'
results of operations. However, a significant portion of Fresenius Worldwide
Dialysis' net revenues, including revenues from the U.S., is received from
customers whose revenues are subject to reimbursement rates which are regulated
by governmental authorities. Non-governmental payors are also exerting downward
pressure on reimbursement rates. Increased operating costs that are subject to
inflation, such as labor and supply costs, may not be recoverable through price
increases in the absence of a compensating increase in reimbursement rates
payable to customers of Fresenius Worldwide Dialysis, and could materially
adversely affect Fresenius Worldwide Dialysis' business and results of
operations.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Fresenius Worldwide
Dialysis Combined Statements of Operations as a percent of net sales and the
percentage increase (decrease) in the U.S. dollar amount of those items as
compared to the prior period.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
NET SALES INCREASE
----------------------- ---------------
PERCENTAGE OF PERCENTAGE THREE MONTHS THREE MONTHS
NET SALES INCREASE ENDED MARCH 31, ENDED MARCH 31,
------------- ------------- ----------------------- ---------------
1994 1995 1995 VS. 1994 1995 1996 1995 VS. 1996
---- ---- ------------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............. 100% 100% 25 100% 100% 13
Cost of Sales......... 58 57 23 56 57 15
Gross Profit.......... 42 43 27 44 43 11
Selling, general and
administrative
expense............. 27 27 24 26 26 12
Research and
development
expense............. 2 2 2 1 2 9
Operating income...... 13 14 38 17 16 9
Interest expense,
net................. 1 1 24 1 1 (31)
Income before income
taxes............... 12 13 38 16 15 11
Provision for income
taxes............... 5 5 12 7 6 5
Net income............ 7 8 34 9 9 13
</TABLE>
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1995 COMPARED TO 1994
Net Sales. Net Sales increased 24.5% to $897 million in 1995 from $720
million in 1994. 1995 net sales benefited by 7.9% from the significant
appreciation of the Deutschemark relative to the U.S. dollar, Fresenius
Worldwide Dialysis' financial statement reporting currency. In local currency
terms, Fresenius Worldwide Dialysis' sales increased, on a weighted average
basis, by 16.6%.
In 1995, Fresenius Worldwide Dialysis' operations in Germany experienced
significant sales growth, including export sales, of 34%, or 19% in local
currency, compared to 1994. Sales growth was also substantial in the U.S.,
totalling 21%. Sales by Fresenius Worldwide Dialysis' other operations in the
rest of the world increased 15%, or 8% in local currency, compared to 1994. On
the basis of location of customers, sales by geographic region increased in 1995
by 25% in Germany, 21% in the U.S. and 28% in the rest of the world. Translated
into local currency, sales to customers in these geographic regions increased in
1995 by 12% in Germany, 21% in the U.S. and 17% in the rest of the world,
compared to 1994.
Strong growth in Germany and the U.S. was mainly attributable to increased
sales of hemodialysis machines due to a high replacement rate by dialysis
centers in those markets and increased sales of dialyzers due to increased
production capacity. In addition, Fresenius Worldwide Dialysis' net sales
benefited from strong demand in the growing markets of Eastern Europe. The sales
increase is also attributable to growth in the number of dialysis patients in
Fresenius Worldwide Dialysis' principal markets. The increase in sales resulted
primarily from higher unit volumes, since Fresenius Worldwide Dialysis' selling
prices in local currencies were virtually unchanged in 1995.
Fresenius Worldwide Dialysis undertook a reorganization in 1995 to
strengthen its international sales and marketing organization by separating the
hemodialysis and peritoneal dialysis businesses to focus its marketing efforts
on the distinct needs of each product market better. In addition, Fresenius
Worldwide Dialysis set up regionalized marketing structures to serve the needs
of customers in different geographic markets better, resulting in the creation
of independent hemodialysis regions and peritoneal dialysis regions. Management
believes that this new organizational structure has improved market penetration
of new products and enhanced its traditionally strong customer contacts, leading
to higher product volumes sold.
During 1995, hemodialysis machines and related disposable products
accounted for 70.9% of Fresenius Worldwide Dialysis' total net sales compared to
70.1% in 1994. Sales of peritoneal dialysis solutions, machines and rented
equipment accounted for approximately 19.9% of Fresenius Worldwide Dialysis'
sales in 1995 compared to 21.3% in 1994. Sales of technical services associated
with Fresenius Worldwide Dialysis' hemodialysis product line accounted for 9.2%
of sales in 1995 and 8.6% in 1994.
In 1995, net sales of hemodialysis machines and related disposable
products, including dialyzers, grew 26.0% to $636.0 million from $504.9 million
in 1994. Net sales of hemodialysis machines increased 34.4% to $140 million from
$104 million in 1994, which was due principally to the increase in demand due to
high machine replacement rates by dialysis centers and the increase in market
acceptance of Fresenius Worldwide Dialysis' products. Sales of dialyzers
increased 29.1% to $248 million in 1995 from $192 million in 1994. Before 1995,
demand for Fresenius Polysulfone(R) dialyzers exceeded available capacity. As a
result of expanded production capacity in 1995 at several manufacturing
locations, Fresenius Worldwide Dialysis was better able to meet market demand.
This result can be attributed mainly to increased capacity at Fresenius
Worldwide Dialysis' production facilities in Germany, the U.S. and Belarus. See
"-- Liquidity and Capital Resources." Production of Fresenius cuprophane
dialyzers produced at Fresenius/SMAD, Fresenius Worldwide Dialysis' French
subsidiary, representing less than 10% of dialyzer sales, was below capacity in
1995.
Sales of peritoneal dialysis products and machines increased 16.2% to
$178.3 million in 1995 from $153.4 million in 1994. The increase in sales of
peritoneal dialysis products resulted in part from the introduction of
PD-NIGHT(TM) in the last quarter of 1995 and from higher sales volumes of
existing products.
Gross Profit. Gross profit for 1995 was $382 million, an increase of
27% from gross profit for 1994 of $300 million. In local currency terms,
however, the increase in gross profit was 17.4%. As a percentage of net sales,
gross profit increased to 42.7% in 1995 compared to 41.7% in 1994. The increase
in gross profit in 1995 reflects increased net sales as well as Fresenius
Worldwide Dialysis' continuous improvement of the
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efficiency of its production processes and successful efforts to reduce
manufacturing costs. Gross profit from the sale of disposable products increased
as a result of lower raw material costs, higher production speeds, changes in
product components and increased automation. In the dialysis machine production
facility in Schweinfurt, Germany, a new logistics system was implemented to
optimize the flow of goods and reduce logistics costs. Successful cost reduction
measures were also implemented at the Fresenius/SMAD plant in France. Gross
profit was negatively affected by start-up costs due to a loss of efficiency at
the Ogden, Utah manufacturing facility, which was expanded in 1995 to commence
manufacturing of polysulfone dialyzers.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses totalled $243 million in 1995, an increase of
24.4% from the prior year total of $195 million. As a percentage of net sales,
SG&A expenses remained constant at 27.1% in 1995 and 1994. SG&A expenses were
significantly affected by currency exchange rates. In terms of local currency,
SG&A expenses increased by 15.7%. The increase in SG&A expenses resulted
principally from the higher sales volume.
Research and Development Expenses. Research and development expenses
in 1995 increased to $17.3 million compared to $16.9 million in 1994. In local
currency terms, however, research and development expenses declined 7.8%.
Research and development expenses do not include $4.3 million of research and
development expenses charged by Fresenius AG to Fresenius Worldwide Dialysis as
corporate overhead, which were incurred by Fresenius AG in developing
Biofine(TM), a PVC-free packaging material for peritoneal dialysis systems and
intravenous solutions. If such overhead charges were taken into account,
research and development expenses would have increased by 12.3% in 1995 compared
to 1994. Research and development costs represent principally personnel wages
and benefits as well as fixed overhead costs.
Operating Income. Operating income for 1995 was $122 million, an
increase of $34 million from an operating income of $88 million in 1994. As a
percentage of net sales, operating income increased to 13.6% in 1995 from 12.2%
in 1994.
Interest Expense. Interest expense was $14 million in 1995 compared
to $12 million in 1994. The higher level of interest expense resulted from a
higher level of borrowings in 1995 compared to 1994.
Income Tax Expense. Expenses for income taxes were $41 million in
1995 compared to $29 million in 1994. Fresenius Worldwide Dialysis' effective
tax rate increased slightly from 34.8% in 1994 to 35.2% in 1995. The increase in
Fresenius Worldwide Dialysis' effective rate resulted principally from a higher
percentage of Fresenius Worldwide Dialysis' combined pre-tax income being earned
in Germany where the fully distributed earnings federal statutory tax rate plus
trade (state) income taxes, net of federal benefit approximates 47%. As a result
of the utilization and recognition of net operating loss carryforwards of its
U.S. subsidiary, for which no tax benefit had previously been recognized,
Fresenius Worldwide Dialysis' income tax provisions in 1995 and 1994 were lower
than the German statutory rate. See Note 15 of Notes to Combined Financial
Statements of Fresenius Worldwide Dialysis.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Net Sales. Net Sales increased 13.0% to $235 million in the first quarter
1996 from $208 million in the first quarter 1995.
In the first quarter of 1996, Fresenius Worldwide Dialysis' operations in
Germany experienced sales growth, including export sales, of 9.2% compared to
the first quarter of 1995. Sales growth was also substantial in the U.S.,
totalling 19.2%. Sales by Fresenius Worldwide Dialysis' operations in the rest
of the world increased 11.6% compared to the first quarter of 1995. The increase
in sales resulted primarily from higher unit volumes. Fresenius Worldwide
Dialysis' selling prices in local currencies were virtually unchanged. The sales
increase was also attributable to growth in the number of dialysis patients in
each of Fresenius Worldwide Dialysis' principal markets.
Strong sales growth in Germany and the U.S. was mainly attributable to
increased sales of hemodialysis machines due to a high replacement rate by
dialysis centers in those markets and increased sales of dialyzers due to
increased production capacity. In addition, Fresenius Worldwide Dialysis' net
sales benefited from strong demand in the growing markets of Eastern Europe.
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In the first quarter of 1996, net sales of hemodialysis machines and
related disposable products, including dialyzers, grew 13.7% to $169.2 million
from $148.9 million in the first quarter of 1995. The increase resulted from
higher machine replacement rates and increased sales of dialyzers as a result of
the availability of additional manufacturing capacity.
Sales of peritoneal dialysis products and machines increased 18.1% to $49.2
million in the first quarter of 1996 compared to $41.7 million in the first
quarter of 1995. The increase in sales of peritoneal dialysis products resulted
in part from the introduction of PD-NIGHT(TM) in the last quarter of 1995 and
from higher sales volumes of existing products.
Gross Profit. Gross profit for the first quarter of 1996 was $102.2
million, an increase of 10.7% from gross profit for the first quarter of 1995.
As a percentage of net sales, gross profit decreased slightly to 43% in the
first quarter 1996 from 44% in the first quarter of 1995.
The gross margin was negatively impacted by the increase in the
Deutschemark/U.S. dollar exchange rate which resulted in higher costs for
Deutschemark denominated purchases and came into full effect only later during
1995 as certain subsidiaries benefitted from favorable forward exchange rate
contracts which were closed during the first quarter of 1995.
Selling, General and Administrative Expenses. SG&A expenses totalled $60.8
million in the first quarter 1996, an increase of 12.0% from the first quarter
of 1995 of $54.3 million. As a percentage of net sales, SG&A expenses remained
substantially constant at 26% in the first quarters of 1996 and 1995.
Research and Development Expenses. Research and development expenses in
the first quarter of 1996 increased to $3.6 million compared to $3.3 million in
the first quarter of 1995. Research and development costs represent principally
personnel wages and benefits as well as fixed overhead costs.
Operating Income. Operating income for the first quarter of 1996 was $37.7
million, an increase of $3.1 million from an operating income of $34.6 million
in the first quarter of 1995.
Interest Expense. Interest expense was $4.0 million in the first quarter
of 1996 compared to $3.3 million in the first quarter of 1995. The higher level
of interest expense resulted from a higher level of borrowings in 1996 compared
to 1995.
Income Tax Expense. Expenses for income taxes were $13.1 million in the
first quarter of 1996 compared to $12.5 million in the first quarter of 1995.
Fresenius Worldwide Dialysis' effective tax rate decreased from 38.1% in the
first quarter of 1995 to 35.9% in the first quarter of 1996. The decrease in
Fresenius Worldwide Dialysis' effective tax rate resulted primarily from lower
deferred tax expenses in Germany which are calculated at the higher tax rate for
undistributed earnings.
LIQUIDITY AND CAPITAL RESOURCES
1995 COMPARED TO 1994
During 1994 and 1995, Fresenius Worldwide Dialysis utilized cash flow from
operations and, to a lesser extent, bank borrowings, principally to fund
investments in property, plant and equipment. During 1995 and 1994 Fresenius
Worldwide Dialysis' cash provided by operating activities was $69.1 million and
$63.4 million, respectively and was generated principally from net income plus
non-cash depreciation charges of $41.7 million in 1995 and $34.9 million in 1994
and less increases in working capital requirements of $37.9 million and $27.8
million, respectively. At December 31, 1995, Fresenius Worldwide Dialysis had
cash of $12.1 million.
Fresenius Worldwide Dialysis had capital expenditures in 1995 and 1994 of
$92.9 million and $59.5 million, respectively. The expenditures in each year
were principally in Germany and the United States. At the production facility in
St. Wendel, Germany, $13.2 million was expended during 1995 for the construction
and installation of a new production line for PVC-free bags. An additional $9.9
million was expended to further automate the production processes and increase
the production capacity at the St. Wendel and Schweinfurt, Germany manufacturing
facilities. Further capital expenditures in Germany included $10.0 million for
rental equipment, of which $7.8 million were additions to capital leases. The
rental
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equipment consisted of hemodialysis machines leased to hospitals and dialysis
centers. To finance the rental equipment Fresenius Worldwide Dialysis enters
into sale/leaseback agreements with a leasing company which cover the sale and
leaseback of rental equipment under a three year capital lease.
To strengthen its international operations further, in 1995 Fresenius
Worldwide Dialysis made acquisitions and capital investments of $8.4 million in
subsidiaries in Argentina, Australia, Colombia, and Germany, as well as in
dialysis centers in Brazil, Hungary and Italy.
In addition, Fresenius Worldwide Dialysis' U.S. subsidiary completed
construction of a 104,000 square foot addition to its Ogden, Utah manufacturing
facility for the manufacture of polysulfone dialyzers. Fresenius USA had
expended $39.5 million for the construction and equipping of the expanded
facility as of December 31, 1995. On March 31, 1995 Fresenius USA entered into a
sale/leaseback arrangement with a bank which, as amended, covers the sale of
approximately $27.0 million of certain new equipment of its dialyzer
manufacturing facility to the bank and leaseback of the equipment under a
four-year operating lease that has renewal options and purchase options at fair
value. Although the rent payments on the lease are variable based on the London
interbank offered rate ("LIBOR") for three-months, Fresenius USA has effectively
fixed its rent expense through the use of interest rate swap agreements. If
Fresenius USA elects not to purchase the equipment or renew the lease at the end
of the lease term, it will be obligated to pay a termination fee of up to $20.25
million, to be offset by sale proceeds from Fresenius USA remarketing the
equipment.
At December 31, 1994 and 1995, Fresenius Worldwide Dialysis had short-term
borrowings of $80 million and $109 million, respectively. The borrowings were
principally under lines of credit with commercial banks and, in 1995, $25.2
million was borrowed from Fresenius AG. At December 31, 1995, Fresenius
Worldwide Dialysis had short-term unused lines of credit of $20 million.
Fresenius Medical Care believes that its internally generated funds, as well as
its credit facilities and possible future debt and equity offerings, will be
sufficient to fund its internal expenditures and anticipated acquisitions after
the Reorganization.
Fresenius Worldwide Dialysis' net assets represent the excess of assets
over liabilities to unrelated third parties of the business units included in
Fresenius Worldwide Dialysis, as discussed in Note 1 to the Fresenius Worldwide
Dialysis combined financial statements. Intercompany transactions and charges
between Fresenius Worldwide Dialysis and Fresenius AG have also effectively been
accounted for within net activity with Fresenius AG. For the years ended
December 31, 1995 and 1994, the net activity with Fresenius AG resulting from
intercompany transactions and charges was credits of $10.0 million and $19.3
million, respectively. Subsequent to the transactions contemplated by the
Reorganization Agreement, such activity will be accounted for as related party
transactions by Fresenius Medical Care.
Further, in connection with the transactions contemplated by the
Reorganization Agreement, Fresenius AG will contribute the net assets of
Fresenius Worldwide Dialysis, including Fresenius USA, to Fresenius Medical Care
in return for approximately 50.3% of the outstanding FMC Ordinary Shares. Such
transaction will be accounted for at cost as it represents a transaction between
entities under common control.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
During the first quarter 1995 and 1996, Fresenius Worldwide Dialysis
utilized cash flow from operations and, to a lesser extent, bank borrowings to
fund investments in property, plant and equipment. During the first quarter of
1996 and of 1995, Fresenius Worldwide Dialysis' cash provided by operating
activities was $12.8 million and $13.0 million, respectively, and was generated
principally from net income plus non-cash depreciation charges of $10.3 million
in the first quarter of 1996 and $9.0 million in the first quarter of 1995 and
less an increase in working capital requirements of $16.0 million and $13.1
million, respectively. At March 31, 1996, Fresenius Worldwide Dialysis had cash
of $31.4 million.
Fresenius Worldwide Dialysis had capital expenditures in the first quarter
of 1996 and of 1995 of $17.8 million and $14.3 million, respectively. The
expenditures in each year were principally in Germany and the U.S. Expenditures
in Germany were incurred to further automate the production processes and
increase the production capacity at the St. Wendel Facility and the Schweinfurt
Facility.
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Further capital expenditures in Germany included $1.5 million for rental
equipment, of which $1.0 million were additions to capital leases. The rental
equipment consisted of hemodialysis machines leased to hospitals and dialysis
centers. To finance the rental equipment Fresenius Worldwide Dialysis enters
into sale/leaseback agreements with a leasing company which cover the sale and
leaseback of rental equipment under three-year capital leases.
In addition in 1995, Fresenius Worldwide Dialysis' U.S. subsidiary
completed construction of a 104,000 square foot addition to its manufacturing
facility for the manufacture of polysulfone dialyzers. Fresenius USA had
expended $39.5 million for the construction and equipping of the expanded
facility as of March 31, 1996. On March 31, 1995, Fresenius USA entered into a
sale/leaseback arrangement with a bank which covers the sale of approximately
$19.0 million of certain new equipment of its dialyzer manufacturing facility to
the bank and leaseback of the equipment under a four-year operating lease that
has renewal options and purchase options at fair value. Although the rent
payments on the lease are variable based on the three-month LIBOR, Fresenius USA
has effectively fixed its rent expense through the use of interest rate swap
agreements. In December 1995, an additional $8.0 million of similar new
equipment was sold and leased back under the above-referenced four-year
renewable lease. If Fresenius USA elects not to purchase the equipment or renew
the lease at the end of the lease term, it will be obligated to pay a
termination fee of up to $20.25 million, to be offset by sale proceeds from
Fresenius USA remarketing the equipment.
At March 31, 1996 and December 31, 1995, Fresenius Worldwide Dialysis had
short-term borrowings of $128.8 million and $109.4 million, respectively. The
borrowings were principally under lines of credit with commercial banks and, in
1996, $25.2 million was borrowed from Fresenius AG.
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SELECTED FINANCIAL DATA OF FRESENIUS USA
The following table summarizes certain financial data with respect to
Fresenius USA and is qualified in its entirety by the consolidated financial
statements of Fresenius USA contained elsewhere in this Joint Proxy
Statement-Prospectus. The selected data as of and for the years ended December
31, 1991, 1992, 1993, 1994 and 1995 have been derived from the consolidated
financial statements of Fresenius USA audited by KPMG Peat Marwick LLP,
independent accountants.
The Abbott Acquisition has been accounted for as a purchase. Because the
Abbott Acquisition occurred on February 24, 1993, the statements below include
the results of operations, assets and liabilities of this acquired business only
for periods and dates occurring on or after February 24, 1993.
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------- -------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $101,436 $128,607 $205,960 $254,344 $304,964 $68,176 $81,062
Cost of sales................................... 71,812 92,575 140,960 175,766 212,102 47,040 55,566
-------- -------- -------- -------- -------- ------- -------
Gross profit.................................... 29,624 36,032 65,000 78,578 92,862 21,136 25,496
Selling, general and administrative and research
and development............................... 28,865 32,964 55,713 66,489 74,836 17,048 18,949
Litigation settlements.......................... 1,300 (400) -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Operating income (loss)......................... (541) 3,468 9,287 12,089 18,026 4,088 6,547
Interest expense (net).......................... (2,167) (2,447) (4,631) (4,195) (4,924) 1,274 1,401
Equity in earnings of Fresenius Brent Medical
Inc........................................... 84 70 86 -- -- -- --
Other income (expense), net..................... (191) (341) (149) (17) (149) 25 62
-------- -------- -------- -------- -------- ------- -------
Income (loss) before income taxes and
extraordinary items........................... (2,815) 750 4,593 7,877 12,953 2,789 5,084
Income tax expense (benefit).................... 15 111 900 723 (3,434) (529) (262)
-------- -------- -------- -------- -------- ------- -------
Income (loss) before extraordinary items........ (2,830) 639 3,693 7,154 16,387 3,318 5,346
Extraordinary items............................. 255 -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Net income (loss)............................... $ (2,575) $ 639 $ 3,693 $ 7,154 $ 16,387 $ 3,318 $ 5,346
======== ======== ======== ======== ======== ======= =======
Net Income (Loss) Per Common and Common Equivalent
Share:
Income (loss) before extraordinary items........ $ (.18) $ .03 $ .18 $ .32 $ .61 $ 0.13 $ 0.19
Extraordinary items............................. .02 -- -- -- $ -- -- --
-------- -------- -------- -------- -------- ------- -------
Net income (loss) per common and common
equivalent share:
Primary....................................... $ (.16) $ .03 $ .18 $ .32 $ .61 $ 0.13 $ 0.19
======== ======== ======== ======== ======== ======= =======
Fully diluted................................. $ (.16) $ .03 $ .18 $ .31 $ .59 $ 0.13 $ 0.19
======== ======== ======== ======== ======== ======= =======
Weighted average number of shares of common
stock and common stock equivalents:
Primary....................................... 15,543 18,692 20,660 23,926 26,647 25,717 27,884
Fully diluted................................. 15,543 18,692 20,660 23,926 27,844 25,872 27,936
Pro Forma:(1)
Net sales....................................... $154,694 $210,642
Gross profit.................................... 49,024 67,424
Operating income................................ 6,838 10,162
Net income...................................... 1,617 4,160
Net income per common share..................... $ .09 $ .20
Weighted average number of shares of common
stock and common stock equivalents............ 18,692 20,660
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- ------------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $ 22,604 $ 18,739 $ 15,525 $ 4,579 $ 12,991 $ 13,503
Total assets.......................................... 78,144 88,961 159,216 185,348 224,921 226,806
Total debt and capital lease obligations.............. 29,039 21,905 68,291 66,073 75,237 72,283
Stockholders' equity.................................. 22,792 31,037 37,006 60,572 78,602 84,792
</TABLE>
- ---------------
(1) Pro forma operating data give effect to the Abbott Acquisition as if this
acquisition were consummated on January 1, 1992. See Note 23 of Notes to
Consolidated Financial Statements of Fresenius USA.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FRESENIUS USA
OVERVIEW
Certain sections of this Joint Proxy Statement-Prospectus contain
forward-looking statements. These forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting
Fresenius USA, but no assurance can be given that such events will occur or that
the results will be as anticipated. Such sections include, without limitation,
discussions concerning the outlook of Fresenius USA, future plans and
management's expectations regarding future performance.
There are certain important factors that could cause results to differ
materially from those anticipated. These factors include:
RELIANCE ON FRESENIUS AG
Fresenius USA is dependent on Fresenius AG in a variety of ways for
technology, products, and, to some degree, financial support. Fresenius AG's
direct and indirect ownership of Fresenius USA Common Stock has the practical
effect of giving Fresenius AG an absolute majority of the voting power of
Fresenius USA with respect to all matters.
COMPETITION AND TECHNOLOGICAL CHANGE
The markets in which Fresenius USA sells its products are highly
competitive. Some of Fresenius USA's principal competitors in the hemodialysis
and peritoneal dialysis fields possess greater financial, marketing and research
and development resources than Fresenius USA. There can be no assurance that
competition, innovation or introduction of new products from this or other
sources will not materially adversely affect sales of Fresenius USA's products
or render one or more of Fresenius USA's present or proposed products obsolete.
RELIANCE ON SUPPLIERS; PURCHASE COMMITMENTS
The supplies for certain of Fresenius USA's products are purchased from
single suppliers, including Fresenius AG, located outside of the United States.
If a particular source of supply becomes unavailable, there can be no assurance
that Fresenius USA would be able to find an acceptable substitute supplier in a
timely fashion. The loss of such a source of supply could have a material
adverse effect on Fresenius USA's revenues and profits, as well as its ability
to supply its products to its customers and retain its customer base.
FDA AND OTHER GOVERNMENT REGULATION
The manufacturing and marketing of Fresenius USA's products are subject to
regulation by the FDA, pursuant to the FDC Act, and numerous other federal,
state and foreign governmental authorities. Fresenius USA believes it has
obtained all necessary clearances for the manufacture and sale of the products
that Fresenius USA currently produces and sells in the jurisdictions where these
products are currently sold. Products developed in the future are likely to
require approval by the FDA and other authorities before they may be sold in the
U.S. or elsewhere. While Fresenius USA believes that it is generally in
compliance with applicable FDA and other requirements, there can be no assurance
that Fresenius USA will be able to continue such compliance, that one or more of
Fresenius USA's products will not be the subject of a recall, or that changes in
regulations or interpretations made by the FDA or other regulatory bodies will
not adversely affect Fresenius USA.
POTENTIAL PRODUCT LIABILITY; LITIGATION
Fresenius USA faces an inherent business risk of exposure to product
liability claims. Although Fresenius USA maintains product liability insurance
at a level which it believes to be prudent, there can be no assurance that such
coverage will be adequate, or that adequate insurance coverage will continue to
be available at acceptable costs. Although Fresenius USA has not been subject to
significant product liability
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claims in the past, there can be no assurance that Fresenius USA can avoid a
significant product liability claim or recall in the future, which could have a
material adverse effect on the business, financial condition or prospects of
Fresenius USA.
HEALTH CARE REFORM
Presently, Medicare reimbursement is available for dialysis equipment
and/or treatment for most ESRD patients at approximately the same nominal
dollars-per-treatment level that prevailed in 1983 (representing a significant
decrease in real dollars-per-treatment). Because the demand for Fresenius USA's
products is affected by the availability and level of Medicare reimbursement,
any spending decreases or significant changes in the Medicare program could have
a material adverse effect on Fresenius USA.
CURRENCY RISK
Products and supplies purchased from Fresenius AG must be paid for by
Fresenius USA in Deutschemarks and, therefore, a decrease in the value of the
U.S. dollar relative to the Deutschemark will increase Fresenius USA's costs for
these products and supplies. Fresenius USA attempts to protect itself from
short-term currency fluctuations using various hedging techniques, but there can
be no assurance that such techniques will continue to be available to Fresenius
USA or that, even if available, they will successfully protect Fresenius USA
from these currency fluctuations. Fresenius USA is unable to protect itself from
long-term changes in exchange rates. If there are long-term changes in exchange
rates, or if Fresenius USA is not successful in protecting itself against
short-term currency fluctuations, Fresenius USA's cost of sales could increase
substantially, which could have a material adverse effect on Fresenius USA's
financial results.
A significant portion of Fresenius USA's products, and components used in
its products, are manufactured outside of the U.S. by Fresenius AG and other
suppliers. As a result, fluctuations in exchange rates of the U.S. dollar
against foreign currencies, particularly the Deutschemark, may affect Fresenius
USA's cost of sales. Fresenius USA engages in foreign currency hedging
arrangements as an effort to minimize the effect of short-term currency
fluctuations on its results of operations. Fresenius USA's policy, which has
been consistently followed, is that forward currency contracts and options be
utilized only for purposes of hedging foreign currency exposures resulting from
purchases made from Fresenius AG in Deutschemarks. Fresenius USA has not used
such instruments for purposes other than hedging. On average during each of the
years ended December 31, 1995 and 1994 the U.S. dollar depreciated relative to
the Deutschemark. The adverse effects of such depreciation on Fresenius USA's
Deutschemark denominated purchases of products and supplies were mitigated by
its hedging activities. At December 31, 1995, Fresenius USA had contracts to
purchase DM 48 million at a fixed rate on the date of settlement. Fresenius
USA's average level of purchases of foreign currency contracts during each of
the years ended December 31, 1995 and 1994 approximated the average purchases of
products and supplies from Fresenius AG during each of the respective years. In
order to minimize the effect of longer-term currency fluctuations, Fresenius USA
is increasingly producing components for the products it sells, or the products
themselves, in the U.S. In 1995, Fresenius USA began producing polysulfone
dialyzers at its expanded facility in Ogden, Utah.
Fresenius USA undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof.
SUBSEQUENT EVENT
During the quarter ended June 30, 1996, Fresenius USA recorded
approximately $9.8 million in additional compensation expense in connection
with the repurchase from certain employees of shares of Fresenius USA Common
Stock and options to purchase Fresenius USA Common Stock. See "FRESENIUS USA
EXECUTIVE COMPENSATION -- Securities Repurchases." Fresenius USA expects that
its operating income for the three-month and six-month periods ended June 30,
1996 will be approximately $7,594 and $14,141, respectively, and that, as a
result of the additional compensation expense incurred in connection with the
securities repurchases, it expects that its net income (loss) for the
three-month and six-month periods will be ($2,164) and $4,383, respectively.
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RESULTS OF OPERATIONS
The following table sets forth certain items from the Fresenius USA
Consolidated Statements of Operations as a percent of net sales and the
percentage increase (decrease) in the dollar amount of those items as compared
to the prior period.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
THREE MONTHS PERCENTAGE --------------
PERCENTAGE OF ENDED INCREASE (DECREASE) THREE MONTHS
NET SALES MARCH 31, -------------------- ENDED
-------------------- ------------------- 1994 VS. 1995 VS. MARCH 31 1996
1993 1994 1995 1995 1996 1993 1994 VS. 1995
---- ---- ---- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... 100% 100% 100% 100% 100% 23% 20% 19%
Cost of sales................. 68 69 70 69 69 25 21 18
Gross profit.................. 32 31 30 31 31 21 18 21
Selling, general and
administrative expense...... 26 25 24 24 23 19 12 11
Research and development
expense..................... 1 1 1 1 1 23 24 20
Operating income.............. 5 5 6 6 8 30 49 60
Interest expense, net......... 2 2 2 2 2 (9) 17 10
Income before income taxes.... 2 3 4 4 6 72 64 82
Net income.................... 2 3 5 5 7 94 129 61
</TABLE>
Fresenius USA's net sales have continued to grow over the last three years,
from $206.0 million in 1993 to $305.0 million in 1995. Fresenius USA's net sales
are derived from sales of dialysis machines, which accounted for approximately
29% of 1995 net sales, and disposable products, which accounted for
approximately 71% of 1995 net sales. Fresenius USA attributes the growth in net
sales during this period principally to increased penetration in both the
hemodialysis and peritoneal dialysis markets, growth in the number of people
with ESRD and the introduction of new products. Improved market penetration was
partly attributable to enhanced sales and marketing programs and, in the case of
peritoneal dialysis products, primarily to the Abbott Acquisition.
1995 COMPARED TO 1994
Net Sales. Net sales were $305.0 million in 1995, an increase of $50.7
million, or 19.9%, compared with net sales of $254.3 million in 1994. The
increase in 1995 net sales primarily reflects higher unit sales volumes in all
major product categories from 1994 levels. Average net sales price per unit in
each major product category did not change significantly during 1995 as compared
with 1994.
Net sales of hemodialysis products were $206.9 million, an increase of
$36.3 million, or 21.3%, compared to 1994 net sales. The sales increase in
hemodialysis products was due to the increased acceptance of Fresenius USA's
products and growth in the number of hemodialysis patients in the U.S.
Net sales of peritoneal products was $89.6 million, an increase of $12.2
million, or 15.8%, compared to 1994 net sales. The increase in net sales of
peritoneal dialysis products was primarily attributable to growth in the number
of peritoneal dialysis patients in the U.S., as well as to acceptance by the
medical community of new peritoneal dialysis therapies introduced by Fresenius
USA.
Gross Profit. Gross profit was $92.9 million in 1995, an increase of $14.3
million, or 18.2%, compared with gross profit of $78.6 million in 1994. Gross
profit margin decreased from 30.9% in 1994 to 30.5% in 1995, primarily due to a
loss of efficiency at the Ogden, Utah manufacturing facility due to the start-up
of dialyzer production, and due to increased costs of products purchased from
Germany, as a result of the continued weakness of the U.S. dollar.
Selling, General and Administrative Expense and Research and Development
Expense. SG&A expense and research and development expense were $74.8 million
in 1995, an increase of $8.3 million, or 12.6%, compared with 1994. SG&A expense
and research and development expense as a percentage of sales decreased to 24.5%
in 1995 from 26.1% in 1994. Research and development expense was $2.3 million in
1995 compared to $1.8 million in 1994, virtually unchanged as a percentage of
sales.
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<PAGE> 179
Interest Expense (Net). Interest expense (net) was $4.9 million in 1995,
an increase of $0.7 million, or 17.4%, over 1994. This increase is primarily the
result of Fresenius USA's increased short-term borrowings during 1995.
Income Tax Expense (Benefit). During 1995, Fresenius USA recognized a
portion of its deferred tax asset related to the utilization of net operating
loss carry-forwards from previous years and reduced the valuation allowance on
its deferred tax asset based on Fresenius USA's belief that it is more likely
than not to be realized through the results of future operations. The net amount
of this tax benefit recognized during 1995 was $3.4 million compared to tax
expense of $0.7 million in 1994. Fresenius USA's income tax provisions for 1995
and 1994 were substantially lower than statutory rates. See Note 17 to
Consolidated Financial Statements of Fresenius USA.
Net Income. Net income was $16.4 million in 1995, an increase of $9.2
million, or 129.1%, from 1994. Net income in 1995 included a tax benefit of $4.6
million, which Fresenius USA recognized during 1995. Excluding the tax benefit,
net income was $11.8 million in 1995, an increase of $4.6 million or 64.8% from
1994.
1994 COMPARED TO 1993
Net Sales. Net sales were $254.3 million in 1994, an increase of $48.3
million, or 23.4%, compared with net sales of $206.0 million in 1993. The
increase in 1994 net sales primarily reflects higher unit sales volumes in all
major product categories from 1993 levels. Average net sales price per unit in
each major product category did not change significantly during 1994 as compared
with 1993.
Net sales of hemodialysis products were $170.6 million, an increase of
$36.5 million, or 27.2%, compared to 1993 net sales. The sales increase in
hemodialysis products was due to the increased acceptance of Fresenius USA's
products and growth in the number of hemodialysis patients in the U.S.
Net sales of peritoneal products was $77.3 million, an increase of $12.3
million, or 18.8%, compared to 1993 net sales. The increase in net sales of
peritoneal dialysis products was primarily attributable to growth in the number
of peritoneal dialysis patients in the U.S., as well as acceptance by the
medical community of new peritoneal dialysis therapies introduced by Fresenius
USA.
Gross Profit. Gross profit was $78.6 million in 1994, an increase of $13.6
million, or 20.9%, compared with gross profit of $65.0 million in 1993. Gross
profit margin decreased from 31.6% in 1993 to 30.9% in 1994. However, gross
margin in 1993 included a $3.9 million refund related to U.S. import duties on
dialyzers and hemodialysis machine components. Excluding this refund, gross
margin in 1993 was 29.7%, compared to 30.9% in 1994.
Selling, General and Administrative Expense and Research and Development
Expense. SG&A expense and research and development expense were $66.5 million
in 1994, an increase of $10.8 million, or 19.3%, compared with 1993. SG&A
expense and research and development expense as a percentage of sales decreased
to 26.1% in 1994 from 27.1% in 1993. Research and development expense was $1.8
million in 1994 compared to $1.5 million in 1993, virtually unchanged as a
percentage of sales.
Interest Expense (Net). Interest expense (net) was $4.2 million in 1994, a
decrease of $0.4 million, or 9.4%, over 1993, primarily as a result of Fresenius
USA's full redemption of all of its 10 1/2% convertible debentures and the
payment of the outstanding principal balance of its industrial revenue bonds
issued in connection with its Ogden, Utah facility, all in June 1994.
Income Tax Expense. Income tax expense was $0.7 million, a decrease of
$0.2 million over 1993, primarily as a result of tax credits from Fresenius
USA's wholly owned Canadian subsidiary. As a result of utilization of net
operating loss carryforwards for which no tax benefit had previously been
recognized, Fresenius USA's income tax provisions for 1994 and 1993 were
substantially lower than statutory rates. See Note 17 to Consolidated Financial
Statements of Fresenius USA.
Net Income. Net income was $7.2 million in 1994, an increase of $3.5
million, or 93.7%, from 1993.
167
<PAGE> 180
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Net Sales. Net sales were $81.1 million for the first quarter of 1996, an
increase of $12.9 million or 18.9% compared with net sales of $68.2 million for
the first quarter of 1995. The increase in sales for the first quarter of 1996
is the result of continued higher unit sales volumes for both hemodialysis and
peritoneal dialysis products.
Gross Profit. Gross profit was $25.5 million for the first quarter of
1996, an increase of $4.4 million or 20.6% compared with gross profit of $21.1
million for the first quarter of 1995. Gross profit margin increased from 31.0%
for the first quarter of 1995 to 31.5% for the first quarter of 1996.
Selling, General and Administrative Expense and Research and Development
Expense. Selling, general and administrative expense and research and
development expense were $18.9 million for the first quarter of 1996, an
increase of $1.9 million or 11.2% compared with $17.0 million for the first
quarter of 1995. These expenses as a percentage of net sales were 23.4% for the
first quarter of 1996 compared to 25.0% for the first quarter of 1995.
Interest Expense (Net). Interest expense (net) was $1.4 million for the
first quarter of 1996 compared to $1.3 million for the same period of 1995.
Income Tax Expense (Benefit). Income tax benefit in the first quarter of
1996 was $0.3 million compared to income tax benefit of $0.5 million for the
same period in 1995. During the first quarter of 1996, Fresenius USA recognized
a tax benefit of approximately $1.0 million compared with $0.8 million during
the first quarter of 1995 related to Fresenius USA's net operating loss
carryforwards from previous years.
Net Income. Net income was $5.3 million for the first quarter of 1996, an
increase of $2.0 million or 61.1% compared to net income of $3.3 million for the
first quarter of 1995. Net income for the first quarter of 1996 and of 1995
included the above tax benefit which resulted from recognition of a portion of
Fresenius USA's deferred tax asset related to Fresenius USA's net operating loss
carryforwards from previous years.
LIQUIDITY AND CAPITAL RESOURCES
Fresenius USA has historically financed its operations, working capital and
capital expenditures through bank borrowings obtained with credit support from
Fresenius AG, private placements of Fresenius USA Series F Preferred Stock and
Fresenius USA Common Stock to Fresenius AG and internally generated funds.
During 1995, Fresenius USA obtained a $20.0 million line of credit from a
commercial bank independent of support by Fresenius AG and entered into a
sale/leaseback arrangement with a bank without support from Fresenius AG. In
addition, during 1994, Fresenius USA successfully completed a public offering of
3,450,000 shares of Fresenius USA Common Stock, realizing proceeds, after
payment of expenses, of approximately $16.2 million. Since 1990, Fresenius USA
has realized $19.5 million in net proceeds from private placements of Fresenius
USA Preferred Stock and Fresenius USA Common Stock to Fresenius AG, all of which
was utilized to reduce outstanding obligations to Fresenius AG and affiliated
companies.
During 1995, Fresenius USA had a negative cash flow from operations of $1.9
million compared to a positive cash flow of $4.1 million in 1994 and $4.4
million in 1993. This change from prior years is primarily due to the increase
of current assets from operations over current liabilities from operations.
Current assets increased primarily due to strong fourth quarter sales. As of
December 31, 1995, Fresenius USA had cash balances of $2.3 million, and working
capital of $13.0 million.
The consideration for the acquired assets in the Abbott Acquisition was (a)
$31.0 million cash paid at the closing, (b) $12.5 million payable in
installments of $2.5 million each in the years 1994 through 1998 inclusive,
discounted to $10.6 million using an imputed interest rate of 5.68%, the first
of which was paid in the first quarter of 1994 and (c) a ten-year warrant to
purchase 1,750,000 shares of Fresenius USA Common Stock at an exercise price of
$8.00 per share (the "Abbott Warrant"), which was valued at $228,000. In
addition, Fresenius USA agreed to purchase from Abbott, and Abbott agreed to
supply, a stated amount of certain Abbott peritoneal dialysis products in each
12-month period following the Abbott Acquisition closing
168
<PAGE> 181
and ending in February 1998. Over the next two years, the minimum purchase
commitments under the agreement are approximately $22.0 million annually.
Fresenius USA obtained funds for the payment at closing of the Abbott
Acquisition by borrowing $6.0 million under existing short-term lines of credit
and by borrowing $25.0 million under a new, five-year term loan due February 17,
1998 with Dresdner Bank, which carries an interest rate of 5.68% per annum.
Repayment is required under this loan at $6.25 million per annum commencing
February 15, 1995. Fresenius USA's future acquisition payment obligations to
Abbott, as well as additional amounts due for products supplied by Abbott to
Fresenius USA, are partially secured by a $10.0 million letter of credit (the
"Abbott Letter of Credit").
In 1995, Fresenius USA completed construction of a 104,000 square-foot
addition to its manufacturing facility in Ogden, Utah for the manufacture of
polysulfone dialyzers. Fresenius USA expended $39.5 million for the construction
and equipping of the expanded facility as of March 31, 1996. On March 31, 1995,
Fresenius USA entered into a sale/leaseback arrangement with a bank which, as
amended, covers the sale by Fresenius USA of approximately $27.0 million of
certain new equipment of Fresenius USA's dialyzer manufacturing facility at its
Ogden, Utah plant to the bank and the leaseback of the equipment under a four-
year operating lease that has renewal options and a purchase option at fair
market value. Although the rent payments on the lease are variable based on
LIBOR, Fresenius USA has effectively fixed its rent expense through the use of
interest rate swap agreements. If Fresenius USA elects not to purchase the
equipment or renew the lease at the end of the lease term, Fresenius USA will be
obligated to pay a termination fee of up to $20.25 million to be offset by sales
proceeds from Fresenius USA remarketing the equipment.
As of December 31, 1995, Fresenius USA had outstanding short-term
borrowings of $33.1 million under lines of credit with six commercial banks. In
March 1995, Fresenius USA replaced a $15.0 million line of credit supported by
Fresenius AG with a $20.0 million line of credit secured by Fresenius USA's
accounts receivable. As of December 31, 1995, Fresenius USA had outstanding $7.5
million under this $20.0 million line of credit. These lines of credit provide
for total credit availability of $47.0 million. Fresenius AG provided credit
support to enable Fresenius USA to obtain the five-year term loan, the
short-term lines of credit and the Abbott Letter of Credit. In addition, at
December 31, 1995, Fresenius USA had fully drawn the amount available under a
$3.6 million short-term line of credit with Fresenius AG, the terms of which are
similar to those of the lines of credit with the commercial banks described
above. At December 31, 1995, Fresenius USA also had outstanding two interest
rate swap agreements with a commercial bank for an aggregate amount of $25.0
million. These agreements effectively change Fresenius USA's rent expense on its
variable payment operating lease to fixed rates based on 8.02% and 5.60%,
respectively.
As of March 31, 1996, Fresenius USA had outstanding short-term borrowings
of $35.9 million under lines of credit with six commercial banks. In March 1995,
Fresenius USA replaced a $15.0 million line of credit supported by Fresenius AG
with a $20.0 million line of credit secured by Fresenius USA's accounts
receivable. As of March 31, 1996, Fresenius USA had borrowed $10.3 million under
this $20.0 million line of credit. Fresenius USA's lines of credit provide for a
total credit availability of $47.0 million. Fresenius AG has provided credit
support to enable Fresenius USA to obtain various term loans and short-term
lines of credit. In addition, at March 31, 1996, Fresenius USA had fully drawn
the amount available under a $3.1 million short-term line of credit with
Fresenius AG, the terms of which are similar to those of the lines of credit
with the six commercial banks described above.
At March 31, 1996, Fresenius USA had outstanding two interest rate swap
agreements with a commercial bank for an aggregate of $25.0 million. These
agreements effectively change Fresenius USA's rent expense on its variable
payment operating lease to fixed rates based on 8.02% and 5.60%, respectively.
Fresenius USA believes that its committed and possible future bank or other
commercial financing, combined with internally generated funds and the sale of
additional debt or equity securities, will be sufficient to fund Fresenius USA's
working capital requirements and other obligations.
On May 8, 1996, Fresenius USA entered into the Reorganization Agreement.
See "THE REORGANIZATION."
For a discussion of recent accounting pronouncements not yet adopted by
Fresenius USA, see Note 3 to Consolidated Financial Statements of Fresenius USA.
169
<PAGE> 182
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statements of earnings
and unaudited pro forma condensed combined balance sheet for Fresenius Medical
Care (collectively, the "Pro Forma Condensed Combined Financial Information")
have been prepared to illustrate the pro forma effects of the proposed
transactions in accordance with US GAAP and are based on the assumptions set
forth below and in the notes to the Fresenius Worldwide Dialysis Combined
Financial Statements and the W. R. Grace & Co. Special-Purpose, Consolidated
Financial Statements included elsewhere in this Joint Proxy
Statement-Prospectus. The Fresenius Medical Care unaudited pro forma condensed
combined statements of earnings are based on the statements of earnings of
Fresenius Worldwide Dialysis and Grace for the year ending December 31, 1995 and
the three months ending March 31, 1996 and are prepared as if the Reorganization
had occurred as of January 1, 1995 and January 1, 1996, respectively. The
Fresenius Medical Care unaudited pro forma condensed combined balance sheet is
based on the March 31, 1996 balance sheets of Fresenius Worldwide Dialysis and
Grace and is prepared as if the Reorganization occurred as of March 31, 1996.
The financial statements of Grace on which the Pro Forma Condensed Combined
Financial Information is based represent the National Medical Care, Inc.
business of Grace only after completing the spin off of New Grace.
The financial statements of Fresenius Worldwide Dialysis and Grace were
prepared as if each entity operated as an independent, stand-alone entity for
all periods presented. Neither entity is a legal entity, and, as such, the net
assets (equity) for each entity represent the excess of its assets over its
liabilities and not the capital structure of its parent and reporting entity.
The accompanying unaudited condensed combined pro forma financial information
does not present historical earnings per share data since the weighted average
number of shares associated with each of these combining segments to support
such a calculation does not exist. The capital structure of Fresenius Medical
Care will consist of 70,000,000 FMC Ordinary Shares issued to Fresenius AG and
the shareholders of Fresenius USA and Grace in consideration for the
contribution of Fresenius Worldwide Dialysis and Grace to Fresenius Medical
Care. Fresenius AG, the public shareholders of Fresenius USA, and the holders of
common stock (and options) of Grace will receive 50.3%, 4.9% and 44.8% of the
outstanding FMC Ordinary Shares, respectively, on a fully diluted basis.
The Pro Forma Condensed Combined Financial Information does not give effect
to certain restructuring and rationalization costs expected to be incurred
following the Reorganization. In addition, although Fresenius Medical Care plans
to realize cost reductions from the Reorganization and such restructuring and
rationalization, no effect has been given in the Pro Forma Financial Statements
to any such benefits. However, such cost reduction will be a function of
numerous factors, and no assurance can be given that any such cost reduction
will be realized over time.
For accounting purposes, the Reorganization will be treated as a purchase
of Grace by Fresenius Medical Care. Accordingly, for the purpose of these Pro
Forma Condensed Combined Financial Statements, the excess of the purchase price
of Grace over the historical costs of Grace's assets is reflected in the pro
forma condensed combined balance sheet as "excess purchase price over cost" and
has been amortized over an estimated composite life in the unaudited pro forma
condensed combined statement of earnings. Fresenius Medical Care intends to
obtain a valuation study to value existing assets and liabilities and to
appropriately allocate the excess purchase price over the cost of the business
acquired. Fresenius Medical Care management believes that the composite life
used in the pro forma condensed combined statement of earnings will not vary
materially from the amounts charged to operations once a valuation study has
been completed and existing assets and liabilities have been recorded at their
fair values.
The pro forma adjustments recognize the increase in debt that is incurred
immediately prior to the Reorganization and the resultant increase in financing
costs in the unaudited pro forma condensed combined statement of earnings. In
accordance with the Reorganization Agreement, Grace will borrow an amount
sufficient to finance the payment to, and assumption of indebtedness of, Grace
Chemicals, such that the Debt of Grace on a consolidated basis at the Effective
Time, will not exceed $2.273 billion, subject to adjustment as provided therein.
See "THE REORGANIZATION -- The Distribution Agreement."
170
<PAGE> 183
For purposes of the Pro Forma Condensed Combined Financial Statements, the
Debt of $2,273,000 is comprised at March 31, 1996 of an off-balance sheet
working capital facility of $200,000; historical capital lease obligations of
$10,239; cash overdrafts of $6,373; $18,800 related to certain accrued expenses;
and new debt of $2,037,588. Interest on the new borrowings ranges from LIBOR
plus 1.375% to LIBOR plus 1.75% while interest on the off-balance sheet facility
is LIBOR plus .50%. (The average LIBOR was 6.026% and 5.432% for the year ended
December 31, 1995 and the three-month period ended March 31, 1996,
respectively.) Interest also includes commitment fees related to letters of
credit. See "FINANCING -- NMC Credit Agreement."
In addition, the acquisition of the minority interest of Fresenius USA has
been recorded in the Pro Forma Condensed Combined Financial Statements and the
resultant goodwill has been amortized over 40 years. The pro forma adjustments
include the elimination of the intercompany activity between Fresenius Worldwide
Dialysis and Grace during the year ended December 31, 1995 and the three-month
period ended March 31, 1996 and the reclassification of the assets and
liabilities as of March 31, 1996. The assets and liabilities of Rena-Med are
reclassified to assets held for disposal. The Schiwa net assets and any gains on
the disposition of those assets will be retained by Fresenius AG. Certain pro
forma adjustments have been made to reflect the results of operations on a
stand-alone basis, including the elimination of Grace Chemicals' overhead
allocations and the costs of the Grace Chemicals long-term and other incentive
plans, that will not be applicable following the Reorganization. Fresenius
Medical Care management believes that the estimated added costs for Fresenius
Medical Care to operate on a stand-alone basis are reasonable and has made an
adjustment to reflect the estimated expenses for Fresenius National Medical Care
to operate as an independent entity.
THE PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION IS PROVIDED FOR
ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO REPRESENT WHAT THE FINANCIAL
POSITION OR RESULTS OF OPERATIONS OF FRESENIUS MEDICAL CARE WOULD ACTUALLY HAVE
BEEN IF THE REORGANIZATION HAD IN FACT OCCURRED AS OF THE DATES INDICATED OR TO
PROJECT THE COMBINED FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY FUTURE
DATE OR PERIOD. THE PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE NOTES THERETO AND THE FINANCIAL STATEMENTS AND
RELATED NOTES THERETO CONTAINED ELSEWHERE HEREIN.
171
<PAGE> 184
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA NOTE
FWD GRACE ADJUSTMENTS REFERENCES ADJUSTED
-------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues...................... $896,540 $2,032,738 $ (37,423) 5 $2,846,871
(31,578) 9
(13,406) 10
Cost of revenues.................. 514,080 1,176,093 8,788 7 1,631,171
(1,423) 7
(32,066) 5
(23,141) 9
(11,160) 10
-------- ---------- ----------
Gross profit.................... 382,460 856,645 1,215,700
Operating expenses:
Selling, general and
administrative............... 242,990 360,960 (8,657) 9 587,725
(6,566) 10
(5,801) 6
2,929 7
(130) 7
2,000 6
Provision for doubtful
accounts..................... -- 88,858 88,858
Depreciation and amortization
(Excluding $41,693 for
Fresenius Worldwide
Dialysis).................... -- 113,176 60,785 3 178,104
5,001 8
(321) 5
(537) 10
Research and development........ 17,292 3,957 (82) 9 21,167
Allocation of Grace Chemicals
expenses..................... -- 29,724 (29,724) 6 --
-------- ---------- ----------
Operating income................ 122,178 259,970 339,846
Interest, net................... 13,064 25,534 166,920 2 183,084
3,571 4
(1,558) 10
(24,447) 2
Other, net...................... (6,289) -- 2,450 9 (3,481)
358 10
Reduction of carrying amounts of
assets to estimated fair
values and restructuring
costs........................ -- 28,923 (12,400) 10 16,523
-------- ---------- ----------
Earnings before income taxes...... 115,403 205,513 143,720
Provision for income taxes........ 40,577 108,616 (62,674) 15 85,260
(1,259) 9
-------- ---------- ----------
Earnings before minority
interest........................ 74,826 96,897 58,460
Minority interest................. 5,111 -- (5,111) 8 522
522 11
-------- ---------- ---------- ----------
Net earnings...................... $ 69,715 $ 96,897 $(108,674) $ 57,938
======== ========== ========== ==========
Earnings per ordinary share....... 16 $ .83
==========
Earnings per ADS.................. 16 $ .28
==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
172
<PAGE> 185
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PRO FORMA NOTE
FWD GRACE ADJUSTMENTS REFERENCES ADJUSTED
-------- -------- ----------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $235,060 $528,291 $ (9,952) 5 $742,914
(7,430) 9
(3,055) 10
Cost of revenues................... 132,854 315,433 2,145 7 434,884
(322) 7
(6,956) 5
(6,091) 9
(2,179) 10
-------- -------- --------
Gross profit..................... 102,206 212,858 308,030
Operating expenses:
Selling, general and
administrative................ 60,832 101,447 (2,327) 9 158,995
(1,190) 10
500 6
715 7
(42) 7
(940) 6
Provision for doubtful
accounts...................... 21,486 21,486
Depreciation and amortization....
(Excluding $10,268 for Fresenius
Worldwide Dialysis)............ 30,628 16,084 3 47,834
1,250 8
(109) 5
(19) 10
Research and development......... 3,647 686 (6) 9 4,327
Allocation of Grace Chemicals
expenses...................... 2,017 (2,017) 6 --
-------- -------- --------
Operating income................. 37,727 56,594 75,388
Interest, net.................... 2,824 7,004 38,644 2 42,145
893 4
(351) 10
(6,869) 2
Other, net....................... (1,523) 1,284 9 (221)
18 10
-------- -------- --------
Earnings before income taxes....... 36,426 49,590 33,464
Provision for income taxes......... 13,067 23,145 (17,003) 15 19,035
(174) 9
-------- -------- --------
Earnings before minority
interest......................... 23,359 26,445 14,429
Minority interest.................. 1,694 (1,694) 8 131
131 11
-------- -------- -------- --------
Net earnings....................... $ 21,665 $ 26,445 $ (33,812) $ 14,298
======== ======== ======== ========
Earnings per ordinary share........ 16 $ .20
========
Earnings per ADS................... 16 $ .07
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
173
<PAGE> 186
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
PRO FORMA NOTE
FWD GRACE ADJUSTMENTS REFERENCES ADJUSTED
-------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..... $ 31,398 $ 33,855 $ (65,253) 1 $ --
Trade accounts receivable,
net........................ 184,324 430,013 (4,577) 5 587,345
(1,160) 9
(1,048) 10
(20,207) 2
Inventories, net.............. 187,292 72,458 (3,259) 9 253,396
(3,095) 10
Prepaid expenses and other
current assets............. 19,702 64,252 (1,101) 9 77,399
(3,543) 9
(1,911) 10
Deferred income taxes......... 4,467 90,280 (25) 9 94,722
------- --------- ---------
Total current
assets.............. 427,183 690,858 1,012,862
Property, plant and equipment,
net........................... 138,754 384,163 (775) 9 519,466
(2,676) 10
Intangible assets, net.......... 65,636 962,831 200,073 8 1,228,534
(6) 9
Excess purchase price over
cost.......................... -- -- 1,785,813 3 1,785,813
Investments in affiliates....... 18,786 -- 18,786
Deferred taxes.................. 3,409 -- 3,409
Other assets.................... 24,991 21,625 25,000 4 71,616
Assets held for disposal........ 554 10 554
------- --------- --------- ---------
Total Assets.................... $678,759 $2,059,477 1,902,804 $4,641,040
======= ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
(Continued)
174
<PAGE> 187
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
PRO FORMA NOTE
FWD GRACE ADJUSTMENTS REFERENCES ADJUSTED
--------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................ $36,804 $110,499 $ (40,228) 1 $ 95,811
(4,577) 5
(693) 9
(5,994) 10
Accrued expenses........................ 62,883 190,948 25,000 4 285,382
(3,642) 9
(2,107) 10
12,300 14
Short-term borrowings................... 128,842 -- 6,373 1 135,215
Current portion of long-term debt and
capital lease obligations............. 18,544 158,202 (153,932) 2 22,814
Income taxes payable.................... 2,390 13,573 (402) 9 15,486
(75) 10
Other current liabilities............... 15,727 -- (641) 9 15,086
-------- ---------- ----------
Total current liabilities........ 265,190 473,222 569,794
Long-term debt and capital lease
obligations, less current portion....... 22,614 28,290 (22,321) 2 28,583
New debt.................................. -- -- 2,037,588 2 2,037,588
Other liabilities......................... 6,517 34,702 (793) 9 40,426
Pension liabilities....................... 16,904 -- (892) 9 16,012
Deferred taxes............................ 805 64,618 171,177 3 236,600
Minority interest......................... 26,870 -- (26,870) 8 17,177
7,439 11
9,738 12
-------- ---------- ----------
Total Liabilities....................... 338,900 600,832 2,946,180
--
Stockholders' Equity:
Capital stock........................... 236,999 13 236,999
Additional paid in capital.............. 1,457,861 13 1,457,861
Retained earnings....................... -- --
Net assets.............................. 339,859 1,458,645 (31,398) 1 --
1,785,813 3
(171,177) 3
226,943 8
(7,439) 11
(9,738) 12
(1,881,542) 2
(2,806) 9
(12,300) 14
(1,694,860) 13
-------- ---------- ----------- ----------
Total Stockholders' Equity....... 339,859 1,458,645 1,694,860
-------- ---------- ----------
Total Liabilities and
Stockholders' Equity........... $678,759 $2,059,477 $ 1,902,804 $4,641,040
======== ========== =========== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
175
<PAGE> 188
FRESENIUS MEDICAL CARE AG
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS)
(1) Pursuant to the Reorganization Agreement, all cash and cash equivalents of
Grace and Fresenius Worldwide Dialysis shall be retained by Grace Chemicals
and Fresenius AG, respectively. See "THE REORGANIZATION." Accordingly, an
adjustment has been recorded to return the cash balance of $31,398 to
Fresenius AG with an offsetting decrease in the net assets of Fresenius
Worldwide Dialysis. At March 31, 1996, Grace recorded an adjustment for
$40,228 to reclassify its outstanding checks to accounts payable. An
adjustment has therefore been recorded to eliminate the Grace financial
statement cash balance of $33,855; reverse the $40,228 reclassification
entry to accounts payable, and to reclassify the remaining cash overdraft
of $6,373 to short-term borrowings.
(2) For purposes of the Pro Forma Condensed Combined Financial Statements,
Grace will incur new debt of $2,037,588 prior to the Reorganization to be
used for payment of the Grace dividend of $1,881,542. Grace's Debt is
subject to adjustment in accordance with the Reorganization Agreement. See
"THE REORGANIZATION -- The Distribution Agreement."
Grace's Debt of $2,273,000 is comprised of an off-balance sheet working
capital facility of $200,000; historical capital lease obligations of
$10,239; cash overdrafts of $6,373, $18,800 related to certain accrued
expenses, and new debt of $2,037,588. See "FINANCING -- NMC Credit
Agreement." Interest on the new borrowings ranges from LIBOR plus 1.375% to
LIBOR plus 1.75% while interest on the off-balance sheet facility is LIBOR
plus .50% (the average LIBOR was 6.026% and 5.432% for the year ended
December 31, 1995 and the three-month period ended March 31, 1996,
respectively). Interest also includes commitment fees related to letters of
credit. See "FINANCING -- NMC Credit Agreement."
Based upon the above, adjustments to record the new debt of $2,037,588,
eliminate existing Grace debt (except for capital lease obligations and
cash overdrafts) of $176,253, and to reduce the equity of Grace by
$1,881,542 for the payment of the Grace dividend have been recorded. In
addition, an adjustment has been recorded for $20,207 to reduce accounts
receivable for the difference between the off-balance sheet working capital
facility of $179,793 at March 31, 1996 and the facility of $200,000 to be
established prior to the Reorganization.
Adjustments have also been recorded to eliminate Grace interest expense
(less the interest on capital lease obligations retained) of $24,447 and
$6,869 for the year ended December 31, 1995 and the three-month period
ended March 31, 1996, respectively. Correspondingly, interest expense on
the total new debt (including the working capital facility) was recorded at
the above noted rates for $166,920 and $38,644 for the year ended December
31, 1995 and the three-month period ended March 31, 1996, respectively.
(3) Adjustments have been made to record the excess purchase price over the
carrying value of the Grace assets and liabilities acquired of $1,785,813
and to establish a deferred tax liability of $171,177, representing the
estimated tax effect of specifically identified assets to be increased to
fair value. The excess purchase price over the historical cost has not been
allocated to specifically identified assets nor has the unidentified
portion been treated as goodwill. Fresenius Medical Care management intends
to undertake a valuation study to record the assets and liabilities
acquired at their fair market value.
Amortization of the excess purchase price in the amounts of $61,005 and
$16,139 for the year ended December 31, 1995 and the three-month period
ended March 31, 1996, respectively, approximating a composite life of 29.4
years and 27.8 years for the years ended December 31, 1995 and the
three-month period ended March 31, 1996, respectively, have been recorded
in the unaudited pro forma condensed combined income statements. These
amounts were determined by using a recently completed Grace valuation study
as an estimate of the amounts that will be recorded upon the completion of
the Fresenius Medical Care valuation. Fresenius Medical Care management
believes that the amortization recorded in the pro forma financial
statements will not vary materially from the amounts that will be recorded
once its valuation study is completed.
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Adjustments were made for $10,735 and $3,038 for the year ended December
31, 1995 and the three-month period ended March 31, 1996, respectively, to
reduce income tax expense for the estimated tax effect for amortization of
the estimated specifically identified assets that will be recorded at fair
value.
(4) Adjustments have been made to record estimated net financing costs of
$25,000 for new debt under the NMC Credit Agreement and to amortize such
debt over the seven year life of the financing.
(5) Adjustments have been made to eliminate intercompany balances and activity
between Grace and Fresenius Worldwide Dialysis at March 31, 1996 and for
the three-month period then ended and for the year ended December 31, 1995.
(6) An adjustment has been made for the year ended December 31, 1995 and the
three-month period ended March 31, 1996 to eliminate historical overhead
allocations from Grace of $29,724 and $2,017; to eliminate the expense of
the Grace long term and other incentive plan of $17,940 and $2,100 and to
establish an estimate of new replacement incentive compensation
arrangements of $7,500 and $1,875; and to record the estimated expenses to
operate on a stand-alone basis of $4,639 and $1,160 resulting in net
benefits of $5,801 and $940, respectively. Adjustments have also been made
to record incremental overhead expenses related to Fresenius Medical Care
corporate of $2,000 and $500 for the year ended December 31, 1995 and the
three-month period ended March 31, 1996, respectively.
(7) An adjustment has been made to record expenses under the proposed operating
lease for land and buildings in Germany of $11,717 for the year ended
December 31, 1995. In addition, a pro rata adjustment of $2,860 has been
recorded for the three month period ended March 31, 1996. See "THE
REORGANIZATION -- Continuing Arrangements between Fresenius Medical Care
and Fresenius AG."
(8) An adjustment has been made to record the acquisition of the Fresenius USA
minority interest and option holders for $226,943. An adjustment has been
made to amortize the resultant goodwill of $200,073 over a 40 year life.
(9) An adjustment has been made to reclassify the assets and liabilities of
Schiwa as net assets held for sale at March 31, 1996 and to reverse all
income statement activity for the year ended December 31, 1995 and the
three-month period ended March 31, 1996. The Schiwa net assets of $2,806
and any gains on the disposition of those assets will be retained by
Fresenius AG. Accordingly, the net assets of Schiwa have been removed from
Fresenius Medical Care. See "THE REORGANIZATION -- Conditions."
(10) An adjustment has been made to reclassify the assets and liabilities of
Rena-Med as net assets held for sale at March 31, 1996 and to reverse all
activity for the three-month period then ended and for the year ended
December 31, 1995. See "THE REORGANIZATION -- Conditions."
(11) Adjustments have been made to record the Grace Preferred Stock existing
prior to the Reorganization of $7,439 as a minority interest and to record
the related dividends of $522 and $131 for the year ended December 31, 1995
and the three-month period ended March 31, 1996, respectively, as minority
interest expense.
(12) An adjustment has been made to record the New Preferred Stock to be issued
in the Reorganization at its par value of $.10 per share for 97,375 shares
outstanding of FNMC in minority interest.
(13) An adjustment has been made to establish the capital structure of Fresenius
Medical Care at 70 million shares with a par value per share of $3.39 (DM
5), with the remaining net asset balance recorded as additional paid in
capital.
(14) An adjustment has been recorded to accrue $12,300 for transition related
expenses, including retention and stock incentive distributions, to be paid
to employees subsequent to closing.
(15) Adjustments have been made to reflect the tax effects of the pro forma
adjustments described in notes 2, 3, 4, 5, 6 and 7 above. The adjustments
to record the costs of incremental Fresenius Medical Care corporate expense
and the lease of German land and buildings were given a German tax
adjustment of 47%; all other adjustments received tax adjustments of 40%.
(16) Earnings per FMC Ordinary Share and earnings per ADS have been calculated
as if all shares of Fresenius Medical Care stock were outstanding as of the
beginning of each respective period presented.
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MANAGEMENT OF FRESENIUS MEDICAL CARE
GENERAL
In accordance with the German Stock Corporation Law, Fresenius Medical Care
has a Supervisory Board and a Management Board. The two Boards are separate and
no individual may simultaneously be a member of both Boards.
THE SUPERVISORY BOARD
Following consummation of the Reorganization, the FMC Supervisory Board
will consist of six members. Pursuant to the Pooling Agreement described under
"DESCRIPTION OF THE POOLING AGREEMENT," at least one-third (but no fewer than
two) of the members of the FMC Supervisory Board elected by the shareholders are
required to be "Independent Directors," i.e., persons with no substantial
business or professional relationship with either of Fresenius Medical Care,
Fresenius AG or any affiliate of either of them. For a discussion of the terms
of the Fresenius Medical Care Pooling Agreement, see "DESCRIPTION OF THE POOLING
AGREEMENT."
The term of a member of the FMC Supervisory Board will expire at the end of
the general meeting of shareholders after the fourth fiscal year following the
year in which such member was elected, but not counting the fiscal year in which
such member's term begins. Any member of the FMC Supervisory Board elected by
the shareholders in a general meeting may be removed by three-fourths of the
votes cast by the shareholders in a general meeting. The FMC Supervisory Board
ordinarily acts by simple majority vote and the Chairman has a casting vote
(i.e., the deciding vote) in case of any deadlock.
The principal function of the FMC Supervisory Board is to appoint and to
supervise the FMC Management Board and to approve the mid-term planning and
certain matters which are not in the ordinary course of business and are of
fundamental importance to Fresenius Medical Care. For additional information
with respect to the functions of the FMC Supervisory Board, see "COMPARISON OF
CERTAIN RIGHTS OF SHAREHOLDERS OF GRACE AND FRESENIUS USA."
MEMBERS OF THE FMC SUPERVISORY BOARD
Set forth below are names, ages, and principal occupations of the persons
who as of the Effective Time are expected to be the members of the FMC
Supervisory Board.
<TABLE>
<CAPTION>
NAME AGE
--------------------------------------------------------------- ---
<S> <C>
Dr. Matthias Schmidt, Chairman................................. 37
Dr. Dieter Schenk, Deputy Chairman............................. 44
Dr. Eckart O. Ebner............................................ 58
Donald L. Staheli(1)........................................... 64
Bernhard Walter................................................ 54
Walter L. Weisman(1)........................................... 61
</TABLE>
- ---------------
(1) Independent Director
Dr. Matthias Schmidt has served as president of the Pharmaceuticals
Division of Fresenius AG since October 1986 and a member of the Management Board
of Fresenius AG since July 1987. Dr. Schmidt is also director of Hemosol Inc., a
Canadian development-stage biopharmaceutical company listed on the Toronto Stock
Exchange and engaged in development of a human blood substitute and stem cell
research.
Dr. Dieter Schenk is an attorney and tax advisor and has been a partner in
the law firm of Norr, Stiefenhofer & Lutz since 1986. Dr. Schenk is also a
member and vice-chairman of the Supervisory Board of Greiffenberger AG.
Greiffenberger AG is a German corporation listed on the Munich Stock Exchange
that manufactures specialty steel and machine tools.
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Dr. Eckart O. Ebner is a public accountant and tax advisor and has been a
partner in the accounting firm of Dr. Ebner, Dr. Stolz and Partner, Stuttgart,
since 1974. Dr. Ebner is also a member of the advisory board of Drescher GmbH,
Rutesheim. Drescher is an internationally operating communication company. He is
also a member of the advisory committee with Georg Thieme Verlag, Stuttgart, an
international publishing company.
Donald L. Staheli is Chairman of the Board and Chief Executive Officer of
Continental Grain Company, an international agribusiness and financial services
concern. Mr. Staheli joined Continental Grain Company in 1969, and was elected
President in 1984, Chief Executive Officer in 1988 and Chairman of the Board in
1994. Mr. Staheli serves as a Director of Prudential Life Insurance Company of
America, Bankers Trust New York Corporation and ContiFinancial Corporation. He
is Chairman of the U.S.-China Business Council, a Director of the New York City
Partnership, a member of the Council on Foreign Relations, and a member of the
Board of Trustees for the American Graduate School of International Business.
Bernhard Walter has been a member of the Board of Managing Directors of
Dresdner Bank AG since prior to 1991. Mr. Walter is also a member of the
Supervisory Boards of various companies in Germany and other European countries.
Walter L. Weisman is a private investor and a former Chairman and Chief
Executive Officer of American Medical International, Inc. ("AMI"). Mr. Weisman
joined AMI in 1972, was elected President in 1979 and served as Chief Executive
Officer from 1985 to 1988. Mr. Weisman is a Vice-Chairman of the Board of the
California Institute of Technology and Chairman of its Institute Relations
Committee, a Trustee of Harvey Mudd College, a Trustee of the Los Angeles County
Museum of Art, Chairman of the Board of the Sundance Institute, a Trustee of the
Ashland Shakespeare Festival, and a Director of Price REIT, Inc. and Clinical
Micro Sensors, Inc.
FMC SUPERVISORY BOARD COMPENSATION
The members of the FMC Supervisory Board will receive no compensation from
Fresenius Medical Care until the Effective Time. Fresenius Medical Care will pay
an annual retainer fee of DM 60,000 to each member of the FMC Supervisory Board,
with the Chairman to be paid twice that amount and the Deputy Chairman to be
paid 150% of that amount. All FMC Supervisory Board members will be compensated
for their reasonable travel and accommodation expenses incurred with respect to
their duties as FMC Supervisory Board members.
FMC MANAGEMENT BOARD AND CERTAIN OTHER EXECUTIVE OFFICERS
Each member of the management board of Fresenius Medical Care (the "FMC
Management Board") is appointed by the FMC Supervisory Board for a maximum term
of five years and is eligible for reappointment thereafter.
Set forth below are names, ages, positions and terms of office of the
persons who as of the Effective Time are expected to be the members of the FMC
Management Board.
<TABLE>
<CAPTION>
YEAR
TERM
NAME AGE POSITION EXPIRES
------------------------------------- --- ------------------------------ -------
<S> <C> <C> <C>
Dr. Gerd Krick....................... 57 Chairman of the FMC Management 2001
Board; Chief Executive Officer
Mathias R. Klingler.................. 43 Chief Executive Officer for 2001
Europe,
Asia Pacific and Latin America
Dr. Ben J. Lipps..................... 55 Chief Executive Officer for 2001
North America
Udo Werle............................ 51 Chief Financial Officer 2001
</TABLE>
Dr. Gerd Krick has been Chairman of the Fresenius AG Management Board since
1992. Prior to 1992, he was a Director of the Medical Systems Division of
Fresenius AG and Deputy Chairman of the Fresenius
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AG Management Board. Dr. Krick was elected as a director of Fresenius USA in
October 1987, became Chairman of the Fresenius USA Board in October 1989 and
continues to serve in that capacity. Dr. Krick is also a director of Gull
Laboratories, Inc., a publicly-held manufacturer and distributor of diagnostic
test products.
Mathias R. Klingler has been President of the Dialysis System Division of
Fresenius AG since April 1993. From 1992 to April 1993 he held the position of
Executive Vice President of Dialysis Systems International at Fresenius AG. From
1987 to 1992 he was General Manager of Pacesetter Systems GmbH and of Siemens AG
after it acquired Pacesetter Systems GmbH. Mr. Klingler is a director of
Fresenius USA.
Dr. Ben J. Lipps has served as President, Chief Executive Officer, Chief
Operating Officer and a director of Fresenius USA since October 1989, and in
various capacities with Old FUSA since 1985. Dr. Lipps joined Dow Chemical
Company in 1966 and led the research team that developed the first hollow fiber
dialyzer between 1967 and 1969. Prior to joining Old FUSA, Dr. Lipps was a Vice
President of research and development for Cordis Dow Corporation.
Mr. Udo Werle has been Chief Financial Officer and Labor Relations Director
of Fresenius AG since January 1994. Mr. Werle was previously a member of the
Management Board of ABB Kraftwerke AG, Mannheim. In his last position as
President of ABB Power Ventures Ltd., Zurich/Mannheim, he was responsible for
all cooperation and joint ventures for the Power Generation segment. Mr. Werle
joined ABB Power Ventures Ltd. in 1970.
Set forth below are the names, ages and positions of the present executive
officers of Fresenius AG's Dialysis Systems Division, Fresenius USA and NMC. It
is expected that the officers of these companies will be substantially the same
following the Reorganization.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------ --- ---------------------------------------
<S> <C> <C>
FRESENIUS AG -- DIALYSIS SYSTEMS DIVISION
Matthias Klingler......................... 43 President and Chief Operating Officer
FRESENIUS USA
Dr. Gerd Krick............................ 57 Chairman of the Board
Dr. Ben J. Lipps.......................... 55 President, Chief Executive Officer and
Chief Operating Officer
Robert E. Farrell......................... 46 Corporate Group Vice President --
Administration, General Counsel and
Clerk
Heinz J. Schmidt.......................... 44 Corporate Group Vice President --
Finance and Treasurer
Scott Walker.............................. 47 Corporate Group Vice President --
Regulatory Affairs
NMC
Geoffrey W. Swett......................... 47 President of the Dialysis Services
Division
John S. Walker............................ 55 President of the Medical Products Group
Peter F. Spears........................... 49 President of NMC Homecare
Robert W. Armstrong, III.................. 46 Vice President and Controller
A. Miles Nogelo........................... 52 Vice President and Treasurer
Christopher T. Ford....................... 46 President of International Dialysis
Services
Philip J. Glassanos....................... 44 Vice President -- Managed Care
William F. Grieco......................... 42 Senior Vice President and General
Counsel
</TABLE>
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<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------ --- ---------------------------------------
<S> <C> <C>
Richard K. Hayden......................... 57 Vice President of Corporate Information
Services
John Michael Lazarus, M.D................. 58 Senior Vice President and Medical
Director
Thomas L. Saltonstall..................... 47 Vice President for Human Resources
Edward E. Berger.......................... 50 Vice President for Government Relations
and External Affairs
</TABLE>
Robert Farrell joined Fresenius USA as Chief Financial Officer, General
Counsel, Treasurer and Clerk in April 1991. In March 1992, he became Vice
President -- Administration of Fresenius USA and ceased serving as Chief
Financial Officer and Treasurer. In October 1995, he was promoted to Corporate
Group Vice President -- Administration of Fresenius USA. From December 1985
until joining Fresenius USA, he served as Vice President -- Corporate Finance of
Genstar Corporation, a Canadian corporation involved in the building products,
food service and financial services industries. He holds a Bachelor of Arts
degree from the University of Notre Dame and a Juris Doctor degree from Hastings
College of Law, University of California. Mr. Farrell is a member of the
California bar.
Heinz Schmidt joined Fresenius USA as Vice President -- Finance and
Treasurer in March 1992. In October 1995, he was promoted to Corporate Group
Vice President -- Finance and continues to serve as Treasurer. Since March 1988,
he has served as Vice President -- Finance and Administration for Old FUSA (and
continues to serve in that office). Mr. Schmidt also served as Vice President --
Finance and Administration for Seratronics from August 1986 to February 1988.
Mr. Schmidt holds a Bachelor of Arts degree from California State University,
Dominguez Hills, and a Masters Degree in Finance from Loyola Marymount
University of California.
Scott Walker joined Old FUSA in 1988 as Director of Quality Assurance,
later served as Product Manager, Reuse Systems, became Vice President --
Regulatory Affairs of Fresenius USA in March 1992, and was promoted to Corporate
Group Vice President -- Regulatory Affairs in October 1995. Since 1982, Mr.
Walker has also worked with Seratronics, and is currently Vice President --
Technical Services for Seratronics. From 1970 to 1982, Mr. Walker held various
positions with Dow Chemical relating to research and production of hollow fiber
dialyzers and other medical products. Mr. Walker holds a Bachelor of Science
degree from the University of California at Berkeley.
Geoffrey W. Swett has spent over 16 years with NMC. He is currently
President of the Dialysis Services Division. Prior to his current position, he
was a Senior Vice President in DSD. Before joining NMC, Mr. Swett worked in
various administration positions within various hospitals. Mr. Swett received
his undergraduate degree from Harvard College.
John S. Walker has spent four years with NMC and is currently the President
of the Medical Products Group. Prior to his current appointment, Mr. Walker
served as the Executive Vice President of the Medical Products Group.
Previously, Mr. Walker served as President of Anaquest Pharmaceuticals and Group
Vice President of Ohmeda Patient Monitoring System Group, both operating
divisions of BOC Group, plc and as the Director of Corporate Strategic Planning
for the Health Technologies Group of Warner Lambert. Mr. Walker received his
undergraduate degree from Harvard College and an MBA degree from Columbia
University.
Peter F. Spears has spent seven years with NMC as the President of NMC
Homecare. Prior to joining NMC, Mr. Spears spent 17 years in the medical
products industry in various marketing, sales and general management positions
with Baxter International, Johnson & Johnson, C.R. Bard and Bristol-Meyers
Squibb. Mr. Spears received his undergraduate degree from the University of
Massachusetts and his MBA degree from Harvard University.
Robert W. Armstrong, III has spent over 15 years with NMC and is currently
the Vice President and Controller of NMC. Prior to his current appointment, Mr.
Armstrong served as NMC's Audit Manager and as the Director, Financial Reporting
& Budgeting. Prior to joining NMC, Mr. Armstrong worked as an Audit
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Supervisor with Deloitte & Touche and as a Materials Manager with ATI, Inc. Mr.
Armstrong received his undergraduate degree from Bowdoin College and his MBA
degree from the University of Pennsylvania.
A. Miles Nogelo has spent 15 years with NMC and is currently the Vice
President and Treasurer of NMC. From 1985-1995 Mr. Nogelo also served as NMC's
Chief Financial Officer. Prior to joining NMC, Mr. Nogelo worked in financial
management with General Foods and as a Partner with Paul Dean Investments. He
also served as the Assistant Treasurer at the Ludlow Corporation. Mr. Nogelo
received his undergraduate degree from Tufts University and his MBA degree from
Harvard University.
Christopher T. Ford has spent 25 years with NMC and is currently President
of International Dialysis Services. Prior to his current appointment, Mr. Ford
served as Director, Vice President of Operations and Senior Vice President for
the Domestic Dialysis Services Division. Mr. Ford received an undergraduate
degree from Northeastern University.
Philip J. Glassanos joined NMC in October 1995 as the Vice President --
Managed Care of NMC. From June 1992 to September 1995, Mr. Glassanos was
Executive Vice President of Braintree Hospital and Vice President of Braintree
Rehabilitation Ventures, Inc., and from April 1987 to June 1992 Mr. Glassanos
was Senior Vice President -- Marketing, Planning and Development of South Shore
Hospital, Inc. Mr. Glassanos received his undergraduate degree and his graduate
degree in Public Health from Tufts University and his Masters of Public Health
from the University of Michigan.
William F. Grieco joined NMC in October 1995 as Senior Vice President and
General Counsel. Prior to that, Mr. Grieco was a partner in the law firm of
Choate, Hall & Stewart, where he maintained a diversified health care practice.
Mr. Grieco received his undergraduate degree and his law degree from Boston
College, and a graduate degree in health policy and management from Harvard
University.
Richard K. Hayden has spent three years at NMC and is currently the Vice
President of Corporate Information Services. From 1990 to 1993, Mr. Hayden was
Senior Vice President of Industrial Operations for Metcalf & Eddy, Inc., an
environmental engineering firm. Previously he held positions in information
services and operations with Cabot Corporation, a chemical manufacturer, GSX
Corporation and SCA Services, waste services companies, and Finast Supermarkets.
Mr. Hayden received undergraduate degrees from Northeastern University and
Bentley College and an MBA degree from Boston College.
John Michael Lazarus, M.D. has been affiliated with NMC in a professional
capacity for 23 years and has served as a consultant to NMC since 1982. Dr.
Lazarus joined NMC as Senior Vice President and Medical Director on April 1,
1996. Dr. Lazarus received his undergraduate degree from the University of North
Carolina and his medical degree from Tulane University. Prior to joining NMC,
Dr. Lazarus was an Associate Professor of Medicine at Harvard Medical School and
Senior Physician and Director of Clinical Services for Nephrology at the Brigham
and Women's Hospital.
Thomas L. Saltonstall joined NMC in 1994 and is currently the Vice
President for Human Resources. From 1992 to 1993, Mr. Saltonstall worked as a
Vice President, Human Resources with The Boston Company, a financial services
corporation, and from 1988 to 1992 he served in similar positions with Fleet
Bank of Massachusetts and the Bank of New England. Mr. Saltonstall received an
undergraduate degree from Harvard College and an MPA degree from Harvard
University.
Edward E. Berger has spent 12 years with NMC and is currently the Vice
President for Government Relations and External Affairs. Prior to joining NMC,
Mr. Berger was a health care management and policy consultant, and an
administrator and faculty member at Boston University. Mr. Berger received an
undergraduate degree from Harvard College and a Ph.D. in Political Science from
Boston University.
COMPENSATION OF THE FMC MANAGEMENT BOARD AND CERTAIN OTHER EXECUTIVE OFFICERS
The members of the FMC Management Board and the executive officers named
above will receive no compensation from Fresenius Medical Care until the
Effective Time. Certain of the members of the FMC Management Board are presently
members of Fresenius AG management or directors and officers of Fresenius USA,
and are entitled to compensation and certain other employment benefits from
their respective
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companies. See "-- Historical Compensation" for a discussion of such matters. It
is anticipated that Dr. Krick and Mr. Werle will continue to hold their
positions with Fresenius AG and to receive compensation for their services to
that company.
Fresenius Medical Care intends to implement appropriate long-term,
performance-based executive compensation plans for the management of Fresenius
Medical Care, consistent with industry practices. In this regard, Fresenius
Medical Care has engaged a benefits consulting firm to consider and recommend
appropriate plans to Fresenius Medical Care.
STOCK OPTION PLAN
Fresenius Medical Care intends to implement a Stock Option Plan (the "FMC
Plan") pursuant to which certain Fresenius USA and NMC management and executive
employees would be issued rights to acquire ADSs representing non-voting
preferred bearer shares of Fresenius Medical Care (the "FMC Preferred Shares").
Each ADS will represent one-third of a non-voting FMC Preferred Share. It is
anticipated that rights to purchase an average of approximately 800,000 ADSs per
year would be issued over a five-year period to eligible FMC Plan participants,
currently approximately 350 employees, although such annual amount may increase
or decrease in any year, depending on the performance of Fresenius Medical
Care's North American operations. Certain management employees would receive
initial grants intended to cover a three-year period; other grants would be made
annually. Grants under the FMC Plan would be in the form of convertible bonds
(the "Bonds"). The FMC Plan would be adopted, and the initial issuance of Bonds
would be made, subject to the receipt of a ruling from the IRS that the Bonds
are the equivalent of nonqualified employee stock options for U.S. federal
income tax purposes.
The Bonds would be convertible into ADSs at a price equal to the fair
market value of the underlying FMC Preferred Shares as of the day following the
day on which the right to purchase the Bonds is granted (the "Anniversary
Date"). For Bonds issued before the FMC Preferred Shares are traded, fair market
value on the Anniversary Date will be determined by an investment banking firm.
The Bonds, which are expected to be Deutschemark denominated, would have a face
amount equal to the nominal value of the FMC Preferred Shares multiplied by the
number of FMC Preferred Shares represented by the ADSs into which the Bonds may
be converted and would bear interest at a rate per year to be determined. It is
contemplated that the right to convert the Bonds would vest over a period of
three years following the Anniversary Date. Upon vesting, the Bonds would be
convertible in whole or in part, subject to appropriate adjustment in the event
of partial conversion.
Fresenius Medical Care would lend to each FMC Plan participant wishing to
purchase Bonds the amount of the purchase price of the Bonds (the "Loan"), which
Loan would bear interest at the same rate as the interest rate on the Bonds. The
Bonds would be non-assignable and non-transferrable during the employee's
lifetime, and would be convertible during employment for 10 years. Upon
termination of employment on account of retirement, disability or death, an
employee or his or her representative would have an additional year to convert.
Generally, upon termination for any other reason, the employee would have 90
days to convert. If the Bonds were not converted, Fresenius Medical Care would
mandatorily redeem the Bonds by cancelling the Loan.
At the time of conversion, the employee would be subject to U.S. income
taxes equal to the value of the ADSs less the conversion price and would be
required to remit to his or her employer company any required withholding taxes.
Employees may also be required to file with Fresenius Medical Care or its
designated agent as a protective measure, a form sufficient under German law to
elect benefits under the U.S.-German income tax treaty (the "Treaty") if the
German taxing authorities take the position that the interest on the Bonds is
otherwise subject to German withholding tax.
Employment and Consulting Agreements
Following the Reorganization, it is expected that Fresenius Medical Care
will have employment agreements with Dr. Gerd Krick, Mathias R. Klingler, Dr.
Ben J. Lipps and Udo Werle.
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In June 1996, Dr. Constantine L. Hampers resigned all offices and
directorships he held with Grace and its subsidiaries, including NMC. Under the
terms of an agreement providing for his resignation, Dr. Hampers will continue
to receive salary (at the annual rate of $875,270), as well as specified
benefits, until December 31, 1996, at which time he will become eligible to
commence receiving the pension benefit provided under his previous employment
agreement with Grace Chemicals. He will also be entitled to participate in
Grace's Annual Incentive Compensation Program for 1996 and to receive any awards
earned under Grace's Long-Term Incentive Program (the "LTIP") for the 1994-1996
and 1995-1997 performance periods (with the award for the 1995-1997 performance
period to be paid on a pro rata basis). In connection with Dr. Hampers'
resignation, a five-year consulting agreement between Dr. Hampers and Grace,
under which Dr. Hampers would have received consulting fees of approximately
$500,000 per year, was cancelled, subject to the execution of the agreement
described below. In addition, as contemplated by his former employment agreement
with a Grace subsidiary, Dr. Hampers was granted the right to purchase a
corporate aircraft from Grace for its fair market value (subject to certain
adjustments), as well as an automobile previously provided for his use. Dr.
Hampers has subsequently agreed to purchase the aircraft from Grace for
approximately $19,000,000.
Dr. Hampers has reached an agreement to serve, following the
Reorganization, as a consultant to Fresenius Medical Care, reporting to Dr. Gerd
Krick, who is the chief executive officer of Fresenius AG and who will serve as
the chief executive officer of Fresenius Medical Care following the
Reorganization. Under the terms of the agreement, Dr. Hampers will receive a $6
million fee from Fresenius Medical Care conditioned upon the successful
completion of the Reorganization as well as a consulting fee of $500,000 per
year for two years.
Historical Compensation
The aggregate amount of compensation paid by Fresenius AG to the members of
Fresenius AG management who, as of the Effective Time, are expected to be
members of the FMC Management Board, during the year ended December 31, 1995,
was approximately $2,377,500. For a discussion of the historical compensation of
Dr. Lipps, see "FRESENIUS USA EXECUTIVE COMPENSATION."
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SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FRESENIUS
MEDICAL CARE
The outstanding share capital of Fresenius Medical Care consists of FMC
Ordinary Shares which are issued only in bearer form. Accordingly, except
insofar as Fresenius Medical Care may be informed of the acquisition of
beneficial ownership of FMC Ordinary Shares through reports filed under Section
13 of the Exchange Act or through the German statutory requirements referred to
herein, Fresenius Medical Care has no way of determining who its shareholders
are or how many shares any particular shareholder owns. Under the new German
Securities Exchange Law, which became effective on January 1, 1995 (the "German
Securities Law"), holders of voting securities of a German company listed on a
stock exchange within the EU are obligated to notify the company of the level of
their holding whenever such holding reaches, exceeds or falls below certain
thresholds, which have been set at 5%, 10%, 25%, 50% and 75% of a company's
outstanding voting rights. In addition, all persons holding 5% or more of the
voting rights of a German listed stock corporation were required to provide the
corporation with an initial notification of the level of their holding prior to
the first annual general meeting of such company held after April 1, 1995. In
addition, under the German Stock Corporation Law, notification to a company is
required upon acquisition of 25% and 50% of the voting securities of the
company.
To the best knowledge of Fresenius Medical Care, the only person that will
beneficially own more than 10% of the FMC Ordinary Shares outstanding upon
consummation of the Reorganization will be Fresenius AG. To the best knowledge
of Fresenius Medical Care, upon consummation of the Reorganization, members of
the FMC Supervisory Board and the FMC Management Board, as a group, will not
hold any FMC Ordinary Shares or ADRs evidencing ADSs, except that, Dr. Gerd
Krick will receive approximately 364 ADSs in respect of shares of Grace Common
Stock held by him, and to the extent that Dr. Lipps does not sell all of the
options held by him to purchase 450,000 shares of Fresenius USA Common Stock, he
will receive ADSs with respect to any shares of Fresenius USA Common Stock
acquired upon exercise of such options and options to purchase FMC Ordinary
Shares in exchange for any unexercised options.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FRESENIUS AG
The share capital of Fresenius AG consists of Fresenius AG Ordinary Shares
and non-voting preference shares, nominal value DM 5 per share ("Fresenius AG
Preference Shares"), both of which are issued only in bearer form. Accordingly,
Fresenius AG has no way of determining who its shareholders are or how many
shares any particular shareholder owns. However, under the German Stock
Corporation and Securities Law, holders of voting securities of a German company
listed on a stock exchange within the EU are obligated to notify the company of
certain levels of holdings, as described above.
Fresenius AG has been informed that the Foundation owns 55.96% of the
Fresenius AG Ordinary Shares. The Foundation serves to promote medical science,
primarily in the fields of research and treatment of illnesses, including the
development of apparatuses and preparations. The Foundation may promote only
those research projects the results of which will be generally accessible to the
public. The Foundation further serves to promote the education of physicians or
of others concerned with the treatment and care of sick persons, primarily those
working in the field of dialysis, as well as to promote the education of
particularly gifted pupils and students. Effective May 1, 1996, the
administrative board of the Foundation consists of Mr. Hans Kroner (Chairman),
Mr. Hans Goring (Vice Chairman), Frankfurt/Main and Professor Dr. Volker Lang,
Gauting. Until May 1, 1996, Mr. Kroner was a member of the Supervisory Board of
Fresenius AG (the "Fresenius AG Supervisory Board"). Pursuant to the terms of
the will of the late Mrs. Else Kroner, under which the Foundation acquired most
of its shares, Mrs. Kroner's executors exercise voting and dispositive power
over the shares held by the Foundation. The executors under Mrs. Kroner's will
are Mr. Kroner and Dr. Alfred Stiefenhofer. Mr. Kroner's address is Dipl.
Volkswirt Hans Kroner, Postfach. 1852, 61288 Bad Homburg v.d.H., Germany. Dr.
Stiefenhofer's address is Norr, Stiefenhofer & Lutz, Brienner Strasse 28, 80333
Munich, Germany. Dr. Stiefenhofer is Chairman of the Fresenius AG Supervisory
Board. In addition, on March 28, 1995, "AW-Beteiligungs-GmbH ("AW") informed
Fresenius AG that it owns 9% of the Fresenius AG Ordinary Shares and 15% of the
Fresenius AG Preference Shares, and on May 4, 1995, H.O.F.-Beteiligungs-
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<PAGE> 198
GmbH ("HOF") informed Fresenius AG that it owns 22.4% of the Fresenius AG
Ordinary Shares. According to published reports, HOF is 50%-owned by Dresdner
Bank AG and 50%-owned by the Foundation. Pursuant to a pooling agreement
relating to the shares held by AW and HOF, the Foundation has voting power over
the shares held by AW and HOF. Accordingly, through (i) their dispositive power
over the shares of Fresenius AG held by the Foundation and (ii) their power to
direct the vote of the shares held by the Foundation (including the shares
subject to the pooling agreement), Dr. Stiefenhofer and Mr. Kroner may be deemed
to beneficially own (under the rules of the Commission, as distinguished from
the German concept of beneficial ownership), 87.36% of the voting shares of
Fresenius AG.
To the best knowledge of Fresenius AG, as of December 31, 1995, members of
the Fresenius AG Supervisory Board and the Fresenius AG Management Board, as a
group, did not hold any Fresenius AG Ordinary Shares or any Fresenius AG
Preference Shares, other than the shares beneficially owned by Dr. Stiefenhofer
and Mr. Kroner.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FRESENIUS USA
The following table sets forth, as of July 23, 1996, certain information
with respect to each person who is known by Fresenius USA to own beneficially
more than 5% of each class of the voting securities of Fresenius USA, each
director of Fresenius USA, certain executive officers, and all directors and
officers of Fresenius USA as a group. For information with respect to the sale
of Fresenius USA Common Stock and options and warrants to purchase Fresenius USA
Common Stock to Fresenius USA by certain of the persons listed in the table
below, see "FRESENIUS USA EXECUTIVE COMPENSATION -- Securities Repurchases."
<TABLE>
<CAPTION>
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE
BENEFICIAL OWNERS OWNED(1) OF CLASS
--------------------------------------------------------- ------------ ----------
<S> <C> <C>
FRESENIUS USA COMMON STOCK
5% Stockholders
Fresenius Aktiengesellschaft............................. 18,673,324(2) 70.6%
Borkenberg 14
61343 Bad Homburg v.d.H.
Germany
Fresenius Securities, Inc................................ 7,833,202(3) 29.6%
2637 Shadelands Drive
Walnut Creek, CA 94598
Abbott Laboratories...................................... 1,750,000(4) 6.3%
One Abbott Park Road
Abbott Park, IL 60064-3500
Directors
Ben J. Lipps............................................. 450,000(5) 1.7%
2637 Shadelands Drive
Walnut Creek, CA 94598
Robert S. Ehrlich........................................ 123,166 *
2637 Shadelands Drive
Walnut Creek, CA 94598
James F. Marten.......................................... 111,871(6) *
2637 Shadelands Drive
Walnut Creek, CA 94598
Francis E. Baker......................................... 15,000 *
2637 Shadelands Drive
Walnut Creek, CA 94598
Mathias R. Klingler...................................... 0 0
Borkenberg 14
61343 Bad Homburg v.d.H.
Germany
</TABLE>
186
<PAGE> 199
<TABLE>
<CAPTION>
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE
BENEFICIAL OWNERS OWNED(1) OF CLASS
--------------------------------------------------------- ------------ ----------
<S> <C> <C>
Gerd Krick............................................... 0 0
Borkenberg 14
61343 Bad Homburg v.d.H.
Germany
Ulrich Wagner............................................ 30,000(7) *
54th Floor
153 East 53rd Street
New York, New York 10022
Executive Officers
Robert E. Farrell........................................ 46,000 *
2637 Shadelands Drive
Walnut Creek, CA 94598
Heinz J. Schmidt......................................... 27,600 *
2637 Shadelands Drive
Walnut Creek, CA 94598
Scott Walker............................................. 26,300(8) *
2637 Shadelands Drive
Walnut Creek, CA 94598
All directors and executive officers as a group.......... 829,937(9) 3.1%
</TABLE>
- ---------------
* Less than 1%
(1) Except as otherwise indicated, the named owner has sole voting and
investment power with respect to the shares set forth. The figures in this
table are calculated in accordance with Rule 13d-3 under the Exchange Act.
(2) Includes 184,779 shares issuable upon the exercise of warrants issued to
Fresenius AG in connection with the Abbott Acquisition and 50,000 shares
issuable upon exercise of a warrant issued to Fresenius AG in consideration
for its providing credit support. Also includes 7,833,202 shares owned by
Fresenius Securities, Inc., a wholly owned subsidiary of Fresenius AG. For
information with respect to the beneficial ownership of the securities of
Fresenius AG, see "-- Security Ownership of Certain Beneficial Owners and
Management of Fresenius AG."
(3) These shares are also beneficially owned by Fresenius AG. See Note 2.
(4) Represents shares issuable upon exercise of a warrant issued to Abbott
Laboratories in connection with the Abbott Acquisition. See "FRESENIUS USA
EXECUTIVE COMPENSATION -- Securities Repurchases."
(5) Includes 450,000 shares issuable upon exercise of options granted subject
to stockholder approval of the Fresenius USA Plan Amendment. See "AMENDMENT
TO THE FRESENIUS USA 1987 STOCK OPTION PLAN."
(6) Includes 61,971 shares issuable upon exercise of presently exercisable
options.
(7) Includes 30,000 shares issuable upon exercise of presently exercisable
options.
(8) Includes 25,800 shares issuable upon exercise of presently exercisable
options.
(9) The amount shown includes any shares owned of record or issuable upon
exercise of presently exercisable options by the directors and all
executive officers.
187
<PAGE> 200
INTERESTS OF CERTAIN PERSONS
See "THE REORGANIZATION -- Continuing Arrangements between Fresenius
Medical Care and Fresenius AG" for a discussion of certain arrangements with
Fresenius AG which will apply if the Reorganization is consummated and
"MANAGEMENT OF FRESENIUS MEDICAL CARE" for a discussion of certain employment
and other arrangements with executives and a former executive of Fresenius AG,
Fresenius USA and Grace which will apply if the Reorganization is consummated
and a discussion of the stock option plan to be adopted by Fresenius Medical
Care.
For a discussion of certain material contracts between Fresenius AG and
Fresenius USA, see "BUSINESS OF FRESENIUS MEDICAL CARE -- Business of Fresenius
USA -- Material Contracts between Fresenius AG and Fresenius USA."
OTHER INTERESTS IN THE REORGANIZATION
Dr. Matthias Schmidt, who will be chairman of the FMC Supervisory Board, is
a member of the Management Board of Fresenius AG.
In connection with the Reorganization, Fresenius AG has agreed to pay to
Dresdner Securities a financial advisory fee equal to (a) a retainer of
$150,000, (b) a transaction fee of $3,000,000 plus, (c) an additional amount up
to $1 million if the Transaction Value (as defined in the agreement between
Fresenius AG and Dresdner Securities) equals or exceeds $2 billion. Fresenius AG
has also agreed to reimburse Dresdner Securities for its reasonable out of
pocket expenses and to indemnify Dresdner Securities for losses and liabilities
arising out of Dresdner Securities' engagement by Fresenius AG, including
liabilities arising under the federal securities laws. In addition, Dresdner
Securities is currently in discussions with Fresenius Medical Care to act as an
underwriter of securities of Fresenius Medical Care, the proceeds of which may
be used to refinance a portion of NMC's bank debt following consummation of the
Reorganization. See "FINANCING -- Refinancing." Dresdner Securities is a wholly
owned subsidiary of Dresdner Bank AG. Dresdner Bank AG is also providing
financial advisory services to Fresenius Medical Care in connection with the
listing of the FMC Ordinary Shares on the Frankfurt Stock Exchange. Dresdner
Bank AG has proposed that its fee for such services equal 1% of the nominal
value of the listed shares. Such fee is currently under negotiation between
Fresenius Medical Care and Dresdner Bank AG. In addition, Dresdner Bank AG is
the lender to Fresenius AG and to Fresenius USA under a $25 million five-year
term loan. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FRESENIUS USA -- Liquidity and Capital Resources" for a
summary of certain terms of such loan. An affiliate of Dresdner Bank AG is also
an owner of certain Fresenius AG Ordinary Shares. See "SECURITY
OWNERSHIP -- Security Ownership of Certain Beneficial Owners and Management of
Fresenius AG." Dresdner Bank AG will be one of four co-arrangers of the NMC
Credit Agreement. See "FINANCING." The Executive Manager of Dresdner Bank AG is
a member of the Fresenius AG Supervisory Board and Mr. Bernhard Walter, who will
become a member of the FMC Supervisory Board, is a member of the Management
Board of Dresdner Bank AG. Dresdner Bank AG will also act as Custodian under the
Deposit Agreement. See "DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS."
See "THE REORGANIZATION -- Conduct of Business Prior to Effective Time;
Certain Covenants" and "DESCRIPTION OF CAPITAL STOCK OF FRESENIUS MEDICAL
CARE -- Dividend Rights" for a discussion of certain matters relating to
Fresenius Medical Care's dividend policy.
Ulrich Wagner, a member of the Fresenius USA Board, is a partner in the law
firm of O'Melveny & Myers LLP, which represents Fresenius AG as U.S. counsel in
connection with the Reorganization and other matters and has, from time to time,
provided legal services to Fresenius USA. Dr. Alfred Stiefenhofer is a partner
in the law firm of Norr, Stiefenhofer & Lutz, German counsel to Fresenius AG in
connection with the Reorganization and other matters. See "SECURITY
OWNERSHIP -- Security Ownership of Certain Beneficial Owners and Management of
Fresenius AG." Dr. Dieter Schenk, who will become Deputy Chairman of the FMC
Supervisory Board, is also a partner in Norr, Stiefenhofer & Lutz.
188
<PAGE> 201
See "FRESENIUS USA EXECUTIVE COMPENSATION" for information with respect to
the compensation of the Fresenius USA Independent Committee.
See "FRESENIUS USA EXECUTIVE COMPENSATION -- Securities Repurchases" for
information regarding the acceleration of options to purchase Fresenius USA
Common Stock and the sale of Fresenius USA Common Stock and options and warrants
to purchase Fresenius USA Common Stock to Fresenius USA by certain directors,
executive officers, employees and beneficial owners of Fresenius USA Common
Stock.
In connection with the Reorganization, Grace has implemented a bonus and
severance plan for NMC executives and employees providing for payments to such
persons in the event that they remain in the employ of NMC following the
Reorganization or in the event that they are terminated within a certain period
of time following the Reorganization.
FRESENIUS USA EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table summarizes the total compensation paid or to be paid by
Fresenius USA for services rendered during 1993, 1994 and 1995 to the Chief
Executive Officer of Fresenius USA and to Mr. Robert Farrell, Mr. Heinz Schmidt
and Mr. Scott Walker, the only executive officers of Fresenius USA who had 1995
compensation in excess of $100,000 (the "Specified Executives"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (SHARES)(1)
- ------------------------------------------------ ---- ------------ ------- ------------
<S> <C> <C> <C> <C>
Ben J. Lipps(2)................................. 1995 225,000 200,000 450,000
President, Chief Executive Officer 1994 202,500 200,000 --
and Chief Operating Officer 1993 180,000 200,000 125,000
Robert E. Farrell............................... 1995 119,203 41,665 --
Corporate Group Vice President -- 1994 113,597 55,900 --
Administration, General Counsel and Clerk 1993 104,230 67,039 40,000
Heinz Schmidt................................... 1995 89,274 54,150 --
Corporate Group Vice President -- Finance 1994 84,835 78,000 --
and Treasurer 1993 78,075 65,961 40,000
Scott Walker.................................... 1995 102,890 70,772 --
Corporate Group Vice President -- 1994 90,729 57,600 --
Regulatory Affairs 1993 85,355 39,727 40,000
</TABLE>
- ---------------
(1) Options shown as granted in 1995 to Dr. Lipps were granted by the
Compensation Committee of the Fresenius USA Board, subject to approval by
the stockholders of Fresenius USA of the Fresenius USA Plan Amendment. See
"AMENDMENT TO THE FRESENIUS USA 1987 STOCK OPTION PLAN" and Fresenius USA
1987 Stock Option Plan attached as Appendix E.
(2) Includes amounts paid to Dr. Lipps by Seratronics, which decreased the
annual salary and bonus payable by Fresenius USA to Dr. Lipps. In each year
listed above, Seratronics paid $66,500 and $0 of salary and bonus,
respectively, to Dr. Lipps. See the description below of Dr. Lipps'
employment arrangement with Fresenius USA.
189
<PAGE> 202
The following table summarizes the stock options granted by Fresenius USA,
subject to stockholder approval, during 1995 to the Specified Executives:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF
NUMBER OF % OF STOCK PRICE
SECURITIES TOTAL APPRECIATION
UNDERLYING OPTIONS EXERCISE FOR OPTION TERM
OPTIONS GRANTED TO PRICE -----------------------
GRANTED EMPLOYEES IN PER SHARE EXPIRATION 5% 10%
NAME (SHARES) FISCAL YEAR ($) DATE ($) ($)
- ----------------------- --------------- ------------ --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ben J. Lipps........... 450,000 98 12.75 July 17, 2005 3,609,000 9,144,000
</TABLE>
The following table summarizes the stock options held at December 31, 1995
by the Specified Executives:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE OPTIONS AT DECEMBER 31, 1995 DECEMBER 31, 1995
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE($)
- ----------------------- --------------- -------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Ben J. Lipps........... -- -- 420,000/275,000 4,569,375/2,240,625
Robert E. Farrell...... 10,250 $126,312 28,750/ 12,000 364,688/ 150,000
Heinz Schmidt.......... -- -- 34,000/ 12,000 449,250/ 150,000
Scott Walker........... 3,000 $ 46,125 31,000/ 12,000 400,500/ 150,000
</TABLE>
Pursuant to an employment agreement between Fresenius USA and Dr. Lipps,
which became effective as of January 1, 1992, Dr. Lipps is required to devote
substantially all of his business efforts and time to serving as the President
of Fresenius USA, subject to his also serving as the President and Chief
Executive Officer of Seratronics. Dr. Lipps receives from Fresenius USA an
annual base salary of $225,000, together with bonuses up to a maximum of
$200,000 based on the attainment of certain sales and profits targets set
annually by management and reviewed by the Fresenius USA Board. Fresenius USA
and Dr. Lipps have agreed that Fresenius USA's obligations in respect of such
salary and bonus are decreased by amounts payable to Dr. Lipps by Seratronics.
Seratronics is wholly owned by Andersen Group, Inc. Mr. Francis E. Baker, a
member of the Fresenius USA Board, is the President of Andersen Group, Inc. Dr.
Lipps also has been granted stock options with respect to 120,000 shares of
Fresenius USA Common Stock at an exercise price of $3.125 per share, which were
fully vested as of December 31, 1995. Dr. Lipps' employment agreement is
terminable upon 30 days' advance notice by Fresenius USA, in which event Dr.
Lipps is owed one year's base salary payable over the year following such
termination plus $100,000 payable upon such termination. The agreement may also
be terminated by Dr. Lipps upon one year's notice, as well as by Fresenius USA
upon termination for cause and under certain other circumstances. Upon any such
termination, Fresenius USA may require that Dr. Lipps refrain, for up to two
years, from carrying on a business in competition with Fresenius USA's business,
in which event Fresenius USA must pay an additional annual amount to Dr. Lipps
equal to his annual salary (or, if greater, the aggregate premiums on certain
life and disability policies carried by Dr. Lipps). During 1993, Dr. Lipps was
granted options for an additional 125,000 shares at $7.125 per share, vesting
over five years, and, in 1995, Dr. Lipps was granted options for an additional
450,000 shares at $12.75 per share, subject to satisfaction of certain vesting
criteria, which have been satisfied and subject to stockholder approval of the
Fresenius USA Plan Amendment. Fresenius AG has indicated that it will vote its
shares of Fresenius USA Common Stock in favor of the Fresenius USA Plan
Amendment. See "AMENDMENT TO THE FRESENIUS USA 1987 STOCK OPTION PLAN" and the
Fresenius USA 1987 Stock Option Plan attached as Appendix E. In June 1996, Dr.
Lipps exercised the 245,000 options exercisable at $3.125 and $7.125 per share
and immediately sold those shares to Fresenius USA. See "-- Securities
Repurchases."
Dr. Wagner, Dr. Marten, Mr. Ehrlich, Mr. Baker and Mr. Klingler each
receive directors fees of $25,000 per annum. Commencing in 1996, non-employee
members of the Executive, Audit and Compensation Committees of the Fresenius USA
Board each received $1,875 per meeting for each such committee meeting attended.
Dr. Krick receives $75,000 annually for serving as Chairman of the Fresenius USA
Board. In June
190
<PAGE> 203
1994, the stockholders of Fresenius USA approved the Non-Employee Directors
Stock Option Plan, pursuant to which each current non-employee director of
Fresenius USA received a grant of options for 30,000 shares of Fresenius USA
Common Stock vesting at a rate of 10,000 options per year in each of 1994, 1995
and 1996. In June 1995, the stockholders of Fresenius USA approved an amendment
to the Non-Employee Directors Stock Option Plan permitting participating
directors to receive all directors' fees in the form of options to purchase
shares of Fresenius USA Common Stock rather than cash. Only Dr. Marten made an
election to receive fees in the form of options in 1995 and 1996. On July 3,
1996 the Fresenius USA Compensation Committee determined that the provisions of
that plan under which Dr. Marten made his election did not contemplate an
extraordinary transaction such as the Reorganization and that his election is
not applicable to his compensation subsequent to January 25, 1996 (the date on
which the Fresenius USA Board was informed of the Reorganization), which
includes his compensation as a member of the Independent Committee. If the
Reorganization is not consummated, future non-employee directors will receive a
grant of options for 30,000 shares of Fresenius USA Common Stock upon their
election. The options will vest at a rate of 10,000 options per year on each of
the first, second and third anniversaries of the directors' initial election.
Dr. Krick and Mr. Klingler declined to accept any options under the Non-Employee
Directors Stock Option Plan. In January 1996, in connection with the
Reorganization, the Fresenius USA Board elected Messrs. Ehrlich and Baker and
Dr. Marten to serve on the Fresenius USA Independent Committee. As compensation
for their services as members of the Fresenius USA Independent Committee,
Messrs. Ehrlich and Baker and Dr. Marten will each receive a retainer fee of
$25,000 and an additional per diem of $1,500 for each meeting attended or each
substantial expenditure of time on Fresenius USA Independent Committee business,
which fees to each member will range between $50,000 and $75,000, and will be
reimbursed for out-of-pocket expenses incurred in connection with Fresenius USA
Independent Committee business or related matters.
In June 1994 the Fresenius USA Board approved the extension of the
expiration date for options to acquire 31,000 shares of Fresenius USA Common
Stock held by Dr. Marten. The expiration date was extended from August 6, 1994
to October 1, 1996, for 6,000 shares, and from June 28, 1994 to October 1, 1996
for 25,000 shares.
Fresenius USA and Mr. Ehrlich were parties to a consulting agreement
pursuant to which Mr. Ehrlich received $10,000 annually. The agreement
terminated in June 1996.
SECURITIES REPURCHASES
On May 6, 1996, the Fresenius USA Compensation Committee voted to
accelerate the vesting of all outstanding unvested options under the Fresenius
USA Plan held by officers subject to Section 16(b) of the Exchange Act
(comprising Dr. Lipps and Messrs. Farrell, Schmidt and Walker), resulting in the
acceleration of the vesting of 50,000 options held by Dr. Lipps and 12,000
options held by each of Messrs. Farrell, Schmidt and Walker. In June 1996,
Fresenius USA purchased from Dr. Lipps, Mr. Schmidt and Mr. Walker 325,000
shares, 18,400 shares and 17,200 shares, respectively, of Fresenius USA Common
Stock at an aggregate purchase price of $5,850,000, $359,536 and $366,088,
respectively. Except for 80,000 shares sold by Dr. Lipps, all of such shares
were acquired upon the exercise of options issued to Dr. Lipps, Mr. Schmidt and
Mr. Walker under the Fresenius USA Plan. Dr. Lipps also expects to sell on
comparable terms to Fresenius USA, subsequent to August 15, 1996 but prior to
the closing of the Reorganization, options to purchase up to 450,000 shares of
Fresenius USA Common Stock, constituting, together with the 245,000 options
exercised by Dr. Lipps prior to his sale of the underlying shares to Fresenius
USA, substantially all of the options to purchase Fresenius USA Common Stock
held by him. No shares were purchased from Mr. Farrell.
Fresenius USA purchased such shares from Dr. Lipps and Messrs. Schmidt and
Walker, and may purchase additional options from Dr. Lipps, as a result of the
condition in the Supplemental Agreement that the number of Fresenius USA Common
Share Equivalents be no higher than 9,253,331. See "THE
REORGANIZATION -- Additional Agreements of Fresenius USA." In connection
therewith, Fresenius USA in June 1996 also purchased from other Fresenius USA
employees 15,200 shares of Fresenius USA Common Stock at $18.00 per share and a
total of 555,045 options to purchase Fresenius USA Common Stock at a purchase
price equal to the excess of $18.00 over the relevant option exercise price, for
an aggregate purchase price of $6,181,820. Funds for the purchase of such shares
and options were obtained by Fresenius
191
<PAGE> 204
USA from the proceeds of the price paid by Fresenius AG for the exercise of
warrants to purchase Fresenius USA Common Stock. See "BUSINESS OF FRESENIUS
MEDICAL CARE -- Business of Fresenius USA -- Material Contracts Between
Fresenius AG and Fresenius USA -- Financial Support."
On July 3, 1996, the Fresenius USA Compensation Committee reviewed the
provisions of the Fresenius USA Non-Employee Directors Stock Option Plan, and
confirmed that, pursuant to the provisions of that plan, the pendency of the
Reorganization has caused acceleration of the vesting of options granted
thereunder, resulting in the vesting of 10,000 options held by each of Dr.
Wagner and Messrs. Baker, Marten and Ehrlich. Options granted under that plan
that are not exercised prior to the closing of the Reorganization will
terminate. Such accelerated options are included in the table under the caption
"-- Security Ownership of Certain Beneficial Owners and Management of Fresenius
USA."
As a result of the foregoing transactions, the directors and officers of
Fresenius USA will receive in the Reorganization, ADSs in the amounts set forth
below. The receipt of such ADSs will be in addition to the cash payments made
and to be made to them as described above.
<TABLE>
<CAPTION>
NAME NO. OF ADSS(1)
--------------
<S> <C>
Gerd Krick............................................. 364(2)
Ulrich Wagner.......................................... 33,360
Francis E. Baker....................................... 16,680
James F. Marten........................................ 124,400
Robert E. Ehrlich...................................... 136,960
Robert G. Farrell...................................... 51,152
Heinz Schmidt.......................................... 30,691
Scott Walker........................................... 29,245
</TABLE>
- ---------------
(1) The figures in the table assume that all options to purchase Fresenius USA
Common Stock held by the person named in the table are exercised prior to
the closing of the Reorganization. If such options are not exercised, they
will become options to purchase FMC Ordinary Shares, except that options to
purchase 30,000 shares and 31,971 shares, respectively, held by Ulrich
Wagner and James Marten issued under the Fresenius USA Non-Employee
Directors Stock Option Plan will lapse if not exercised prior to the
closing. In addition, if Dr. Lipps does not sell all of the options held by
him to purchase 450,000 shares of Fresenius USA Common Stock, he will
receive ADSs with respect to any shares of Fresenius USA Common Stock
acquired upon exercise of such options and options to purchase FMC Ordinary
Shares in exchange for any unexercised options.
(2) The actual number will depend on the final exchange ratio of ADSs for Grace
Common Stock.
It is also expected that Dr. Krick, Dr. Lipps and Mr. Klingler will enter
into employment agreements with Fresenius Medical Care. See "MANAGEMENT OF
FRESENIUS MEDICAL CARE -- Compensation of the FMC Management Board and Certain
Other Executive Officers -- Employment Agreements."
Fresenius USA and Fresenius AG have entered into a letter of intent with
Abbott contemplating the following arrangements with respect to the Abbott
Warrants held by Abbott to purchase 1,750,000 shares of Fresenius USA Common
Stock. Contemporaneously with the closing of the Reorganization, Abbott will
surrender Abbott Warrants to purchase 875,000 shares to Fresenius USA, and
Fresenius USA will pay Abbott the sum of $11,812,500 (equal to the product of
such number of shares and the excess of $21.50 over $8.00, the exercise price of
the Abbott Warrants). FMC Ordinary Shares underlying the ADSs issuable in
respect of the remaining shares of Fresenius USA Common Stock issuable upon
exercise of such Abbott Warrants (comprising approximately 324,333 FMC Ordinary
Shares) will be issued to Fresenius AG in connection with its contribution of
Fresenius Worldwide Dialysis to Fresenius Medical Care. Fresenius AG will agree
that upon Abbott's exercise of the warrants, Fresenius AG will deliver to Abbott
the FMC Ordinary Shares (or, at Abbott's election, Fresenius AG will deliver
such FMC Ordinary Shares to the Depositary against issuance of ADRs evidencing
the appropriate number of ADSs) issuable in accordance with the terms of such
Abbott Warrants. The exercise price payable upon exercise of the Abbott Warrants
will be retained by Fresenius AG
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and, if the Abbott Warrants expire unexercised, Fresenius AG will retain the FMC
Ordinary Shares issued to it in respect of such Abbott Warrants. It is also
expected that Fresenius Medical Care will assume Fresenius USA's obligations
under the Registration Rights Agreement between Fresenius USA and Abbott, as a
result of which Abbott will be entitled to require Fresenius Medical Care to
register under the Securities Act the ADSs issued to Abbott upon the exercise of
such Abbott Warrants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Fresenius USA Board during
1995 were Mr. Ehrlich, Dr. Krick and Dr. Wagner. Dr. Krick served as the
Chairman of the Fresenius AG Board during 1995, and Mr. Ehrlich was formerly the
Chairman and the President of Fresenius USA. Dr. Krick is the Chairman of the
Fresenius AG Management Board. During 1992, Fresenius USA agreed to purchase
certain stock options held by Mr. Ehrlich, and to issue new options to him in
exchange for other options held by him, and, in 1994, Fresenius USA made a
secured loan to Mr. Ehrlich to allow him to exercise certain stock options. The
loan was repaid during the first quarter of 1996. Dr. Wagner is a partner in the
law firm of O'Melveny & Myers, which, from time to time, provides legal services
to Fresenius USA and which also represents Fresenius AG.
INDEMNIFICATION AGREEMENTS
Fresenius USA will enter into indemnification agreements with each of its
directors. Such agreements provide contractual rights to indemnification
identical to the rights provided under Fresenius USA's by-laws; the only
material difference being a right to advancement of expenses incurred in
connection with any indemnifiable proceedings.
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FINANCING
The following summary describes the anticipated material terms of the NMC
Credit Agreement and other instruments and agreements pertaining to NMC's
indebtedness. The receipt of necessary financing on terms satisfactory to Grace
and Fresenius AG is a condition to the consummation of the Reorganization. See
"THE REORGANIZATION."
NMC CREDIT AGREEMENT
General. Grace, on behalf of NMC, has obtained a commitment letter from The
Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank and NationsBank
N.A. (the "Arrangers") concerning the provision of credit to NMC in connection
with the Reorganization. The following is a summary of the anticipated material
terms on which such credit is to be provided, as contemplated by such commitment
letter. There can be no assurance that such credit will ultimately be provided
to NMC or that the terms and rates of such credit will conform to those
contemplated by the commitment letter. Completion of the financing on terms
satisfactory to each of Grace and Fresenius AG is a condition to their
respective obligations to consummate the Reorganization.
NMC Credit Agreement -- General Terms. Immediately prior to the
Distribution, NMC expects to enter into the NMC Credit Agreement with the
Arrangers and certain other lenders (collectively, the "Lenders"), pursuant to
which the Lenders will make available to NMC and certain specified subsidiaries
and affiliates an aggregate of approximately $2.50 billion through three credit
facilities (collectively, the "NMC Credit Facility"): (i) a revolving credit
facility of up to $1.0 billion (of which up to $250 million will be available
for letters of credit, up to $450 million will be available for borrowings in
certain non-U.S. currencies, up to $20 million will be available as swing lines
in U.S. dollars and up to $20 million will be available as swing lines in
certain non-U.S. currencies) for up to seven years ("Facility 1"); (ii) a term
loan facility of $1.0 billion for up to seven years ("Facility 2"); and (iii) a
term loan facility of $500 million for up to two years ("Facility 3").
The NMC Credit Agreement is expected to provide that the proceeds of loans
under the NMC Credit Facility may be used by NMC (i) to finance the payment of
dividends and other amounts (including the Distribution Payment) to Grace
Chemicals and Grace, (ii) to refinance outstanding debt, (iii) to finance
existing and future letters of credit and (iv) for the general corporate
purposes of NMC and certain of its subsidiaries and affiliates, including
working capital and acquisitions. Loans under the NMC Credit Facility will bear
interest at one of the following rates, to be chosen by the borrower for each
period during which interest accrues: (i) LIBOR plus an applicable margin or
(ii) a base rate (the "Base Rate") equal to the higher from time to time of (A)
the prime rate of NationsBank, N.A. or (B) the federal funds rate plus 0.50%. A
fee will be payable to the Arrangers equal to a percentage of the entire NMC
Credit Facility. In addition, a fee will be payable to the Lenders equal to a
percentage per annum (initially 0.375) of the portion of the NMC Revolving
Credit Facility not used for dollar borrowings from time to time.
No principal payments will be due under the NMC Credit Facility for the
first 24 months of its term. Thereafter, principal payments of $500 million will
be due at the end of the second year and $0 in the third year; principal
payments will be due in equal quarterly installments aggregating $180 million in
the fourth year; $200 million in the fifth year; $200 million in the sixth year;
$200 million in the seventh year, together with an additional payment of $220
million at the end of the seventh year. In addition to the foregoing mandatory
principal payments, the NMC Credit Facility will be reduced by certain portions
of the net cash proceeds from certain sales of assets, sales of accounts
receivable and the issuance of debt and equity securities. All payments
outstanding under Facility 1 are due and payable at the end of the seventh year.
Prepayment will be permitted at any time without penalty, except in certain
defined periods. The NMC Credit Agreement will contain customary covenants with
respect to NMC and its subsidiaries, including but not limited to: the provision
of information; the maintenance of properties, insurance and legal existence;
the conduct of business; compliance with laws; access to property and books; the
absence of liens on or other security interests in NMC's properties (including
stock and assets); limitations on consolidations, mergers and sales of assets
above specified amounts; limitations on subsidiary debt and uses of proceeds;
financial covenants; limitations on restricted payments; the requirement of
arm's-length transactions with affiliates; and
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limitations on acquisitions and capital expenditures. The NMC Credit Agreement
will contain customary provisions with respect to defaults, representations and
warranties, and conditions to borrowing.
Security. The NMC Credit Agreement will provide that borrowings under the
NMC Credit Facility will be secured by a pledge of NMC common stock (to secure
the guarantee of Grace), a pledge of 100% of the stock of NMC's material
domestic subsidiaries and 66% of the stock of its material foreign subsidiaries
and, if and at such time as Fresenius Medical Care becomes a guarantor as to
Facility 2 and/or Facility 3, a pledge of the stock of the direct and indirect
material subsidiaries of Fresenius Medical Care (to secure such guarantee). The
collateral is to be released upon NMC's (or, if Fresenius Medical Care is
guarantor of the NMC Credit Facility, then Fresenius Medical Care's) receipt of
investment grade ratings for its long-term senior unsecured debt from both
Moody's Investor Services, Inc. and Standard and Poor's Corporation or upon the
achievement of certain financial ratios.
Guarantees. The NMC Credit Agreement is expected to provide that
obligations thereunder will be guaranteed by Grace. In addition, Grace Chemicals
has agreed to guarantee Facility 2 up to a maximum of $450 million and has
agreed to guarantee Facility 3 (which provides for a maximum of $500 million of
available credit).
The NMC Credit Agreement is expected to provide that the guarantee of Grace
Chemicals under Facility 2 will be released as to $300 million upon the
occurrence of any of the following events not earlier than 45 days, but not
later than 60 days, following the Effective Date: (a) the receipt of an
unconditional joint and several guarantee from Fresenius Medical Care and
certain of its subsidiaries for the full amount of the NMC Credit Facility (the
form of such guarantee and related documentation to be agreed upon prior to the
Effective Date); or (b) the receipt of a letter of credit or other acceptable
financial accommodation for the account of Grace Chemicals or Fresenius Medical
Care, in form and substance satisfactory to the Lenders, covering $300 million
in principal amount of borrowing under Facility 2, plus 90 days of interest
thereon; or (c) the prepayment of $300 million in principal amount of borrowings
under Facility 2. The balance of the Grace Chemicals guarantees under Facility 2
will be released upon NMC (or Fresenius Medical Care, if Fresenius Medical Care
guarantees the NMC Credit Facility), on a consolidated basis, achieving a ratio
of senior debt to EBITDA of equal to or less than 3.5.
The NMC Credit Agreement is expected to provide that the guarantee of Grace
Chemicals under Facility 3 will be released upon the occurrence of any of the
following events after 45 days, but within 60 days, following the Effective
Date: (a) the receipt of an unconditional joint and several guarantee from
Fresenius Medical Care and certain of its subsidiaries for the full amount of
the NMC Credit Facility (the form of such guarantee and related documentation to
be agreed to prior to the Effective Date); or (b) the receipt of a letter of
credit or other acceptable financial accommodation for the account of Grace
Chemicals or Fresenius Medical Care in form and substance satisfactory to the
Lenders covering a principal amount of $500 million plus 90 days of interest
thereon under Facility 3; or (c) the repayment in full of Facility 3.
If such guarantees are not released within 60 days following the Effective
Date, demand for payment will be made on Grace Chemicals under such guarantees,
other than with respect to $150 million guaranteed under Facility 2. While it is
the intention of Fresenius Medical Care to provide the unconditional joint and
several guarantees referred to in clauses (a) of each of the preceding two
paragraphs in a manner so as to cause the release of the Grace Chemicals'
guarantees as to $800 million not before 46 days, but on or prior to 60 days,
following the Effective Date, no assurance can be given that such guarantees
will be provided or that either or both Grace Chemicals guarantees will be
released. In the event that Fresenius Medical Care does not provide such
guarantees, or otherwise effect the release of Grace Chemicals' guarantees as
provided in clauses (b) or (c) of the preceding two paragraphs, Grace Chemicals
would be required to provide the letters of credit referred to in clauses (b) of
each of the preceding two paragraphs or repay the amounts referred to in clause
(c) of each of the preceding two paragraphs and, thereafter, be subrogated to
the rights of the Lenders with respect to such repaid amounts after the Lenders
under the respective facilities have been repaid in full; and Grace Chemicals
has undertaken to the Lenders to maintain unused available credit in an amount
to be determined while the Grace Chemicals guarantees are outstanding in order
to facilitate such actions. If such events occur, Grace Chemicals would have a
substantial cash outlay at such time and could have, thereafter, substantial new
indebtedness.
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In connection with Grace Chemicals' agreement to extend guarantees under
the NMC Credit Agreement, to provide a significant inducement for the release of
such guarantees as to $800 million on or prior to the 50th day following the
Effective Date, Fresenius Medical Care and Grace Chemicals intend to enter into
an agreement providing that, if such Grace Chemicals guarantees, other than with
respect to $150 million guaranteed under Facility 2, have not been released
prior to the close of business on the 50th day following the Effective Date,
Fresenius Medical Care will, at such time, make a $300 million payment to W. R.
Grace Foundation, Inc. (which contribution may not be used to satisfy any legal
obligation of Grace Chemicals). In addition, it is intended that Fresenius
Medical Care will agree that (i) it will contribute the capital stock of
Fresenius USA to Grace promptly following the Effective Date and (ii) during the
49-day period following the Effective Date, (a) it will not engage, or permit
NMC to engage, in any settlement discussions regarding OIG matters without Grace
Chemicals' participation and consent and (b) it will cause the respective
businesses of NMC and Fresenius USA to be conducted in the ordinary course,
without incurring additional debt (other than indebtedness permitted under the
NMC Credit Agreement), relinquishing or modifying contracts with affiliates of
Fresenius AG and without making cash distributions other than to a subsidiary of
Grace.
In connection with the above, it is intended that Fresenius Medical Care
will also agree that, during the 45-day period following the Effective Date, it
will not (except as required by the Reorganization Agreement or the agreement
described in the preceding paragraph): (i) make, or cause to be made, a capital
contribution to Grace (or its subsidiaries) or take, or cause to be taken, any
action which would cause a capital contribution to any such entity to be
required under the NMC Credit Agreement; (ii) provide, or cause to be provided,
any guarantee of any debt of Grace (or its subsidiaries), or procure or provide,
or cause to be procured or provided, any letter of credit or other credit
support of any such debt; (iii) take, or cause to be taken, any other action
that has the effect, directly or indirectly, of rendering any assets of
Fresenius Medical Care (other than Grace (or its subsidiaries)) to support the
debt of NMC.
Under this agreement, it is intended that Fresenius Medical Care will
consent to jurisdiction and enforceability in the states of New York and Florida
by Grace Chemicals and W.R. Grace Foundation, Inc., will agree that all costs of
enforcement of the agreement will be borne by Fresenius Medical Care, will agree
that W. R. Grace Foundation, Inc. will be a third-party beneficiary of the
agreement and will agree that any provision of the agreement that is invalid or
unenforceable shall only be so to the extent of such invalidity or
unenforceability without in any way affecting any remaining provisions.
Refinancing. Not earlier than 45 days following the closing of the
Reorganization, Fresenius Medical Care intends to issue up to $600 million in
debt and equity securities, the proceeds of which will be used to refinance
Facility 3 and other indebtedness. It is presently expected that such securities
will consist of up to $350 million of subordinated debt and up to $250 million
of FMC Preferred Shares. Fresenius Medical Care is currently conducting
discussions with investment bankers with respect to a possible offering of such
securities within 60 days following the closing. There can be no assurance,
however, that such refinancing will be successfully completed on the foregoing
or any other terms.
OTHER INDEBTEDNESS
In December 1991, NMC entered into a five-year receivables purchase program
under which it may offer to sell, on a non-recourse basis, up to $120 million of
an undivided ownership interest in a defined pool of receivables. To accommodate
the growth of NMC, the program was increased to $180 million in June 1994. As of
December 31, 1995, NMC had sold approximately $180 million of receivables under
this program. The net cash proceeds are reported as operating cash flow, and the
sale of accounts receivable is reflected as a reduction of receivables on NMC's
balance sheet. Grace and NMC are attempting to amend the terms of such program
to increase its size to $200 million and to accommodate NMC as a stand-alone
entity by removing the current Grace obligations thereunder.
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CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE TRANSACTIONS
TO GRACE AND GRACE SHAREHOLDERS
In the opinion of special counsel to Grace, Wachtell, Lipton, Rosen & Katz,
and tax counsel to Grace, Miller & Chevalier (collectively, "Counsel"), the
following discussion is an accurate description of the material federal income
tax consequences expected to result to Grace and Grace shareholders as a result
of the Reorganization. Such opinions have been filed as exhibits to the
Registration Statement. This discussion is based on the current provisions of
the Code, applicable Treasury regulations, judicial authority and administrative
rulings and practice. There can be no assurance that the IRS will not take a
contrary view. No ruling from the IRS has been or will be sought with respect to
any aspect of the transactions described herein. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to shareholders.
The tax treatment applicable to a shareholder may vary depending upon the
shareholder's particular situation, and certain shareholders (including
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, and persons who are not citizens or residents of the United
States or who are foreign corporations, foreign partnerships or foreign estates
or trusts as to the United States) may be subject to special rules not discussed
below. EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE TRANSACTIONS DESCRIBED HEREIN,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS,
AND OF CHANGES IN APPLICABLE TAX LAWS.
CONSEQUENCES OF THE DISTRIBUTION
The obligation of Grace to consummate the Distribution is conditioned,
among other things, upon the delivery of satisfactory tax opinions (the
"Opinions") from Counsel. Counsel currently expects that the Opinions will state
that the Distribution will qualify as a tax-free distribution under Section 355
of the Code. Assuming that the Distribution so qualifies, the following is a
summary of the material federal income tax consequences of the Distribution:
(a) A Grace shareholder will not recognize any income, gain or loss as
a result of the Distribution.
(b) A Grace shareholder will apportion the tax basis of his or her
Grace Common Stock between such Grace Common Stock and New Grace Common
Stock received in the Distribution in proportion to the relative fair
market values of such Grace Common Stock and New Grace Common Stock on the
Effective Date.
(c) A Grace shareholder's holding period for the New Grace Common
Stock received in the Distribution will include the period during which
such shareholder held the Grace Common Stock with respect to which the
Distribution was made, provided that such Grace Common Stock is held as a
capital asset by such shareholder as of the time of Distribution.
(d) The earnings and profits of Grace will be allocated between Grace
and New Grace.
(e) No gain or loss will be recognized to Grace as a result of the
Distribution.
Current Treasury regulations require each Grace shareholder who receives
New Grace Common Stock pursuant to the Distribution to attach to his or her
federal income tax return for the year in which the Distribution occurs a
detailed statement setting forth such data as may be appropriate in order to
show the applicability of Section 355 of the Code to the Distribution. Grace (or
New Grace on its behalf) will convey the appropriate information to each Grace
shareholder of record as of the Grace Record Date.
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A preferred share purchase right ("New Grace Right") will attach to each
share of New Grace Common Stock distributed in the Distribution. While the
distribution of the New Grace Rights should not be taxable to shareholders or to
Grace or New Grace, shareholders may, depending upon the circumstances,
recognize taxable income in the event that the New Grace Rights become
exercisable for New Grace Junior participating preferred stock, par value $.01
per share (or other consideration) or for common stock of an acquiring company.
CONSEQUENCES OF THE RECAPITALIZATION
The obligation of Grace to consummate the Recapitalization is conditioned,
among other things, upon the delivery of the Opinions. Counsel currently expects
that the Opinions will state that, among other things, the Recapitalization will
be a tax-free transaction to Grace. Assuming the Recapitalization so qualifies,
the following is a summary of the material federal income tax consequences of
the Recapitalization:
(a) No gain or loss will be recognized by Grace as a result of the
Recapitalization.
(b) No gain or loss will be recognized by Grace shareholders upon the
receipt of the New Preferred Shares.
(c) A Grace shareholder will apportion the tax basis of his or her
Grace Common Stock between such Grace Common Stock and the New Preferred
Shares received in the Recapitalization in proportion to the relative fair
market values of such Grace Common Stock and the New Preferred Shares on
the Effective Date.
(d) A Grace shareholder's holding period for the New Preferred Shares
received in the Recapitalization will include the period during which such
shareholder held the Grace Common Stock with respect to which the New
Preferred Shares were distributed, provided that such Grace Common Stock is
held as a capital asset by such shareholder as of the time of
Recapitalization.
(e) Under certain circumstances, Section 305(c) of the Code requires
that any excess of the redemption price of preferred stock over its fair
market value on the date of issuance be included in income, prior to
receipt, by holders of such stock as a constructive dividend to the extent
of the issuing corporation's earnings and profits. Grace believes that as a
result of recently promulgated Treasury regulations, it is unlikely that
holders of the New Preferred Shares will be required to include the
redemption price of such stock in income as a constructive dividend.
(f) The New Preferred Shares may be deemed to be "Section 306 stock"
for federal income tax purposes. A shareholder that receives "Section 306
stock" within the meaning of Section 306(c) of the Code may be required to
recognize as ordinary income, in the case of a taxable disposition of such
stock, or as dividend income, in the case of a redemption of such stock,
all or a portion of the proceeds received by such shareholder from such
disposition or redemption, without regard to the shareholder's tax basis in
its shares, and may not recognize any loss therefrom. The portion of the
proceeds so treated is the amount realized not in excess of the amount that
would have been a dividend if, instead of the preferred stock, the issuing
corporation had distributed cash in an amount equal to the fair market
value of the stock, up to the amount of earnings and profits of the
corporation available for distribution (i.e., an amount equal to the fair
market value of the New Preferred Shares). If the proceeds of such
disposition or redemption exceed the amount that would have been a
dividend, the remainder would be treated as gain from the sale of the
preferred stock to the extent that it exceeds the adjusted basis of such
stock.
(g) Dividends paid on the New Preferred Shares may constitute
"extraordinary dividends" under Section 1059(c) of the Code, in which case
corporate shareholders will be required to reduce their basis in their New
Preferred Shares by the non-taxed portion of such dividends.
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CONSEQUENCES OF THE GRACE MERGER
The respective obligations of Grace and Fresenius AG to consummate the
Reorganization is conditioned, among other things, upon the delivery of the
Opinions. Counsel currently expects that the Opinions will state that, among
other things, the Grace Merger will qualify as a tax-free transaction to Grace
and its shareholders under Sections 367 and 368(a) of the Code. Assuming the
Grace Merger so qualifies, the following is a summary of the material federal
income tax consequences of the Grace Merger:
(a) The Grace Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368 (a) of the Code.
(b) No gain or loss will be recognized by Grace as a result of the
Grace Merger.
(c) No gain or loss will be recognized by Grace shareholders upon the
receipt of FMC Ordinary Shares in exchange for Grace Common Stock pursuant
to the Grace Merger, except that holders of Grace Common Stock who receive
cash upon exercise of any available appraisal rights or cash in lieu of
fractional shares will recognize gain or loss equal to the difference
between such cash and the tax basis in their shares subject to appraisal
rights or the tax basis allocated to their fractional shares of Grace
Common Stock, and such gain or loss will constitute capital gain or loss if
such Grace Common Stock is held as a capital asset.
(d) The tax basis of the FMC Ordinary Shares received by Grace
shareholders who exchange their Grace Common Stock for FMC Ordinary Shares
in the Grace Merger will be the same as the tax basis of Grace Common Stock
surrendered in exchange therefor.
(e) The holding period for the shares of FMC Ordinary Shares received
in the Grace Merger will include the period during which the shares of
Grace Common Stock surrendered in exchange therefor were held, provided
that such shares of Grace Common Stock were held as capital assets at the
Effective Date.
In rendering the Opinions, Counsel will receive, rely on and assume the
accuracy of certain representations by Grace, NMC and Fresenius AG and certain
other information, data, documentation and other materials deemed necessary,
including representations that, to the best knowledge of the management of Grace
and NMC as of the date of the transaction: (a) there is no plan or intention by
the shareholders of Grace to sell, exchange, transfer by gift or otherwise
dispose of any of their stock in, or securities of, either Fresenius Medical
Care or New Grace subsequent to the Reorganization; (b) there is no plan or
intention to liquidate New Grace subsequent to the Distribution, to sell or
otherwise dispose of a substantial amount of the assets of New Grace or its
subsidiaries (except in the ordinary course of business), to redeem shares of
New Grace Common Stock (with certain enumerated exceptions), to cause New Grace
to merge with any other corporation or to cease to conduct New Grace's business;
and (c) there is no plan or intention to liquidate Fresenius Medical Care
subsequent to the Reorganization, to sell or otherwise dispose of a substantial
amount of the assets of Fresenius Medical Care or its subsidiaries (except in
the ordinary course of business), to redeem FMC Ordinary Shares, to cause
Fresenius Medical Care to merge with any other corporation (other than pursuant
to the Reorganization) or to cease to conduct its business. These
representations address, among other things, the requirements for tax-free
treatment of the Distribution and the Grace Merger that (a) Grace shareholders
retain a continuity of interest in both Grace (through their equity interest in
Fresenius Medical Care) and New Grace after the Distribution and (b) Grace's
historic businesses continue after the Distribution.
There will be no material federal income tax consequences to the holders of
Grace Preferred Stock as a result of the Distribution, the Recapitalization or
the Grace Merger.
For a description of the consequences to Grace, NMC and Grace shareholders
if the Distribution or the Grace Merger were not to qualify as tax-free, see
"RISK FACTORS -- Other Risks -- Certain U.S. Tax Considerations Related to the
Distribution."
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On or prior to the Effective Date, Grace and NMC will enter into the Grace
Tax Sharing and Indemnification Agreement providing for various tax matters, see
"THE REORGANIZATION -- The Grace Tax Sharing and Indemnification Agreement."
See also "CERTAIN INCOME TAX CONSEQUENCES OF THE TRANSACTIONS TO HOLDERS OF
FRESENIUS USA COMMON STOCK -- U.S. and German Tax Consequences of Holding FMC
Ordinary Shares or ADSs" and "-- Other Tax Consequences."
EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES OF THE REORGANIZATION, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS, AND OF PROPOSED CHANGES IN
APPLICABLE TAX LAWS.
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CERTAIN INCOME TAX
CONSEQUENCES OF THE TRANSACTIONS TO
HOLDERS OF FRESENIUS USA COMMON STOCK
The discussion below is a summary of all material U.S. federal and German
tax consequences generally applicable to U.S. Holders of Fresenius USA Common
Stock upon the receipt of the FMC Ordinary Shares, ADSs or (in the case of
Fresenius USA Dissenting Stockholders) cash in the Fresenius USA Merger. A "U.S.
Holder" is (a) any citizen or resident of the U.S., (b) a corporation,
partnership, or other entity created or organized in or under the laws of the
U.S. or any political subdivision thereof, or (c) an estate or trust the income
of which is subject to U.S. federal income taxation regardless of source of
income.
This discussion is based on the Code, Treasury regulations promulgated
thereunder, IRS rulings, interpretations and judicial decisions, and German tax
law, as currently in effect, all of which are subject to change at any time,
which change may be applied retroactively to the transactions described herein.
A ruling from the IRS regarding the U.S. federal income tax consequences of the
Fresenius USA Merger on the Fresenius USA stockholders will not be requested.
Instead, Fresenius Medical Care and Fresenius USA are relying on the opinion of
KPMG Peat Marwick LLP, tax advisors to Fresenius AG, with respect to the matters
addressed herein solely as they relate to Fresenius USA stockholders. Such
opinion has been filed as an exhibit to the Registration Statement.
The discussion below is not a complete analysis of all of the potential
U.S. federal and German tax consequences of the Fresenius USA Merger or of
holding FMC Ordinary Shares or ADSs. In addition, the U.S. federal tax
consequences to particular U.S. Holders of Fresenius USA Common Stock (such as
insurance companies, tax-exempt entities, financial institutions and dealers in
securities), and to non-U.S. Holders may be different from that discussed
herein. FRESENIUS USA STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL AND GERMAN TAX CONSEQUENCES APPLICABLE TO
PARTICIPATING IN THE FRESENIUS USA MERGER AND HOLDING FMC ORDINARY SHARES OR
ADSs.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Stockholders of Fresenius USA who exchange their shares of Fresenius USA
Common Stock for FMC Ordinary Shares or ADSs in the Fresenius USA Merger will
not be subject to federal income tax on the exchange, except to the extent that
cash is received in lieu of fractional shares. Provided that the shares of
Fresenius USA Common Stock have been held as capital assets, such cash will be
treated as capital gain, and as long-term capital gain if the shares of
Fresenius USA Common Stock have been held for more than one year. Such an
exchanging stockholder will have a basis in the FMC Ordinary Shares or the ADSs
received in the exchange equal to the basis of the shares of Fresenius USA
Common Stock given up, decreased by the cash received and increased by the
amount of gain recognized. The holding period of the FMC Ordinary Shares or ADSs
to such an exchanging stockholder will include the holding period of the shares
of Fresenius USA Common Stock given up in the exchange.
Fresenius USA Dissenting Stockholders who exchange their shares of
Fresenius USA Common Stock entirely for cash will be treated as having sold
their shares of Fresenius USA Common Stock in a transaction in which gain or
loss is recognized. Such gain or loss will be capital gain or loss, provided
that the shares of Fresenius USA Common Stock have been held as capital assets.
Such gain will be long-term capital gain if the shares of Fresenius USA Common
Stock were held for more than one year.
Fresenius Medical Care will recognize no gain or loss upon receipt of
Fresenius USA Common Stock in exchange for FMC Ordinary Shares or ADSs.
U.S. AND GERMAN TAX CONSEQUENCES OF HOLDING FMC ORDINARY SHARES OR ADSS
TAX TREATMENT OF DIVIDENDS
Under German law, German corporations are required to withhold tax on
dividends in an amount equal to 25% of the gross amount paid to resident and
non-resident shareholders. A partial refund of this 25%
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withholding tax can be obtained by U.S. Holders under the Treaty. For U.S.
federal income tax purposes, U.S. Holders are taxable on dividends paid by
German corporations subject to a foreign tax credit for certain German income
taxes paid. The amount of the refund of German withholding tax and the
determination of the foreign tax credit allowable against U.S. income tax depend
on whether the U.S. Holder is a corporation owning at least 10% of the voting
stock of the German corporation.
In the case of any U.S. Holder, other than a U.S. corporation owning FMC
Ordinary Shares or ADSs representing at least 10% of the FMC Ordinary Shares,
the German withholding tax is partially refunded under the Treaty to reduce the
withholding tax to 15% of the gross amount of the dividend. In addition, for so
long as the German imputation system continues to provide German resident
individual shareholders with a tax credit of corporate taxes with respect to
dividends paid by German corporations, the Treaty provides that U.S. Holders
(other than a U.S. corporation that owns FMC Ordinary Shares or ADSs
representing at least 10% of the FMC Ordinary Shares) are entitled to a further
refund equal to 5% of the gross amount of the dividend. For U.S. federal income
tax purposes, the benefit resulting from this refund is treated as a refund
received by the U.S. Holder with respect to German corporate taxes equal to
5.88% of the gross amount of the dividend, subject to a withholding tax of 0.88%
(15% of 5.88%).
Thus, for each $100 of gross dividend paid by Fresenius Medical Care to a
U.S. Holder (other than a U.S. corporation owning FMC Ordinary Shares or ADSs
representing at least 10% of the FMC Ordinary Shares), the dividend after
partial refund of the 25% withholding tax under the Treaty will be subject to a
German withholding tax of $15. If the U.S. Holder also applies for the
additional 5% refund, German withholding tax is effectively reduced to $10; the
cash received per $100 of gross dividend is $90. For U.S. federal income tax
purposes, the U.S. Holder is treated as receiving a total dividend of $105.88
(to the extent paid out of the current and accumulated earnings and profits of
Fresenius Medical Care as determined for U.S. federal income tax purposes),
consisting of the $100 gross dividend and the deemed refund of German corporate
tax of $5.88. The notional $105.88 dividend is deemed to have been subject to
German withholding tax of $15.88. Thus, for each $100 of gross dividend, the
U.S. Holder will include $105.88 in gross income and will be entitled to a
foreign tax credit of $15.88, subject to the general limitations on foreign tax
credits for U.S. federal income tax purposes.
In the case of a corporate U.S. Holder owning FMC Ordinary Shares or ADSs
representing at least 10% of the FMC Ordinary Shares, the 25% German withholding
tax is reduced under the Treaty to 5% of the gross amount of the dividend. Such
a corporate U.S. Holder may, therefore, apply for a refund of German withholding
tax in the amount of 20% of the gross amount of the dividends. The corporate
U.S. Holder is entitled to a foreign tax credit equal to 5% of the gross amount
of the dividends. Furthermore, such a corporate U.S. Holder is allowed a foreign
tax credit for the portion of the total income taxes (trade income tax and
corporation income tax including any surtax) paid by the German corporation
attributable to the distributed profits, subject to the general limitations on
foreign tax credits for U.S. federal income tax purposes.
Dividends paid in Deutschemarks to a U.S. Holder of FMC Ordinary Shares or
ADSs will be included in income in a dollar amount calculated by reference to
the exchange rate in effect on the date the dividends (including the deemed
refund of German corporate tax) are received by such U.S. Holder. If dividends
paid in Deutschemarks are converted into dollars on the date received, U.S.
Holders generally should not be required to recognize foreign currency gain or
loss in respect of the dividend income.
Effective January 1, 1995, a 7.5% surtax on the German withholding tax is
being levied on dividend distributions paid by a German resident company. The
surtax amounts to 1.875% (7.5% x 25%) of the gross dividend amount. Because the
Treaty reduces the German withholding tax, U.S. Holders are entitled to a full
refund of this surtax.
Under the Treaty, the refund of German tax (including the withholding tax,
Treaty payment and surtax) will not be granted when the FMC Ordinary Shares or
the ADSs (a) are part of the business property of a U.S. Holder's permanent
establishment located in Germany or (b) are part of the assets of an individual
U.S. Holder's fixed base located in Germany and used for the performance of
independent personal services.
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REFUND PROCEDURES
To claim the 5% Treaty refund, the reduction of the German withholding tax
from 25% to 15% (5% for U.S. Holders that are corporations owning FMC Ordinary
Shares or ADSs representing at least 10% of the FMC Ordinary Shares) and the
refund of the 7.5% German surtax when applicable, the U.S. Holder must submit
(either directly or, as described below, through the Depositary) a claim for
refund to the German tax authorities, with the original bank voucher (or
certified copy thereof) issued by the paying entity documenting the tax withheld
within four years from the end of the calendar year in which the dividend is
received. Claims for refund are made on a special German claim for refund form
("Claim Refund Form"), which must be filed with the German tax authorities:
Bundesamt fur Finanzen, 53221 Bonn-Beuel, Germany. The Claim Refund Forms may be
obtained from the German tax authorities at the same address where the
applications are filed, or from the Embassy of the Federal Republic of Germany,
4645 Reservoir Road, N.W., Washington, D.C. 20007-1998, or from the Office of
International Operations, Internal Revenue Service, 1325 K Street, N.W.,
Washington, D.C. 20225, Attention: Taxpayer Service Division, Room 900.
U.S. Holders must also submit to the German tax authorities certification
of their last filed U.S. federal income tax return. Certification is obtained
from the office of the Director of the IRS Center by filing a request for
certification with the Internal Revenue Service Center in Philadelphia,
Pennsylvania, Foreign Certificate Request, P.O. Box 16347, Philadelphia, PA
19114-0447. Requests for certification are to be made in writing and must
include the U.S. Holder's name, address, phone number, social security number or
employer identification number, tax return form number, and tax period for which
certification is requested. The IRS will send the certification (IRS Form 6166)
back to the U.S. Holder for filing with the German tax authorities. This
certification is valid for three years and need only be resubmitted in a fourth
year in the event of a subsequent application for refund.
In accordance with arrangements under the Deposit Agreement, the Depositary
(or a custodian as its designated agent) will hold the FMC Ordinary Shares and
receive and distribute dividends to U.S. Holders of ADSs, and perform
administrative functions necessary to obtain the 5% treaty refund, the reduction
in German withholding tax and the refund of the German surtax when applicable.
These arrangements are provided by the German tax authorities and may be amended
or revoked at any time in the future.
Under the arrangements currently in effect, in order for the Depositary to
file the Claim Refund Forms, the Depositary will mail to eligible U.S. Holders,
which U.S. Holders will be requested to sign and return to the Depositary, (a) a
statement authorizing the Depositary to perform these procedures and agreeing
that the German tax authorities may inform the IRS of any refunds of German
taxes, and (b) a written authorization to remit the refund of withholding to
another account than that of the U.S. Holder. The Depositary will attach the
signed statement, the IRS Form 6166, the Claim Refund Form and a certified
statement issued by the bank or broker paying the dividend to the U.S. Holder,
documenting the dividend paid and the tax withheld and file them with the German
tax authorities. The Depositary will also file the signed request for
certification with the appropriate IRS Center. The Depositary will charge a fee
to the U.S. Holder for provision of these services.
To the extent U.S. Holders hold ADSs registered with brokers participating
in the Depository Trust Company, it is expected that such brokers will assist
the Depositary in performing the procedures described above, and, in particular,
prepare and forward the Claim Refund Forms together with the required
documentation to the Depositary. The Depositary will then file the Claim Refund
Forms and any attachments thereto with the German tax authorities.
The German tax authorities will issue the refunds which will be denominated
in Deutschemarks in the name of the Depositary. The Depositary will convert the
refunds to dollars and issue corresponding refund checks to the U.S. Holders of
ADSs and brokers. The brokers, in turn, will remit corresponding refund amounts
to the U.S. Holders holding ADSs registered with such brokers. U.S. Holders of
FMC Ordinary Shares or ADSs who receive a refund attributable to reduced
withholding taxes under the Treaty may be required to recognize foreign currency
gain or loss, which will be treated as ordinary income or loss, to the extent
that the dollar value of the refund received by the U.S. Holders differs from
the dollar equivalent of the
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refund on the date the dividend on which such withholding taxes were imposed was
received by the Depositary or the U.S. Holder, as the case may be.
TAXATION OF CAPITAL GAINS
Under the Treaty, a U.S. Holder who is not a resident of Germany for German
tax purposes will not be liable for German tax on capital gains realized or
accrued on the sale or other disposition of FMC Ordinary Shares or ADSs unless
the FMC Ordinary Shares or ADSs (a) are part of the business property of a
permanent establishment located in Germany or (b) are part of the assets of a
fixed base of an individual located in Germany and used for the performance of
independent personal services.
Upon a sale or other disposition of the FMC Ordinary Shares or ADSs, a U.S.
Holder will recognize gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between the amount realized and the U.S. Holder's
tax basis in the FMC Ordinary Shares or ADSs. Such gain or loss will generally
be capital gain or loss if the Ordinary Shares or ADSs are held by the U.S.
Holder as a capital asset, and will be long-term capital gain or loss if the
U.S. Holder's holding period for the FMC Ordinary Shares or ADSs exceeds one
year.
GIFT AND INHERITANCE TAXES
The U.S.-Germany estate tax treaty provides that an individual whose
domicile is determined to be in the U.S. for purposes of the estate tax treaty
will not be subject to German inheritance and gift tax (the equivalent of the
U.S. federal estate and gift tax) on the individual's death or making of a gift
unless the FMC Ordinary Shares or ADSs (a) are part of the business property of
a permanent establishment located in Germany or (b) are part of the assets of a
fixed base of an individual located in Germany and used for the performance of
independent personal services. An individual's domicile in the U.S., however,
does not prevent imposition of German inheritance and gift tax with respect to
an heir, donee, or other beneficiary who is domiciled in Germany at the time the
individual died or the gift was made.
The U.S.-Germany estate tax treaty also provides a credit against U.S.
federal estate and gift tax liability for the amount of inheritance and gift tax
paid in Germany, subject to certain limitations, in a case where the FMC
Ordinary Shares or ADSs are subject to German inheritance or gift tax and U.S.
federal estate or gift tax.
GERMAN CAPITAL TAX
The Treaty provides that a person resident in the U.S. will not be subject
to German capital tax with respect to the FMC Ordinary Shares or ADSs unless the
FMC Ordinary Shares or ADSs (a) are part of the business property of a permanent
establishment located in Germany or (b) are part of the assets of a fixed base
of an individual located in Germany and used for the performance of independent
personal services.
OTHER GERMAN TAXES
There are no German transfer, stamp or other similar taxes that would apply
to U.S. Holders who purchase or sell FMC Ordinary Shares or ADSs.
OTHER TAX CONSEQUENCES
In connection with the formation of Fresenius Medical Care, Fresenius AG
will contribute stock of various subsidiaries owning Fresenius Worldwide
Dialysis assets located in many countries. These Fresenius Worldwide Dialysis
assets are not all currently owned by these subsidiaries or may be owned in
addition to other assets that will not be retained by these subsidiaries. It is
the intention of Fresenius AG to incorporate Fresenius Worldwide Dialysis assets
on a country-by-country basis prior to the Contribution to Fresenius Medical
Care, which will require transferring assets (including by distribution,
spin-off, merger and liquidation) to accomplish its intention. Such transfers
may give rise to tax liabilities in these foreign countries for which the
subsidiaries being contributed may be liable. In the opinion of KPMG Peat
Marwick LLP, neither Fresenius Medical Care nor any of its subsidiaries will
have any U.S. federal or German income tax liability as a result of any of the
transfers of the Fresenius Worldwide Dialysis assets or the contribution of the
stock of Fresenius AG's subsidiaries holding such assets to Fresenius Medical
Care.
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Based on the currently available information of the stock ownership of
Fresenius AG and Grace and the anticipated ownership of the FMC Ordinary Shares
at the Effective Time, because five or fewer individuals do not own more than
50% of FMC Ordinary Shares (measured by value), Fresenius Medical Care should
not currently be classified as a "personal holding company" ("PHC"), as such
term is defined in the Code. It is currently not expected that Fresenius Medical
Care will become a PHC in the foreseeable future. No assurance can be given,
however, that such stock ownership will not change in the future.
If Fresenius Medical Care were classified as a PHC, it would be taxed on
its U.S. source passive income, including dividends received from NMC and
Fresenius USA, and would avoid this tax (currently imposed at a 39.6% rate) on
such passive income only to the extent it paid dividends to its shareholders.
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DESCRIPTION OF NEW PREFERRED SHARES
The following summary of the material provisions of the New Preferred
Shares does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Certificate of Amendment which is attached
hereto as Appendix B. ALL SHAREHOLDERS ARE URGED TO READ THE CERTIFICATE OF
AMENDMENT IN ITS ENTIRETY.
GENERAL
In the Recapitalization, holders of Grace Common Stock will receive one New
Preferred Share for each share of Grace Common Stock held. Neither the stated
value nor the Liquidation Preference of the New Preferred Shares is necessarily
indicative of the price at which the New Preferred Shares will actually trade at
or after the time of the issuance, and the New Preferred Shares may trade at
prices below their stated value. The market price of the New Preferred Shares
can be expected to fluctuate with changes in the market and economic conditions,
the financial condition and prospects of FNMC and other factors that generally
affect the market prices of securities. FNMC intends to seek to list the New
Preferred Shares on a national securities exchange. However, no assurance can be
given that the New Preferred Shares will satisfy the listing criteria of any
such exchange.
The number of New Preferred Shares authorized will be equal to the number
of shares of Grace Common Stock issued and outstanding at the Effective Time.
The Liquidation Preference of the New Preferred Shares will be $.10 per share.
The New Preferred Shares will rank, with respect to dividend rights and rights
on liquidation, dissolution or winding up, subsequent to all shares of Grace 6%
Preferred Stock, Grace Class A Preferred Stock and Grace Class B Preferred Stock
outstanding as of the Effective Time, and prior to all other shares of Grace
capital stock, including Grace Class C Preferred Stock and Grace Common Stock.
DIVIDENDS
The holders of the New Preferred Shares will be entitled to receive, when,
as and if declared by the FNMC Board, out of assets legally available therefor,
dividends on the New Preferred Shares (the "Special Dividend") equal, in the
aggregate, to the Special Dividend Amount (the "Special Dividend Amount")
calculated as indicated below. Subject to the requirements of applicable law,
the Special Dividend will be declared in a single declaration, irrespective of
the number of installments in which it will be paid, and will be publicly
announced by Fresenius Medical Care on or before May 1, 2002 (such announcement,
the "Public Announcement"). Upon such declaration, the Special Dividend will be
payable in cash in annual installments on the Payment Date; and the aggregate
amount payable on any Payment Date will be equal to the lesser of (a) $100
million or (b) the amount of the Special Dividend Amount remaining unpaid.
The Special Dividend Amount will be equal to $200 million (a) plus the
Special Differential, if the Special Differential is a positive number, and (b)
less the absolute value of the Special Differential, if the Special Differential
is a negative number. The Special Differential will be equal to (a) the
Applicable Percentage of the excess of the cumulative actual adjusted cash flow
of Fresenius Medical Care on a consolidated basis for the five-year period
beginning on January 1, 1997 and ending on December 31, 2001 (the "Dividend
Accrual Period"), above $3.7 billion less (b) $200 million. The adjusted cash
flow of Fresenius Medical Care on a consolidated basis will be equal to net
income to common shareholders (without regard to the Special Dividend), plus
depreciation and amortization, plus non-cash charges, provisions for impairment
in the value of long-term assets, and similar recorded reserves as of December
31, 2001, as reflected on Fresenius Medical Care's consolidated audited
financial statements prepared in accordance with US GAAP, less any after-tax
cash expenses paid to third parties incurred with respect to the matters
underlying the OIG Investigation regarding NMC and its subsidiaries referenced
in the five subpoenas received by NMC from the OIG on October 17, 1995 not
reflected in net income to common shareholders during the Dividend Accrual
Period. The Applicable Percentage will be 44.8%, which percentage will be
increased and decreased proportionately to reflect issuances or repurchases of
New Preferred Shares following the Reorganization. The Special Dividend Amount
is not subject to any maximum or minimum limitation.
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Set forth below are two hypothetical examples of the computation of the
Special Dividend Amount. Shareholders should note that all amounts used to
compute "Adjusted Cash Flow" in the examples below are hypothetical amounts
selected for illustrative purposes only, and are not intended and should not be
treated as estimates or forecasts of future performance by Fresenius Medical
Care or of the likelihood of payment of the Special Dividend or of the Special
Dividend Amount. For a discussion of certain factors which may affect the
payment of the Special Dividend, see "RISK FACTORS -- Other Risks -- Special
Dividend."
<TABLE>
<CAPTION>
1997-2001
----------
CUMULATIVE
----------
<S> <C>
HYPOTHETICAL CASE 1
Net Income to Common Shareholders................................................. $2,100
Plus: Depreciation & Amortization................................................. 1,500
Less: After Tax Charges related to OIG Investigation not reflected in net income
during the dividend accrual period.............................................. --
Plus: Other Defined Non Cash Charges & Reserves................................... --
--------
= Adjusted Cash Flow to Common Shareholders..................................... $3,600
========
Calculation of the "Special Differential"
Adjusted Cash Flow during "Dividend Accrual Period"............................. $3,600
Less: Target Cash Flow.......................................................... 3,700
Excess Cash Flow above Target Cash Flow......................................... 0
x 44.8% (Applicable Percentage)................................................. 0
Less: 200 million............................................................... (200)
Special Differential............................................................
--------
$ (200)
Special Dividend Payable
Target Face Amount.............................................................. $ 200
Plus: Special Differential...................................................... (200)
--------
Special Dividend Amount......................................................... $ 0
HYPOTHETICAL CASE 2
Net Income to Common Shareholders................................................. $2,700
Plus: Depreciation & Amortization................................................. 1,300
Less: After Tax Charges related to OIG Investigation not reflected in net income
during the dividend accrual period.............................................. --
Plus: Other Defined Non Cash Charges & Reserves................................... --
========
= Adjusted Cash Flow to Common Shareholders..................................... $4,000
========
Calculation of the "Special Differential"
Adjusted Cash Flow during "Dividend Accrual Period"............................. $4,000
Less: Target Cash Flow.......................................................... 3,700
Excess Cash Flow above Target Cash Flow......................................... 300
x 44.8% (Applicable Percentage)................................................. 135
Less: $200 million.............................................................. (200)
Special Differential............................................................ $ (65)
--------
</TABLE>
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<TABLE>
<CAPTION>
1997-2001
----------
CUMULATIVE
----------
<S> <C>
Special Dividend Payable
Target Face Amount.............................................................. $ 200
Plus: Special Differential...................................................... (65)
----------
Special Dividend Amount......................................................... $ 135
New Preferred Shares Outstanding................................................ 98.1
Special Dividend Payable per share to New Preferred Shareholders on Oct. 1, 2002
($100 million / 98.1 shares)................................................. $ 1.0
Special Dividend Payable per share to New Preferred Shareholders on Oct. 1, 2003
($35 million / 98.1 shares).................................................. $ 0.36
</TABLE>
The Special Dividend will begin to accrue from January 1, 1997, and will
accrue on a quarterly basis, in each case, whether or not declared, subject to
decrease in future periods to the extent that the Special Differential decreases
after any accrual. Any payment of the Special Dividend made in an amount less
than the total amount of the Special Dividend at the time payable will be
allocated pro rata on a share-by-share basis among all New Preferred Shares
outstanding at the time.
The Special Dividend must be paid in cash, except that if FNMC Common Stock
is listed on the NYSE or quoted on the Nasdaq Stock Market, the Special
Dividend, or any installment thereof, may be paid, in the sole discretion of
FNMC, either in (a) cash, (b) FNMC Common Stock, based upon the market price as
of the record date for such payment, or (c) any combination of cash and FNMC
Common Stock, based upon the market price as of the record date for such
payment.
If, at any time after May 1, 2002, any portion of the Special Dividend is
not declared, or if any installment thereof is not paid on the applicable
Payment Date, FNMC may not make any dividend payment or other distribution of
assets, properties, cash, rights, obligations or securities on account of any
shares of capital stock which rank below the New Preferred Shares ("Junior
Stock"), or purchase, redeem or otherwise acquire for value of any shares of
Junior Stock, except for distributions or purchases paid exclusively in other
Junior Stock.
The New Preferred Shares are not entitled to receive any other dividends or
payments other than the Special Dividend. If no Special Dividend is payable on
the New Preferred Shares, the New Preferred Shares will still be entitled to a
$.10 Liquidation Preference per share, to the voting rights described below
under the first paragraph of "-- Voting Rights" and to the Optional Redemption
Price as described under "-- Optional Redemption."
ADJUSTMENTS
The FNMC Board, with the concurrence of all of the Independent Directors of
Fresenius Medical Care, or a majority of such Independent Directors if there are
three or more, shall make appropriate adjustments to the provisions of the New
Preferred Shares respecting dividends and distributions thereon in order to
preserve their intended economic effect, in the light of changes in
capitalization, accounting policy and extraordinary transactions (including
without limitation mergers, consolidations or sales of assets). No adjustments
of such provisions on account of the foregoing or otherwise shall be made
without the concurrence of the Independent Directors of Fresenius Medical Care.
VOTING RIGHTS
In addition to any voting rights provided by law, holders of the New
Preferred Shares will be entitled to vote, in person or by proxy, on all matters
voted on by holders of FNMC Common Stock voting together as a single class with
other shares entitled to vote thereon. With respect to any such vote, each New
Preferred Share shall entitle the holder thereof to cast one-tenth of a vote.
If, on any date after the Public Announcement, FNMC has failed to declare,
or has failed to pay on the applicable Payment Date, the full amount of the
installment of the Special Dividend payable on the New
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Preferred Shares, then the number of directors constituting the FNMC Board will,
without further action, be increased by two and the holders of shares of the New
Preferred Shares will receive, in addition to their other voting rights, the
exclusive right, voting separately as a single class, to elect two directors to
fill such newly created directorship. Any such additional directors will
continue as directors, and the holders of the New Preferred Shares will have
such additional voting rights until such time as all installments of the Special
Dividend then payable have been declared and paid in full, at which time such
additional directors will cease to be directors, the number of directors
constituting the FNMC Board will be reduced by two and the additional voting
rights of the holders of the New Preferred Shares will terminate.
Each director elected by the holders of the New Preferred Shares will,
unless his or her term expires earlier or unless he or she is removed, hold
office until the annual meeting of shareholders next succeeding his or her
election or until his or her successor, if any, is elected and qualified.
If any director so elected by the holders of the New Preferred Shares
ceases to serve as a director before his or her term expires (except by reason
of the termination of the voting rights accorded to the holder of the New
Preferred Shares), the holders of the New Preferred Shares then outstanding and
entitled to vote for such director may elect a successor to hold office for the
unexpired term of the director whose place shall be vacant.
OPTIONAL REDEMPTION
FNMC will not have any right to redeem any of the New Preferred Shares
prior to the Public Announcement. Thereafter, FNMC may, at its sole option and
election, redeem all or a portion of outstanding New Preferred Shares (an
"Optional Redemption"), on not more than 45 nor less than 30 days' notice of the
date of redemption (any such date an "Optional Redemption Date"), at a price per
share (the "Optional Redemption Price") equal to the greater of (a) the
Liquidation Preference or (b) an amount per share equal to any unpaid portion of
the Special Dividend, whether or not declared or payable, on the applicable
Optional Redemption Date. The Optional Redemption Price shall be paid in cash,
except that if FNMC Common Stock is listed on the NYSE or quoted on the Nasdaq
Stock Market, the Optional Redemption Price may be paid, in the sole discretion
of FNMC, either in (a) cash, (b) FNMC Common Stock, based upon the market price
as of the record date for such Optional Redemption, or (c) any combination of
cash and FNMC Common Stock, based upon the market price as of the record date
for such Optional Redemption. If FNMC redeems less than all the New Preferred
Shares then outstanding, the New Preferred Shares to be redeemed shall be
selected pro rata.
PREEMPTIVE RIGHTS
The holders of New Preferred Shares are not entitled to any preemptive or
subscription rights.
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DESCRIPTION OF CAPITAL STOCK OF FRESENIUS MEDICAL CARE
The following description of the material terms of the capital stock of
Fresenius Medical Care does not purport to be complete and is qualified in its
entirety by reference to Fresenius Medical Care's organizational documents. For
information with respect to the Deposit Agreement pursuant to which the FMC
Ordinary Shares will be held on behalf of U.S. shareholders, see "DESCRIPTION OF
AMERICAN DEPOSITARY RECEIPTS."
GENERAL
The outstanding share capital of Fresenius Medical Care after the
Reorganization will consist of approximately 70,000,000 FMC Ordinary Shares, all
of which will be issued in bearer form and will be freely transferable.
The FMC Management Board will be authorized in the Articles of Association
with the approval of the Supervisory Board, to increase the capital of Fresenius
Medical Care by issuing FMC Preferred Shares to be known as Approved Capital.
The Articles of Association will also authorize the issuance of FMC Preferred
Shares as Conditional Capital, which will not require Supervisory Board consent.
Such authorization will be provided by Fresenius AG as sole shareholder of
Fresenius Medical Care following the Contribution and prior to the
Reorganization. The issuance of Approved Capital pursuant to such shareholder
authorization is limited to a period not exceeding five years from the date of
shareholder authorization. No further consent of shareholders is required in
connection with the issuance of FMC Preferred Shares as Approved Capital or
Conditional Capital.
FMC Preferred Shares issued as Approved Capital may be issued for cash up
to a total of DM 70 million nominal amount (14 million shares), to be known as
"Approved Capital I" or for non-cash consideration up to a total of DM 105
million nominal amount (21 million shares), to be known as "Approved Capital II"
in connection with acquisitions by Fresenius Medical Care. Conditional Capital
may be used to issue FMC Preferred Shares in connection with acquisitions, or as
part of equity-based employee compensation arrangements. See "MANAGEMENT OF
FRESENIUS MEDICAL CARE -- Compensation of FMC Management Board and Certain Other
Executive Officers -- Stock Option Plan." However, certain issues of Conditional
Capital as employee compensation may be subject to legal challenge. See
"COMPARISON OF CERTAIN RIGHTS OF SHAREHOLDERS OF GRACE AND FRESENIUS USA."
Fresenius Medical Care and Fresenius AG may enter into a pooling agreement for
the benefit of the holders of FMC Preferred Shares which may contain certain
provisions similar to those of the Pooling Agreement. See "DESCRIPTION OF THE
POOLING AGREEMENT."
ABSENCE OF A PUBLIC MARKET
Prior to the consummation of the Reorganization, there will have been no
public market for the ADSs or the FMC Ordinary Shares. Application will be made
to list the ADSs on the NYSE and to list the FMC Ordinary Shares on the
Frankfurt Stock Exchange as soon as possible following the Reorganization.
However, there can be no assurance that such FMC Ordinary Shares or such ADSs
will be listed on the Frankfurt Stock Exchange or the NYSE, respectively, or
that a public market for such FMC Ordinary Shares or such ADSs will develop.
DIVIDEND RIGHTS
Dividends, if any, are declared at the annual general meeting of
shareholders, which must be held within eight months from the end of a fiscal
year, and are paid once a year. Shareholders may present a dividend coupon
(Dividendenschein) to receive such dividends at any time within a four-year
period which commences at the end of the year during which the dividend became
due. If a shareholder has presented a dividend coupon to Fresenius Medical Care
for payment within such four-year period, the statute of limitations for
enforcing the right to receive such dividend payment is two years from the end
of such four-year period. When a shareholder has presented the last outstanding
dividend coupon in order to receive the dividend payable in respect of that
dividend coupon, such shareholder is required to submit to Fresenius Medical
Care the renewal
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coupon (Erneuerungsschein) attached at the bottom of each sheet of dividend
coupons in order to obtain the next series of dividend coupons to be issued by
Fresenius Medical Care.
Pursuant to the Deposit Agreement, the Depositary will receive all such
dividends and distributions on all Deposited Securities and will, as promptly as
practicable, distribute such dividends and distributions to the holders of ADRs
entitled thereto. See "DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS --
Distributions on Deposited Securities."
For each fiscal year, the treatment of all unappropriated profits,
including the amount of net profits of Fresenius Medical Care which will be
distributed by way of dividends is proposed by the FMC Management Board and the
FMC Supervisory Board, and is subject to the approval of the shareholders. The
FMC Management Board and the FMC Supervisory Board may allocate up to 50% of
unappropriated profits to the free reserve of Fresenius Medical Care (that is,
not distribute such profits) without shareholder approval, in which case the
shareholders approve the treatment of the balance of such profits. For a
discussion of the intended dividend policy of Fresenius Medical Care, see "THE
REORGANIZATION -- Conduct of Business Prior to Effective Time -- Certain
Covenants -- Certain Transactions." Failure or inability of FNMC to pay the
Special Dividend on the New Preferred Shares does not prevent Fresenius Medical
Care from paying dividends on the FMC Ordinary Shares.
LIQUIDATION RIGHTS
In accordance with the German Stock Corporation Law (Aktiengesetz), upon a
liquidation of Fresenius Medical Care, any liquidation proceeds remaining after
paying all of Fresenius Medical Care's liabilities would be distributed among
the holders of FMC Ordinary Shares and the holders of any outstanding non-voting
preferred shares in proportion to the total nominal value of the shares held by
each holder.
PREEMPTIVE RIGHTS
Under the German Stock Corporation Law, an existing stockholder in a stock
corporation has a preferential right to subscribe for any issue by such
corporation of shares, debt instruments convertible into shares and
participating debt instruments in proportion to the shares held by such
stockholder in the existing capital of such corporation. The German Stock
Corporation Law provides that this preferential right can only be excluded by a
stockholder resolution passed at the same time as the resolution authorizing the
capital increase. A supermajority of at least three quarters of the votes
present at the meeting, as well as a "special justification" by the corporation
stating that the goal pursued by the corporation with the issuance of the new
security could not reasonably be achieved without the elimination of preemptive
rights, is required for the exclusion. The Approved Capital and Conditional
Capital described under "-- General" will exclude preemptive rights. Such
exclusion will be authorized by Fresenius AG in its capacity as sole shareholder
of Fresenius Medical Care prior to the Reorganization, and probably does not
need justification in issuances thereafter.
VOTING RIGHTS
Each FMC Ordinary Share entitles the holder thereof to one vote at general
meetings of the shareholders of Fresenius Medical Care for every DM 5 of nominal
value. Resolutions are passed at a general or special meeting of the
shareholders of Fresenius Medical Care by a majority of the votes cast, unless a
higher vote is required by law or the Articles of Association of Fresenius
Medical Care. The German Stock Corporation Law and the organizational documents
of Fresenius Medical Care require that the following significant resolutions be
passed by a majority of at least 75% of the capital represented in connection
with the vote taken on such resolution: changes or amendments to the scope of
business; changes or amendments to Fresenius Medical Care's Articles of
Association; certain capital increases; capital decreases; a dissolution of
Fresenius Medical Care; a merger of Fresenius Medical Care into or a
consolidation of Fresenius Medical Care with another company, a transfer of all
of Fresenius Medical Care's assets; a change of Fresenius Medical Care's
corporate form; and the elimination of preemptive rights.
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A general or special meeting of the shareholders of Fresenius Medical Care
may be called by the FMC Management Board, the FMC Supervisory Board or by
shareholders holding in the aggregate at least 5% in nominal value of Fresenius
Medical Care's issued share capital. The right to attend and vote at a
shareholders' meeting is only accorded to those shareholders who, not later than
five days before the meeting, deposit their shares until the end of the meeting
with Fresenius Medical Care, with a German notary, with a bank serving as a
depositary for such securities or at any other place of deposit specified in the
notice of the general meeting. Shares are also deemed to have been deposited if,
with the consent of a depositee, they are blocked in the bank account in which
they are held until the end of the general meeting. In order to exercise the
right to attend and vote at the general meeting, shareholders must provide
Fresenius Medical Care at the general meeting with appropriate documentation
which evidences the deposit of FMC Ordinary Shares as described above. Following
such deposit of FMC Ordinary Shares or the blocking of the account in which they
are held, a holder of FMC Ordinary Shares may still sell or otherwise dispose of
his FMC Ordinary Shares; provided, however, that any voting instructions such
shareholder may have given with respect to such FMC Ordinary Shares will be
invalidated and any admission cards such shareholder may have received that
would entitle him or her to attend and vote at the meeting must be returned to
the deposit bank or Fresenius Medical Care. Notice of shareholder meetings must
be published in the German Federal Gazette (Bundesanzeiger) at least one month
prior to the last day on which the FMC Ordinary Shares must be deposited, which
is required to be not later than the fifth business day prior to the date of the
general meeting. Pursuant to the Articles of Association of Fresenius Medical
Care, notice of shareholder meetings will also be published in two U.S.
newspapers, which initially will be The New York Times and The Wall Street
Journal.
Although notice of each shareholder meeting (whether the annual general
meeting or a special meeting) is required to be given as described above,
neither the German Stock Corporation Law nor the organizational documents of
Fresenius Medical Care have any minimum quorum requirement applicable to such
meetings.
Amendments of the organizational documents of Fresenius Medical Care may be
proposed either jointly by the FMC Supervisory Board and the FMC Management
Board or by a shareholder or group of shareholders holding a minimum of 5% of
the nominal value of Fresenius Medical Care's issued share capital. A resolution
amending the articles of association of Fresenius Medical Care must be passed by
at least 75% of the capital represented at the meeting of shareholders at which
the resolution is considered.
For a discussion of the procedures to be followed by the Depositary to
enable holders of ADRs to give voting instructions with respect to the FMC
Ordinary Shares represented by their ADSs, see "DESCRIPTION OF AMERICAN
DEPOSITARY RECEIPTS -- Voting of Deposited Securities."
FMC PREFERRED SHARES
Under German law, the annual dividend paid on the FMC Preferred Shares
must, in all cases, be paid before payment on the FMC Ordinary Shares is paid.
The minimum annual dividend payable on the FMC Preferred Shares will be 4% of
the shares' nominal value or 20 pfennigs per year. In addition, the dividend on
the preferred shares of a German corporation is generally greater than the
dividend on ordinary shares. Accordingly, Fresenius Medical Care's Articles of
Association also provide that the annual dividend paid on the FMC Preferred
Shares must exceed the annual dividend on the FMC Ordinary Shares by 2% of the
FMC Preferred Shares' nominal value or 10 pfennigs. The FMC Preferred Shares
will not be entitled to a preference in liquidation.
The FMC Preferred Shares will not have any voting rights, except as
described in this paragraph. If (i) the minimum annual dividend payable on the
FMC Preferred Shares is not paid in any year, and (ii) both the dividend
arrearage and the dividend payable on the FMC Preferred Shares for the following
year are not paid in full, in the following year, then the FMC Preferred Shares
shall have the same voting rights as the FMC Ordinary Shares until all FMC
Preferred Share dividend arrearages are fully paid up.
Fresenius Medical Care believes that the FMC Preferred Shares may provide
flexibility in structuring and executing future financing and acquisitions, and
in meeting other corporate needs such as providing employee compensation plans
that may involve the issuance of equity securities. Where advisable, the FMC
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Preferred Shares can be given economic and other terms (other than voting
rights) comparable to those of the FMC Ordinary Shares.
EXCHANGE CONTROLS AND OTHER LIMITATIONS
At the present time, Germany does not restrict the export or import of
capital, except for investments in areas like Iraq, Serbia or Montenegro.
However, for statistical purposes only, every individual or corporation residing
in Germany (a "Resident") must report to the German Central Bank (Deutsche
Bundesbank), subject only to certain immaterial exceptions, any payment received
from or made to an individual or a corporation resident outside of Germany (a
"Non-resident") if such payment exceeds DM 5,000 (or the equivalent in a foreign
currency). In addition, Residents must report any claims against, or any
liabilities payable to, Non-residents, if such claims or liabilities, in the
aggregate, exceed DM 500,000 (or the equivalent in a foreign currency) at the
end of any month. Residents must also report any direct investment made or
received from outside Germany if such investment exceeds DM 100,000.
There are no limitations imposed by German law or the Articles of
Association (Satzung) of Fresenius Medical Care on the right of a Non-resident
to hold or vote the FMC Ordinary Shares or the ADSs.
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DESCRIPTION OF THE POOLING AGREEMENT
The following is a summary of the material provisions of the Pooling
Agreement, to be dated as of the Effective Date, among Fresenius Medical Care,
Fresenius AG and the Independent Directors as agents of the Minority
Shareholders (the "Pooling Agreement"). This summary does not purport to be
complete and is qualified in its entirety by reference to the Pooling Agreement
which will be filed as an Exhibit to the Registration Statement. Terms used
herein and not otherwise defined shall have the respective meanings set forth in
the Pooling Agreement.
GENERAL
The Pooling Agreement shall be for the benefit of all persons ("Minority
Shareholders") from time to time beneficially owning shares or ADRs of Fresenius
Medical Care, other than Fresenius AG and its affiliates or their agents and
representatives.
INDEPENDENT DIRECTORS
During the term of the Pooling Agreement, no less than one third of all
members of the FMC Supervisory Board to be elected by shareholders must be
Independent Directors (i.e., persons without a substantial business or
professional relationship with Fresenius Medical Care, Fresenius AG, or any
Affiliate of either, other than as a director of Fresenius Medical Care);
provided that there must be at least two Independent Directors at all times
during the term of the Pooling Agreement; and provided that if an Independent
Director resigns, is removed, or is otherwise unable or unwilling to serve in
such capacity, a new person will be appointed to serve as an Independent
Director in accordance with the provisions of the Fresenius Medical Care
articles of association and the Pooling Agreement, if as a result of the
resignation or removal the number of Independent Directors falls below the
aforementioned minimum.
EXTRAORDINARY TRANSACTIONS
During the term of the Pooling Agreement, Fresenius Medical Care and its
affiliates and Fresenius AG and its affiliates must comply with all provisions
of German law regarding (a) any merger, consolidation, sale of all or
substantially all assets, recapitalization, other business combination,
liquidation or other similar action not of the ordinary course of business of
Fresenius Medical Care, (b) any issuance of shares of voting capital stock of
Fresenius Medical Care ("Voting Shares") representing more than 10% of the total
Voting Shares outstanding on a fully diluted basis and (c) any amendment to the
Articles of Association of Fresenius Medical Care which adversely affects any
holder of FMC Ordinary Shares.
INTERESTED TRANSACTIONS
During the term of the Pooling Agreement, Fresenius AG and Fresenius
Medical Care have agreed that any transaction or contract (or a series of
related transactions or contracts) between Fresenius AG or any of its
affiliates, on the one hand, and Fresenius Medical Care or its affiliates, on
the other hand, which transaction or contract (or a series of related
transactions or contracts) involves aggregate payments in any year in excess of
10 million DM for each individual transaction or contract (or a related series
of transactions or contracts) ("Interested Transactions") must be approved by a
majority of the Independent Directors unless such transaction or contract (or
series of related transactions or contracts) has been described in a business
plan or budget of Fresenius Medical Care that has been previously approved by a
majority of Independent Directors. In any year in which the aggregate amount of
transactions that require approval (or that would have required approval in such
year but for the fact that such payment or other consideration did not exceed DM
10 million) has exceeded DM 50 million, all further Interested Transactions
involving more than DM 5 million must be approved by a majority of the
Independent Directors unless such transaction or contract (or series of related
transactions or contracts) has been described in a business plan or budget of
Fresenius Medical Care that has been previously approved by a majority of
Independent Directors.
DISPOSITION OF VOTING SHARES; TAKE-ALONG RIGHTS
During the three-year period following the Effective Date (the "Standstill
Period") Fresenius AG and its affiliates may not sell, assign, transfer or
otherwise dispose of any Voting Shares except (a) to any person or entity over
which Fresenius AG has control (other than Fresenius Medical Care) or (b)
pursuant to a sale in which all Minority Shareholders are offered the
opportunity to participate on a pro rata basis with
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Fresenius AG. During the Standstill Period, Fresenius AG, must at all times own
at least 50.3% of all Voting Shares outstanding on a fully diluted basis, but
may not own more than 57% of all Voting Shares outstanding on a fully diluted
basis (unless such greater ownership percentage is approved by a majority of the
Independent Directors on behalf of the Minority Shareholders and all outstanding
Voting Shares not then owned by Fresenius AG are acquired by Fresenius AG at the
same price and terms in compliance with the Exchange Act).
During any remaining term of the Pooling Agreement following the Standstill
Period, (a) Fresenius AG (and its affiliates) may not acquire Voting Shares
during any 90-day period representing more than 5% of the outstanding Voting
Shares on a fully diluted basis unless (i) Fresenius AG announces its intention
to effect such acquisitions at least two days prior to the commencement of such
90-day period and reports the result of such acquisitions promptly following
such 90-day period or (ii) Fresenius AG shall acquire such shares in an offering
in which all holders of FMC Ordinary Shares (including holders of ADSs) shall
have preemptive rights; and (b) Fresenius AG and its affiliates may not acquire
Voting Shares, during any such 90-day period representing more than 15% of the
outstanding Voting Shares on a fully diluted basis except (i) pursuant to a
tender offer for all Voting Shares (subject to proration) made in compliance
with the Exchange Act and the Securities Act or (ii) pursuant to an offering in
which all holders of FMC Ordinary Shares (including holders of ADSs) shall have
preemptive rights.
During any remaining term of the Pooling Agreement after the Standstill
Period, Fresenius AG and its affiliates may not sell, assign, transfer or
otherwise dispose of any Voting Shares representing more than 50% of the
aggregate voting power of FMC Voting Shares (other than to a person or entity
over which Fresenius AG has control that agrees to be bound by the terms of this
Agreement or in a widely distributed public offering), without offering all
other holders of Voting Shares the opportunity to participate on a pro rata
basis on the same terms and conditions.
During the term of the Pooling Agreement, Fresenius AG and its affiliates
may not pledge or encumber the Voting Shares held by them in such a way that any
voting rights may be exercised by the pledgee and may not enter into any other
pooling agreement with respect to such Voting Shares, in each case if such
action would prevent Fresenius AG from fulfilling its obligations under the
Pooling Agreement.
The foregoing will not apply to FMC Voting Shares held by Fresenius AG
which are subject to options as described under "THE REORGANIZATION -- Employee
Benefits."
LISTING OF AMERICAN DEPOSITARY SHARES; SEC FILINGS
During the term of the Pooling Agreement, Fresenius AG has agreed to use
its best efforts to exercise its rights as the majority shareholder to cause
Fresenius Medical Care to and Fresenius Medical Care has agreed to (a) maintain
the effectiveness of the Deposit Agreement (or a similar agreement) and to
assure that the ADSs are listed on either the NYSE or the Nasdaq Stock Market;
(b) file all reports, required by the NYSE or the Nasdaq Stock Market, as
applicable, the Securities Act, the Exchange Act and all other applicable laws
("Securities Filings"); (c) prepare all financial statements required for any
Securities Filing in accordance with US GAAP; (d) on an annual basis, prepare
audited consolidated financial statements including, without limitation, a
balance sheet, a statement of income and retained earnings, and a statement of
changes in financial position, and all appropriate notes, all in accordance with
US GAAP, and, on a quarterly basis, prepare and file consolidated financial
statements prepared in accordance with US GAAP, (e) file materials with the
Commission with respect to annual and special shareholder meetings under cover
of Form 6-K which materials will also be made available to the Depositary for
distribution to holders of ADRs, and (f) make available to the Depositary for
distribution to holders of ADRs on an annual basis, a copy of any report
prepared by the Supervisory Board and provided to the shareholders of Fresenius
Medical Care generally pursuant to Section 3.14(2) of the German Stock
Corporation Law (or any successor provision) concerning the results of its
examination of the managing board report on the relation of Fresenius Medical
Care with connected enterprises. Fresenius Medical Care intends to provide in
the materials referred to in clause (e) information generally comparable to that
which would be provided to shareholders of a U.S. corporation in a proxy
statement filed with the Commission, except that certain information, including
information relating to
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Fresenius Medical Care's management, executive compensation and options,
beneficial ownership of Fresenius Medical Care securities and certain related
party transactions will be provided in accordance with the disclosure
requirements applicable to "foreign private issuers," as defined in the
Commission's rules.
TERM
The Pooling Agreement will terminate upon (a) the acquisition of all Voting
Shares by Fresenius AG or its affiliates; (b) the reduction of Fresenius AG's
beneficial ownership in Fresenius Medical Care to less than 25% of the voting
power of the outstanding FMC Voting Securities or (c) Fresenius Medical Care no
longer meeting the minimum threshold for obligatory registration of the FMC
Ordinary Shares or ADSs under Section 12(g)(1) of the Exchange Act and Rule
12g-1 thereunder.
AMENDMENT
The Pooling Agreement may be amended by written consent of Fresenius AG and
a majority of the Independent Directors; provided that Minority Shareholders
beneficially owning more than 75% of the FMC Ordinary Shares held by Minority
Shareholders approve such amendment.
ENFORCEMENT; GOVERNING LAW
The Pooling Agreement is governed by New York law and may be enforced in
the state and federal courts of New York. Fresenius Medical Care and Fresenius
AG have confirmed their intention to abide by the terms of the Pooling Agreement
as described herein.
DIRECTORS AND OFFICERS
Subject to any mandatory restrictions imposed by German law, Fresenius
Medical Care intends to obtain directors and officers insurance in respect of
all liabilities arising from or relating to the service of the members of the
FMC Supervisory Board and the officers of Fresenius Medical Care in accordance
with customary and usual policies followed by public corporations in the U.S. if
available at commercially reasonable rates and on commercially reasonable terms
and conditions.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of the material provisions of the Deposit
Agreement to be entered into among Fresenius Medical Care, Morgan Guaranty Trust
Company of New York, as Depositary, and the registered holders from time to time
of the ADRs issued thereunder. This summary does not purport to be complete and
is qualified in its entirety by reference to the Deposit Agreement. Copies of
the Deposit Agreement are available for inspection at the principal office of
the Depositary in New York, which is presently located at 60 Wall Street, New
York, New York 10260. Terms used herein and not otherwise defined shall have the
respective meanings set forth in the Deposit Agreement.
ADRs evidencing ADSs are issuable by the Depositary pursuant to the terms
of the Deposit Agreement. Each ADS represents, as of the date hereof, the right
to receive one-third of a FMC Ordinary Share deposited under the Deposit
Agreement (together with any additional shares deposited thereunder and all
other securities, property and cash received and held thereunder at any time in
respect of or in lieu of such deposited FMC Ordinary Shares, the "Deposited
Securities") with the Custodian, currently the Frankfurt office of Dresdner Bank
AG (together with any successor or successors thereto, the "Custodian"). An ADR
may evidence any number of ADSs. Only persons in whose names ADRs are registered
on the books of the Depositary will be treated by the Depositary and Fresenius
Medical Care as registered holders ("Holders").
DEPOSIT, TRANSFER AND WITHDRAWAL
FMC Ordinary Shares may be deposited under the Deposit Agreement by
delivery thereof to the Custodian, at the account maintained by the Custodian
for such purpose at the Deutscher Kassenverein AG (the "DKV"). In connection
with the deposit of FMC Ordinary Shares thereunder, the Depositary or the
Custodian may require the following in form satisfactory to it: (a) a written
order directing the Depositary to execute and deliver to, or upon the written
order of, the person or persons designated in such order an ADR or ADRs
evidencing the number of ADSs representing such deposited FMC Ordinary Shares (a
"Delivery Order"); (b) proper endorsements or duly executed instruments of
transfer in respect of any such deposited FMC Ordinary Shares in registered
form; (c) instruments assigning to the Custodian or its nominee any distribution
on or in respect of such deposited FMC Ordinary Shares or indemnity therefor;
and, (d) proxies entitling the Custodian to vote any such deposited FMC Ordinary
Shares in registered form. As soon as practicable after the Custodian receives
Deposited Securities pursuant to any such deposit or pursuant to paragraph (10)
or (13) of the form of ADR, the Custodian shall present such Deposited
Securities for registration of transfer into the name of the Custodian or its
nominee, to the extent such registration is practicable, at the cost and expense
of the person making such deposit (or for whose benefit such deposit is made)
and shall obtain evidence satisfactory to it of such registration. Deposited
Securities shall be held by the Custodian for the account and to the order of
the Depositary at such place or places and in such manner as the Depositary
shall determine. Deposited Securities may be delivered by the Custodian to any
person only under the circumstances expressly contemplated in the Deposit
Agreement. To the extent that the provisions of or governing the FMC Ordinary
Shares make delivery of certificates therefor impracticable, FMC Ordinary Shares
may be deposited by such delivery thereof as the Depositary or the Custodian may
reasonably accept, including, without limitation, by causing them to be credited
to an account maintained by the Custodian for such purpose with Fresenius
Medical Care or an accredited intermediary, such as a bank, acting as a
registrar for the FMC Ordinary Shares, together with delivery of the documents,
payments and Delivery Order referred to in the Deposit Agreement to the
Custodian or the Depositary.
After any such deposit of FMC Ordinary Shares, the Custodian shall notify
the Depositary of such deposit and of the information contained in any related
Delivery Order by letter, first class airmail postage prepaid, or, at the
request, risk and expense of the person making the deposit, by cable, telex or
facsimile transmission. After receiving such notice from the Custodian, the
Depositary, subject to the Deposit Agreement, shall as promptly as practicable
execute and deliver at the Transfer Office which is presently located at the
principal New York Office of the Depositary, to or upon the order of any person
named in such notice, an ADR or ADRs registered as requested and evidencing the
aggregate ADSs to which such person is entitled.
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Subject to provisions of the Deposit Agreement, the Depositary may so issue
ADRs for delivery at the Transfer Office only against deposit with the Custodian
of: (a) Shares in form satisfactory to the Custodian; (b) rights to receive
Shares from Fresenius Medical Care or any registrar or transfer agent of
Fresenius Medical Care or other entity recording Share ownership or transactions
on behalf of Fresenius Medical Care; or, (c) unless requested in writing by
Fresenius Medical Care to cease doing so at least two business days in advance
of the proposed deposit, other rights to receive FMC Ordinary Shares (until such
FMC Ordinary Shares are actually deposited pursuant to (a) or (b) above,
"Pre-released ADRs") only if (i) Pre-released ADRs are fully collateralized
(marked to market daily) with cash or U.S. government securities held by the
Depositary for the benefit of Holders (but such collateral shall not constitute
"Deposited Securities"), (ii) each recipient of Pre-released ADRs represents and
agrees in writing with the Depositary that such recipient or its customer (a)
beneficially owns such FMC Ordinary Shares, (b) assigns all beneficial right,
title and interest therein to the Depositary for the benefit of the Holders, (c)
holds such FMC Ordinary Shares in trust for the account of the Depositary and
(d) will deliver such FMC Ordinary Shares to the Custodian as soon as
practicable and promptly upon demand therefor and (iii) all Pre-released ADRs
evidence not more than 20% (twenty percent) of all ADSs (excluding those
evidenced by Pre-released ADRs). The Depositary may retain for its own account
any earnings on collateral for Pre-released ADRs and its charges for issuance
thereof. FMC Ordinary Shares or evidence of rights to receive FMC Ordinary
Shares may be deposited through (x) the electronic transfer of such FMC Ordinary
Shares to the account maintained by the Custodian for such purpose at the DKV,
(y) evidence satisfactory to the Custodian of irrevocable instructions to cause
such FMC Ordinary Shares to be transferred to such account or (z) delivery of
certificates representing such FMC Ordinary Shares. If use of the DKV book-entry
system in connection with the ADSs is discontinued at any time for any reason,
Fresenius Medical Care shall make such other book-entry arrangements (if any)
that it determines, after consultation with the Depositary, are reasonable. At
the request, risk and expense of the person depositing FMC Ordinary Shares, the
Depositary may accept deposits for forwarding to the Custodian and may deliver
ADRs at a place other than its office.
Subject to the terms and conditions of the Deposit Agreement and to the
provisions of or governing Deposited Securities (including Fresenius Medical
Care's Articles of Association (Satzung) or applicable law), upon surrender of
an ADR in form satisfactory to the Depositary at the Transfer Office, the Holder
thereof is entitled to delivery at the Custodian's office of the whole number of
Deposited Securities at the time represented by the ADSs evidenced by the ADR so
surrendered. At the request, risk and expense of the Holder thereof, the
Depositary may deliver such Deposited Securities at such other place as may have
been requested by the Holder. Delivery of such Deposited Securities may be made
by delivery of (a) FMC Ordinary Shares to an account in the DKV specified by the
Holder thereof and (b) any other securities, property and cash to which such
Holder is then entitled in respect of an ADR to, or upon the order of, such
Holder. Notwithstanding any other provision of the Deposit Agreement, the
withdrawal of Deposited Securities may be restricted only for the reasons set
forth in General Instruction I.A.(1) of Form F-6 (as such instructions may be
amended from time to time) under the Securities Act.
DISTRIBUTIONS ON DEPOSITED SECURITIES
Subject to the terms and provisions of the Deposit Agreement, to the extent
practicable, the Depositary will, as promptly as practicable, distribute by mail
to each Holder entitled thereto on the record date set by the Depositary
therefor at such Holder's address shown on the ADR Register, in proportion to
the number of Deposited Securities (on which the following distributions on
Deposited Securities are received by the Custodian) represented by ADSs
evidenced by such Holder's ADRs:
(a) Cash: Any U.S. dollars available to the Depositary resulting from a
cash dividend or other cash distribution or the net proceeds of sales of any
other distribution or portion thereof ("Cash"), on an averaged or other
practicable basis, subject to appropriate adjustments for (i) taxes or other
governmental charges withheld, (ii) such distribution being impermissible or
impracticable with respect to certain Holders, and (iii) deduction of the
Depositary's expenses in (1) converting any foreign currency to U.S. dollars by
sale or in such other manner as the Depositary may determine to the extent that
it determines that such conversion may be made on a reasonable basis, (2)
transferring foreign currency or U.S. dollars to the U.S. by such means as
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the Depositary may determine to the extent that it determines that such transfer
may be made on a reasonable basis, (3) obtaining any approval or license of any
governmental authority required for such conversion or transfer, which is
obtainable at a reasonable cost and within a reasonable time and (4) making any
sale by public or private means in any commercially reasonable manner. Whenever
the Depositary or the Custodian shall receive foreign currency, as a cash
dividend or other cash distribution or as the net proceeds from the sale of
securities, property or rights, which, in the judgment of the Depositary can
then be converted on a reasonable basis into U.S. dollars and distributed to
Holders entitled thereto in the U.S., the Depositary shall convert or cause to
be converted, as promptly as practicable, by sale or in any other manner that it
may determine, such foreign currency into U.S. dollars and shall transfer the
resulting U.S. dollars (net of its reasonably and customary charges and expenses
in effecting such conversion) to the U.S. If at any time the Depositary shall,
after consultation with Fresenius Medical Care if practicable, determine that in
its reasonable judgment any foreign currency received by the Depositary is not
convertible on a reasonable basis into U.S. dollars transferable to the U.S., or
if any approval or license of any governmental authority or agency thereof that
is required for such conversion is denied or in the opinion of the Depositary is
not obtainable at a reasonable cost or within a reasonable period, the
Depositary shall, subject to applicable laws and regulations, (A) to the extent
requested to do so in writing by Holders entitled to receive the same,
distribute the foreign currency (or an appropriate document evidencing the right
to receive such foreign currency) to such Holders or, to the extent not so
requested, (B) hold such foreign currency (without liability for interest
thereon or the investment thereof) for the respective accounts of the other
Holders entitled to receive the same. If at the time the Depositary shall
determine that in its judgment any U.S. dollars received by the Depositary upon
conversion of foreign currency are not transferable into the U.S., or if any
approval or license of any governmental authority or agency thereof that is
required for such transfer is denied or in the opinion of the Depositary is not
obtainable at a reasonable cost or within a reasonable period, the Depositary
shall hold such U.S. dollars (without liability for interest thereon or
investment thereof) for the respective accounts of the Holders entitled to
receive the same. If any such conversion of foreign currency and transfer into
U.S. dollars, in whole or in part, can be effected for distribution to some but
not all of the Holders entitled thereto, the Depositary may, in its reasonable
discretion make such conversion and distribution in U.S. dollars to the extent
permissible to the Holders entitled thereto and may distribute the balance of
the foreign currency received by the Depositary to, or hold such balance
(without liability for interest thereon or investment thereof) for the
respective accounts of, the Holders entitled thereto for whom such conversion
and distribution is not practicable;
(b) Shares: (i) Additional ADRs evidencing whole ADSs representing any FMC
Ordinary Shares available to the Depositary resulting from a dividend or free
distribution on Deposited Securities consisting of FMC Ordinary Shares (a "Share
Distribution") and (ii) U.S. dollars available to it resulting from the net
proceeds of sales of FMC Ordinary Shares received in a Share Distribution, which
FMC Ordinary Shares would give rise to fractional ADSs if additional ADRs were
issued therefor, as in the case of Cash;
(c) Rights: (i) Warrants or other instruments in the discretion of the
Depositary representing rights to acquire additional ADRs in respect of any
rights to subscribe for additional FMC Ordinary Shares or rights of any nature
available to the Depositary as a result of a distribution on Deposited
Securities ("Rights"), only if and to the extent that Fresenius Medical Care
timely furnishes to the Depositary evidence satisfactory to the Depositary that
the Depositary may lawfully distribute the same (Fresenius Medical Care has no
obligation to so furnish such evidence), or (ii) to the extent Fresenius Medical
Care does not so furnish such evidence and sales of Rights are practicable, any
U.S. dollars available to the Depositary from the net proceeds of sales of
Rights as in the case of Cash, or (iii) to the extent Fresenius Medical Care
does not so furnish such evidence and such sales cannot practicably be
accomplished by reason of the nontransferability of the Rights, limited markets
therefor, their short duration or otherwise, nothing (and any Rights may lapse).
Fresenius Medical Care shall have no obligation to register the Rights or any
such securities under the Securities Act of 1933.
(d) Other Distributions: (i) Securities or property available to the
Depositary resulting from any distribution on Deposited Securities other than
Cash, Share Distributions and Rights ("Other Distributions"), by any means that
the Depositary may deem equitable and practicable, or (ii) to the extent the
Depositary deems distribution of such securities or property not to be equitable
and practicable, any U.S. dollars available
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to the Depositary from the net proceeds of sales of other Distributions as in
the case of Cash. Distributions of U.S. dollars will be by checks drawn on a
bank in the U.S. for whole dollars and cents (any fractional cents being
withheld without liability for interest and added to future distributions of
U.S. dollars).
To the extent that the Depositary determines in its discretion, after
consultation with Fresenius Medical Care to the extent practicable, that any
distribution is not practicable with respect to any Holder, the Depositary may
make such distribution as it so determines is equitable and practicable,
including the distribution of foreign currency, securities or property (or
appropriate documents evidencing the right to receive foreign currency,
securities or property) or the retention thereof as Deposited Securities with
respect to such Holder's ADRs (without liability for interest thereon or the
investment thereof).
There can be no assurance that the Depositary will be able to effect any
currency conversion or to sell or otherwise dispose of any distributed or
offered property, subscription or other rights, FMC Ordinary Shares or other
securities in a timely manner or at a specified rate or price, as the case may
be.
DISCLOSURE OF INTERESTS
Each Holder of an ADR and all persons holding ADRs or beneficial interests
in ADRs agree to comply with all applicable provisions of German law and
Fresenius Medical Care's Articles of Association (Satzung) regarding the
notification of such person's interest in FMC Ordinary Shares, which provisions
at the date of the Deposit Agreement include Sections 21 and 22 of the German
Securities Trading Act (Wertpapierhandelsgesetz) and Section 20 of the German
Stock Corporation Law (Aktiengesetz). At the date of the Deposit Agreement, (i)
the statutory notification obligations of the Securities Trading Act apply to
anyone whose holding, either directly or by way of imputation pursuant to the
provisions of Section 22 of the German Securities Trading Act, of voting rights
in Fresenius Medical Care reaches or exceeds 5%, 10%, 25%, 50% or 75% or, after
having reached or exceeded any such threshold, falls below that threshold and
(ii) the statutory notification obligations of the German Stock Corporation Law
apply to any enterprise that, either directly or by way of imputation pursuant
to the provisions of Section 20(2), the German stock corporation owns more than
25% or 50% of FMC Ordinary Shares or, after having exceeded either of these
thresholds, no longer owns such percentage of shares. Each Holder and all
persons holding ADRs or beneficial interests in ADRs acknowledge that failure to
provide on a timely basis any required notification of an interest in FMC
Ordinary Shares may result in withholding of certain rights, including voting
and dividend rights, in respect of the FMC Ordinary Shares in which such Holder
or owner of a beneficial interest has an interest. All persons holding ADRs or
beneficial interests in ADRs agree to comply with all such disclosure
requirements and ownership limitations and to cooperate with the Depositary in
the Depositary's compliance with any instructions from Fresenius Medical Care in
respect thereof, and the Depositary shall use its best efforts to comply, to the
extent practicable, with such instructions.
RECORD DATES
The Depositary shall, after consultation with Fresenius Medical Care if
practicable, fix a record date (which shall be as near as practicable to any
corresponding record date set by Fresenius Medical Care) for the determination
of the Holders who shall be entitled to receive any distribution on or in
respect of Deposited Securities or the net proceeds thereof, to give
instructions for the exercise of any voting rights in respect of Deposited
Securities, to receive any notice or to act in respect of other matters and only
such Holders at the close of business on such record date shall be so entitled.
VOTING OF DEPOSITED SECURITIES
As soon as practicable after receipt from Fresenius Medical Care of notice
of any meeting or solicitation of consents or proxies of holders of FMC Ordinary
Shares or other Deposited Securities, unless Fresenius Medical Care informs the
Depositary otherwise in order to comply with applicable law, the Depositary
shall mail to Holders a notice stating (a) such information as is contained in
such notice and any solicitation materials (or a summary thereof in English
provided by Fresenius Medical Care), (b) that each Holder at the close of
business on the record date set by the Depositary therefor will be entitled,
subject to any applicable
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provisions of German law and Fresenius Medical Care's Articles of Association
(Satzung), to instruct the Depositary as to the exercise of the voting rights,
if any, pertaining to the Deposited Securities represented by the ADSs evidenced
by such Holder's ADRs and (c) the manner in which such instructions may be
given, including instructions to give a proxy to a person designated by
Fresenius Medical Care. Upon receipt of instructions of a Holder on such record
date in the manner and on or before the date established by the Depositary for
such purpose, the Depositary shall endeavor insofar as practicable and permitted
under the provisions of or governing Deposited Securities to vote or cause to be
voted the Deposited Securities represented by the ADSs evidenced by such
Holder's ADRs in accordance with such instructions. Deposited Securities
represented by ADSs with respect to which no voting instructions are given will
not be voted or counted as present at a shareholders meeting. The Depositary
will not itself exercise any voting discretion in respect of any Deposited
Securities.
INSPECTION OF TRANSFER BOOKS
The Deposit Agreement provides that the Depositary will keep books at its
Transfer Office for the registration, registration of transfer, combination and
split-up of ADRs, which at all reasonable times will be open for inspection by
the Holders and Fresenius Medical Care for the purpose of communicating with
Holders in the interest of the business of Fresenius Medical Care or a matter
related to the Deposit Agreement.
REPORTS AND OTHER COMMUNICATIONS
The Depositary shall make available for inspection by Holders at the
Transfer Office any reports and communications received from Fresenius Medical
Care which are both (a) received by the Depositary or the Custodian as the
holder of the Deposited Securities and (b) made generally available to the
holders of such Deposited Securities by Fresenius Medical Care. The Depositary
shall also send to the Holders copies of such reports when furnished by
Fresenius Medical Care. Any such reports and communications furnished to the
Depositary by Fresenius Medical Care shall be furnished in English.
On or before the first date on which Fresenius Medical Care makes any
communication available to holders of Deposited Securities or any securities
regulatory authority or stock exchange on a non-confidential basis, by
publication or otherwise, Fresenius Medical Care shall transmit to the
Depositary a copy thereof in English or with an English translation or summary.
In connection with any registration statement under the Securities Act relating
to the ADRs or with any undertaking contained therein, Fresenius Medical Care
and the Depositary shall each furnish to the other and to the Commission or any
successor governmental agency such information as shall be required to make such
filings or comply with such undertakings. Fresenius Medical Care has delivered
to the Depositary, the Custodian and any Transfer Office, a copy of its Articles
of Association (Satzung) and any other provisions adopted by it governing the
FMC Ordinary Shares and any other Deposited Securities issued by Fresenius
Medical Care or any affiliate of Fresenius Medical Care and, promptly upon any
change thereto, Fresenius Medical Care shall deliver to the Depositary, the
Custodian and any Transfer Office, a copy (in English or with an English
translation) of such provisions as so changed. The Depositary and its agents may
rely upon Fresenius Medical Care's delivery thereof for all purposes of the
Deposit Agreement.
CHANGES AFFECTING DEPOSITED SECURITIES
Upon any change in nominal or par value, split-up, consolidation,
cancellation or any other reclassification of Deposited Securities, or upon any
recapitalization, reorganization, merger, consolidation, liquidation or sale of
all or substantially all of the assets of Fresenius Medical Care or to which it
is a party, any securities, cash or other property that shall be received by the
Depositary in exchange for, or in conversion or replacement of, Deposited
Securities shall be treated as Deposited Securities under the Deposit Agreement,
and the ADRs shall thenceforth evidence ADSs representing the right to receive
the Deposited Securities as so reconstituted, subject to the provisions of the
following sentence. In any such case the Depositary may with Fresenius Medical
Care's approval (which approval shall not be unreasonably withheld), and shall
if Fresenius Medical Care shall so reasonably request, subject to the Deposit
Agreement, distribute any part of the
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securities, cash or other property so received or execute and deliver additional
ADRs as in the case of a dividend of FMC Ordinary Shares and thereafter the
Depositary may, in its discretion but with the prior approval of Fresenius
Medical Care (which approval shall not be unreasonably withheld), call for the
surrender of outstanding ADRs to be exchanged for new ADRs specifically
describing such newly received Deposited Securities to the extent not so
distributed.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The ADRs and the Deposit Agreement may be amended by Fresenius Medical Care
and the Depositary, provided that any amendment that imposes or increases any
fees or charges (other than stock transfer or other taxes and other governmental
charges, transfer or registration fees, cable, telex or facsimile transmission
costs, delivery costs or other such expenses), or that shall otherwise prejudice
any substantial existing right of Holders, shall become effective 30 days after
notice of such amendment shall have been given to the Holders. Every Holder of
an ADR at the time any amendment to the Deposit Agreement so becomes effective
shall be deemed, by continuing to hold such ADR, to consent and agree to such
amendment and to be bound by the Deposit Agreement as amended thereby. In no
event shall any amendment impair the right of the Holder of any ADR to surrender
such ADR and receive the Deposited Securities represented thereby, except in
order to comply with mandatory provisions of applicable law.
The Depositary shall at the written direction of Fresenius Medical Care,
terminate the Deposit Agreement and the ADRs by mailing notice of such
termination to the Holders at least 30 days prior to the date fixed in such
notice for such termination. The Depositary may terminate this Deposit
Agreement, after giving the notice set forth in the preceding sentence at any
time after 45 days has elapsed after the Depositary shall have delivered to
Fresenius Medical Care its written resignation, provided that no successor
depositary shall have been appointed and accepted its appointment before the end
of such 45 days. After the date so fixed for termination, the Depositary and its
agents will perform no further acts under the Deposit Agreement and the ADRs,
except to advise Holders of such termination, receive and hold (or sell)
distributions on Deposited Securities and deliver Deposited Securities being
withdrawn together with any such distributions on Deposited Securities (without
liability for interest) and any net proceeds of the sale of any Rights or other
property, without liability for interest, as the Depositary may reasonably
effect. As soon as practicable after the expiration of six months from the date
so fixed for termination, the Depositary shall sell the Deposited Securities and
shall thereafter (as long as it may lawfully do so) hold in a segregated account
the net proceeds of such sales, together with any other cash then held by it
under the Deposit Agreement, without liability for interest, in trust for the
pro rata benefit of the Holders of ADRs not theretofore surrendered. After
making such sale, the Depositary shall be discharged from all obligations in
respect of the Deposit Agreement and such ADR, except to account for such net
proceeds and other cash and for its obligations under Section 16 of the Deposit
Agreement. After the date so fixed for termination, Fresenius Medical Care shall
be discharged from certain of its obligations under the Deposit Agreement.
CHARGES OF DEPOSITARY
The Depositary may to the extent permitted by applicable law and the rules
of any securities exchange on which the ADSs are admitted for trading, charge
each person to whom ADRs are issued against deposits of Shares, including
deposits in respect of Share Distributions, Rights and Other Distributions, and
each person surrendering ADRs for withdrawal of Deposited Securities, up to U.S.
$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs delivered or
surrendered. The Depositary may sell (by public or private sale), after
consultation with Fresenius Medical Care to the extent practicable, sufficient
securities and property received in respect of Share Distributions, Rights and
Other Distributions prior to such deposit to pay such charge. Fresenius Medical
Care will pay all other charges and expenses of the Depositary and any agent of
the Depositary (except the Custodian) pursuant to agreements from time to time
between Fresenius Medical Care and the Depositary, except (a) stock transfer or
other taxes and other governmental charges (which are payable by Holders or
persons depositing FMC Ordinary Shares), (b) cable, telex and facsimile
transmission and delivery charges incurred at the request of persons depositing,
or Holders delivering, FMC Ordinary Shares, ADRs or Deposited Securities (which
are payable by such persons or Holders), (c) transfer
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or registration fees for the registration of transfer of Deposited Securities on
any applicable register in connection with the deposit or withdrawal of
Deposited Securities (which are payable by persons depositing FMC Ordinary
Shares or Holders withdrawing Deposited Securities; there are no such fees in
respect of the FMC Ordinary Shares as of the date of the Deposit Agreement) and
(d) expenses of the Depositary in connection with the conversion of foreign
currency into U.S. dollars and in compliance with foreign exchange regulations
(which are paid out of such foreign currency). These charges may be changed in
the manner provided in the Deposit Agreement.
LIABILITY OF HOLDERS FOR TAXES
If any tax or other governmental charge shall become payable by or on
behalf of the Custodian, the Depositary or Fresenius Medical Care, with respect
to the ADRs, any Deposited Securities represented by the ADSs evidenced thereby
or any distribution thereon, such tax or other governmental charge shall be paid
by the Holder thereof to the Depositary. The Depositary may refuse to effect any
registration, registration of transfer, split-up or combination thereof or,
subject to the terms and conditions of the Deposit Agreement, any withdrawal of
such Deposited Securities until such payment is made. The Depositary may also
deduct from any distributions on or in respect of Deposited Securities, or may
sell by public or private sale for the account of the Holder of an ADR any part
or all of such Deposited Securities (after attempting by reasonable means to
notify the Holder hereof prior to such sale), and may apply such deduction or
the proceeds of any such sale in payment of such tax or other governmental
charge, the Holder hereof remaining liable for any deficiency, and shall reduce
the number of ADSs evidenced hereby to reflect any such sales of FMC Ordinary
Shares. In connection with any distribution to Holders, Fresenius Medical Care
will remit to the appropriate governmental authority or agency all amounts (if
any) required to be withheld and owing to such authority or agency by Fresenius
Medical Care; and the Depositary and the Custodian will remit to the appropriate
governmental authority or agency all amounts (if any) required to be withheld
and owing to such authority or agency by the Depositary or the Custodian. If the
Depositary determines that any distribution in property other than cash
(including FMC Ordinary Shares or Rights) on Deposited Securities is subject to
any tax that the Depositary or the Custodian is obligated to withhold, the
Depositary may dispose of all or a portion of such property in such amounts and
in such manner as the Depositary deems necessary and practicable to pay such
taxes, by public or private sale, and the Depositary shall distribute the net
proceeds of any such sale or the balance of any such property after deduction of
such taxes to the Holders entitled thereto. The Depositary shall work with
Fresenius Medical Care to establish and maintain arrangements with the relevant
tax authorities that assist holders and persons holding beneficial interests in
ADRs in claiming tax refunds, credits or other benefits (pursuant to treaty or
otherwise) relating to distributions on the ADSs. For a description of the
current arrangements, see "CERTAIN INCOME TAX CONSEQUENCES OF THE TRANSACTIONS
TO HOLDERS OF FRESENIUS USA COMMON STOCK -- U.S. and German Tax Consequences of
Holding FMC Ordinary Shares or ADSs -- Refund Procedures."
GENERAL LIMITATIONS
The Depositary, Fresenius Medical Care, their respective officers,
directors and agents and each of them shall: (a) incur no liability (i) if law,
rule or regulation of the U.S., the Federal Republic of Germany or any other
country or of any other governmental or regulatory authority or stock exchange
or Fresenius Medical Care's Articles of Association (Satzung), the provisions of
or governing any Deposited Security, the issuance of any securities by Fresenius
Medical Care, any act of God, war or other circumstance beyond its control shall
prevent, delay or subject to any civil or criminal penalty any act which the
Deposit Agreement or the ADRs provide shall be done or performed by it, or (ii)
by reason of any exercise or failure to exercise any discretion given it in the
Deposit Agreement or the ADRs, (b) assume no liability except to perform its
obligations to the extent they are specifically set forth in the ADRs and the
Deposit Agreement without gross negligence or bad faith, (c) be under no
obligation to appear in, prosecute or defend any action, suit or other
proceeding in respect of any Deposited Securities or the ADRs, or (d) not be
liable for any action or inaction by it in reliance upon the advice of or
information from legal counsel, accountants, any person presenting FMC Ordinary
Shares for deposit, any Holder, or any other person believed by it in good faith
to be competent to give such advice or information. The Depositary, Fresenius
Medical Care and each of their respective
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agents may rely and shall be protected in acting upon any written notice,
request, direction or other document believed by them in good faith to be
genuine and to have been signed or presented by the proper party or parties. The
Depositary may rely upon instructions from Fresenius Medical Care or its German
counsel in respect of any approval or license of the government of Germany or
any agency thereof required for any currency conversion, transfer or
distribution. The Depositary and its agents will not be responsible for any
failure to carry out any instructions to vote any of the Deposited Securities,
for the manner in which any such vote is cast or for the effect of any such
vote, provided that such action or inaction is in good faith. The Depositary and
its agents may own and deal in any class of securities of Fresenius Medical Care
and its affiliates and in ADSs. Fresenius Medical Care has agreed to indemnify
the Depositary and its agents under certain circumstances and the Depositary has
agreed to indemnify Fresenius Medical Care against losses incurred by Fresenius
Medical Care under certain circumstances.
Prior to the issue, registration, registration of transfer, split-up or
combination of any ADR, the delivery of any distribution in respect thereof, or,
the withdrawal of any Deposited Securities, Fresenius Medical Care, the
Depositary or the Custodian may require: (a) payment with respect thereto of (i)
any stock transfer or other tax or other governmental charge, (ii) any stock
transfer or registration fees in effect for the registration of transfers of FMC
Ordinary Shares or other Deposited Securities upon any applicable register and
(iii) any applicable charges as provided in the Deposit Agreement; (b) the
production of proof satisfactory to it of (i) the identity and genuineness of
any signature and (ii) such other information, including, without limitation,
information as to citizenship, residence, exchange control approval, beneficial
ownership of ADRs, Deposited Securities or other securities, compliance with
applicable law, regulations, provisions of or governing Deposited Securities and
terms of the Deposit Agreement and the ADR, as it may deem necessary or proper;
and (c) compliance with such regulations as the Depositary may establish
consistent with the Deposit Agreement. The issuance of ADRs, the acceptance of
deposits of FMC Ordinary Shares, the registration, registration of transfer,
split-up or combination of ADRs or, subject to the requirements of General
Instruction I.A.(1) of Form F-6 (as such instructions may be amended from time
to time) under the Securities Act, the withdrawal of Deposited Securities may be
suspended, generally or in particular instances, when the ADR Register or any
register for Deposited Securities (including the DKV) is closed or when any such
action is deemed necessary or advisable by the Depositary or Fresenius Medical
Care.
GOVERNING LAW
The Deposit Agreement and the ADRs are governed by and will be construed in
accordance with the laws of the State of New York.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
The Depositary is Morgan Guaranty Trust Company of New York, a New York
banking corporation, which has its principal office located in New York, New
York. Morgan Guaranty Trust Company of New York is a commercial bank offering a
wide range of banking and trust services to its customers in the New York
metropolitan area, throughout the U.S. and around the world.
The Consolidated Balance Sheets of J.P. Morgan, the parent corporation of
Morgan Guaranty Trust Company of New York ("J.P. Morgan"), are set forth in the
most recent Annual Report and Form 10-Q. The Annual Report, Form 10-K and Form
10-Q of J.P. Morgan are on file with the Commission.
The Articles of Association and By-Laws of Morgan Guaranty Trust Company of
New York, together with the annual report, Form 10-K and Form 10-Q of J.P.
Morgan will be available for inspection at the Principal New York Office of the
Depositary.
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COMPARISON OF CERTAIN RIGHTS OF
SHAREHOLDERS OF GRACE AND FRESENIUS USA
As a result of the Reorganization, holders of record of Grace Common Stock
and Fresenius USA Common Stock, at the Effective Time, will own ADSs evidencing
FMC Ordinary Shares represented by ADRs. Holders of Grace Common Stock will also
own the New Preferred Shares. The following is a summary of material significant
differences between the rights of holders of Grace Common Stock and Fresenius
USA Common Stock, on the one hand, and the rights of holders of FMC Ordinary
Shares, on the other. These differences arise from differences between the
corporate laws of New York, Massachusetts and Germany, as well as from
differences between Grace's Certificate of Incorporation and By-laws and
Fresenius USA's Restated Articles of Organization and By-laws, on the one hand,
and the Articles of Association (Satzung) of Fresenius Medical Care, on the
other. For a description of the rights of the holders of the New Preferred
Shares, see "DESCRIPTION OF NEW PREFERRED SHARES." Copies of the Certificate of
Incorporation and By-laws of Grace and Articles of Association (Satzung) of
Fresenius Medical Care have been filed as exhibits to the Registration
Statement. Reference is also made to the Grace Amendment attached to this Joint
Proxy Statement-Prospectus as Appendix B. All summaries of such documents set
forth herein are qualified in their entirety by reference to the full documents.
For further information as to where these and other exhibits to the Registration
Statement, as well as Fresenius USA's Restated Articles of Organization and
By-laws, may be obtained, see "AVAILABLE INFORMATION" and "INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE."
DUTIES OF DIRECTORS
GRACE
Section 717(a) of the NYBCL provides that a director shall perform his
duties as director, including his duties as a member of any committee of the
board upon which he may serve, in good faith and with that degree of care which
an ordinarily prudent person in a like position would use under similar
circumstances.
Section 717(b) of the NYBCL permits a board of directors to consider,
including in connection with a change or potential change in control of the
corporation, both the long-term and short-term effects of the decision on the
corporation and, specifically, the effects on: (a) the potential growth,
development, productivity and profitability of the corporation; (b) current
employees; (c) retired employees and other beneficiaries of the corporation
still entitled to receive, directly or indirectly, benefits from the
corporation; (d) customers and creditors of the corporation; and (e) the ability
of the corporation to continuously provide goods, services, employment
opportunities and benefits and make any other contributions to the communities
in which it does business.
FRESENIUS USA
Section 65 of the MBCL provides that a director or officer shall perform
his or her duties in good faith and in a manner he or she reasonably believes to
be in the best interests of the corporation and with such care as an ordinarily
prudent person in a like position would use under similar circumstances. For
limitations on the liability of directors, see "-- Limitation on Directors'
Liability -- Fresenius USA." The MBCL does not specifically set out permissible
considerations for directors evaluating a potential change in control of the
corporation.
FRESENIUS MEDICAL CARE
According to the German Stock Corporation Law, the members of a management
board (Vorstand) manage the stock corporation within their sole responsibility.
Under German law, members of the supervisory board must act in the interest
of the corporation in fulfilling its duties to: (a) appoint and dismiss members
of the management board; (b) approve transactions between the corporation and
members of the management board or their relatives; (c) supervise the management
board; and (d) exercise other approval rights.
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The members of the management board must act with the diligence of an
orderly and conscientious manager and have the burden of proving that they did
so if it is ever contested. Members of the management board also have a duty to
maintain the confidentiality of corporate information. Members of the management
board who violate their duties may be held jointly and severally liable by the
corporation for any resulting damages, unless their actions were validly
approved by resolution at a shareholders' meeting. The members of the
supervisory board have similar liabilities if they violate their duties. For
limitations on the liability of directors, see "-- Limitation on Directors'
Liability -- Fresenius Medical Care."
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
GRACE
Pursuant to the Grace Certificate of Incorporation, the Grace Board is
divided into three classes, and directors are elected to serve staggered
three-year terms. The Grace Certificate of Incorporation provides that the
number of directors of Grace will be not less than nine and not more than 50, as
determined by a majority of the Grace Board, provided that the number of
directors may not be reduced to shorten the term of any incumbent director.
FRESENIUS USA
The Fresenius USA By-laws provide that the number of directors of Fresenius
USA shall be not more than 11 nor less than three. Such number may be increased
by the stockholders or a majority of the directors then in office. Such number
may be decreased, but not below three, by the stockholders or a majority of the
directors then in office, but only to eliminate vacancies existing by reason of
death, resignation or removal.
Until June 26, 1996, the date on which Fresenius AG converted all 200,000
shares of Fresenius USA Series F Preferred Stock into Fresenius USA Common
Stock, the By-laws provided that the Fresenius USA Board consist of an odd
number of directors, and that a majority of such directors be elected by the
holders of the Fresenius USA Series F Preferred Stock ("Preferred Directors")
and the remaining directors be elected by the holders of Fresenius USA Common
Stock ("Common Directors"). Preferred Directors, or directors elected to serve
as a committee by the Preferred Directors, were required to constitute a
majority of all Fresenius USA Board committees (except as otherwise required by
law), and action by the Fresenius USA Board or any committee thereof required
the affirmative vote of at least one Preferred Director or other director
elected to serve by the Preferred Directors.
FRESENIUS MEDICAL CARE
The German Stock Corporation Law provides for two separate bodies: the
management board (Vorstand) and the supervisory board (Aufsichtsrat). The
management board (Vorstand) is the legal representative of the stock corporation
and is responsible for its management. According to Fresenius Medical Care's
Articles of Association, the FMC Management Board consists of at least two
members designated by the FMC Supervisory Board.
For certain matters, as determined in the Articles of Association (Satzung)
and the Rules of Procedure of the Management Board (Geschaftsordnung) of
Fresenius Medical Care, a decision of the FMC Management Board requires the
express prior approval by the FMC Supervisory Board.
The FMC Supervisory Board is responsible for the supervision of the FMC
Management Board and represents the stock corporation with respect to the FMC
Management Board.
The FMC Supervisory Board consists of six members, all of whom are to be
elected by a vote of the majority of the votes cast at a general meeting in
accordance with the German Stock Corporation Law. If and when either (i)
Fresenius Medical Care itself has more than 500 employees or (ii) Fresenius
Medical Care enters into a domination agreement with a German subsidiary having
more than 500 employees, or if such subsidiary is integrated into Fresenius
Medical Care, then one-third of the members of the FMC Supervisory Board will be
elected by the German employees of Fresenius Medical Care and its German
subsidiaries. If and when the aggregate number of employees of Fresenius Medical
Care and its German subsidiaries exceeds
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2,000, the FMC Supervisory Board will be increased to 12 persons, six of whom
will be elected by the holders of FMC Ordinary Shares, and six of whom will be
elected by the German employees of Fresenius Medical Care and its German
subsidiaries. In such case, the Chairman of the FMC Supervisory Board will be
selected from the members elected by the shareholders and will have a casting
(tie-breaking) vote.
The maximum term of office for members of the FMC Management Board is
limited to five years according to the German Stock Corporation Law. According
to the Articles of Association of Fresenius Medical Care, the term of office for
members of the FMC Supervisory Board is limited to four fiscal years. Under
German law, a member of the supervisory board may not be a member of the
management board. The German Stock Corporation Law disregards the fiscal year in
which the term of office begins and extends the term until the shareholders'
meeting in the year following the fourth fiscal year. Accordingly, members of
the FMC Supervisory Board will have a term of nearly five years. Members of both
the FMC Management Board and the FMC Supervisory Board may be re-elected for
additional terms, and there is no limit on the number of such additional terms.
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
GRACE
Directors of Grace may be removed only for cause and only upon the
affirmative vote of a majority of the voting power of all shares of capital
stock of Grace. The Grace By-laws provide that, if a vacancy occurs in any class
of directors, it may be filled by the vote of a majority of the directors
remaining in office, or by the sole remaining director. Any vacancy in the Grace
Board resulting from an increase in the number of directors may be filled by a
vote of directors constituting a majority of the entire Grace Board prior to
such increase. Any director elected by the Grace Board is required to stand for
election at the next annual meeting of shareholders.
FRESENIUS USA
Directors of Fresenius USA may be removed (a) with or without cause by a
majority vote of stockholders, except that directors elected by a class of
stockholders may only be removed by majority vote of such class, or (b) for
cause by a majority of the directors then in office. In case (b), when Fresenius
USA Series F Preferred Stock was outstanding, a Preferred Director could only be
removed by a vote of the Preferred Directors and a Common Director by a vote of
the Common Directors.
If a vacancy occurs in the Fresenius USA Board, such vacancy may be filled
by the stockholders or by a vote of a majority of the directors then in office.
When Fresenius USA Series F Preferred Stock was outstanding, a vacancy among the
Preferred Directors could only be filled by holders of Fresenius USA Series F
Preferred Stock or by the Preferred Directors and a vacancy among the Common
Directors could only be filled by the holders of Fresenius USA Common Stock or
by the Common Directors.
FRESENIUS MEDICAL CARE
The members of the FMC Management Board may be removed by the FMC
Supervisory Board only for reasons amounting to good cause, such as gross breach
of duty, inability to duly fulfill their responsibilities or revocation of
confidence by the shareholders, by a majority vote, at the general or special
meeting. Members of the FMC Supervisory Board elected by the shareholders at the
general meeting may be removed upon the affirmative vote of a majority of at
least 75% of all votes cast by the shareholders at the general or a special
meeting. Any member of the FMC Supervisory Board can be removed for good cause,
including gross breach of duty, by a court decision upon request of the FMC
Supervisory Board. In such case, the FMC Supervisory Board's determination to
take such action requires a simple majority vote with the member affected having
no voting power.
The Articles of Association of Fresenius Medical Care provide that the
shareholders' meeting may appoint substitute members for the FMC Supervisory
Board and may determine the order in which such substitute members will serve
(and which FMC Supervisory Board members they will replace) in case of a
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vacancy. If and when a vacancy occurs in the FMC Supervisory Board, such vacancy
will automatically be filled by a substitute member, who will serve until the
next shareholders' meeting, at which meeting an election shall be held to fill
the vacancy. The FMC Supervisory Board member elected at such shareholders'
meeting holds office until the expiration of the term of the member whose
resignation or removal created the vacancy. If there are no substitute members,
or all substitute members are already serving on the FMC Supervisory Board, the
FMC Management Board, a member of the FMC Supervisory Board or a shareholder,
can ask a court to appoint a FMC Supervisory Board member if (a) there is no
possibility of a quorum because more than half of the FMC Supervisory Board
positions are vacant, or (b) for more than three months, the FMC Supervisory
Board has had fewer members than Fresenius Medical Care's Articles of
Association provide.
SHAREHOLDER NOMINATIONS
GRACE
The Grace By-laws establish procedures that must be followed for
shareholders to nominate individuals for election to the Grace Board.
Nominations by shareholders of individuals for election to the Grace Board must
be made by delivering written notice of such nomination to the Secretary of
Grace not less than 60 days nor more than 90 days prior to the annual meeting at
which directors will be elected, unless the annual meeting takes place on a date
other than the ordinary date specified in the Grace By-laws, in which case
notice by a shareholder to be timely must be so received not later than the
close of business on the 10th day following the date on which notice or
disclosure of the date of the meeting was first given. The nomination notice
must set forth certain information about the shareholder making the nomination,
including name and address, number of shares of capital stock of Grace
beneficially owned, a representation that the shareholder will be a holder of
record of stock entitled to vote at the meeting and intends to appear in person
or by proxy, and a description of any material interest of the shareholder and
each proposed nominee and between proposed nominees. The nomination notice must
set forth certain information about the persons to be nominated, including
information concerning the nominees' principal occupation or employment and the
class and number of shares of Grace that are beneficially owned by such person.
If the presiding officer at the shareholders' meeting determines that a
nomination was not made in accordance with these procedures, the presiding
officer may so declare at the meeting and the nomination will not be acted upon.
FRESENIUS USA
The By-laws of Fresenius USA do not establish procedures that must be
followed for stockholders to nominate individuals for election to the Fresenius
USA Board.
FRESENIUS MEDICAL CARE
If a shareholder wants to nominate individuals for election to the FMC
Supervisory Board other than those recommended by the existing FMC Supervisory
Board, such shareholder can communicate this motion to Fresenius Medical Care
within one week after the publication of the call of the shareholders' meeting
in the German Federal Gazette (Bundesanzeiger). The nomination must contain the
name, the profession and the domicile of the individual. If such communication
is given to the company, the FMC Management Board must, within 12 days after the
publication of the call of the shareholders general meeting in the Federal
Gazette, notify the banks and the shareholders' associations which at the last
general shareholders meeting have exercised voting rights for shareholders or
who have requested such notification, of the calling in of the general
shareholder meeting, the notification of the agenda as well as of the
applications and proposals for elections of shareholders, including the names of
the shareholders and a possible response by the FMC Management Board. The same
notification has to be submitted by the FMC Management Board to shareholders who
have deposited a share with Fresenius Medical Care or who have after the
publication of the call of the general shareholder meeting in the Federal
Gazette requested such notification. In addition, any shareholder can nominate
individuals for the FMC Supervisory Board at the shareholders' general meeting.
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ACTION BY WRITTEN CONSENT
GRACE
Under the NYBCL, whenever shareholders are required or permitted to take
any action by vote, such action may be taken without a meeting on written
consent signed by the holders of all outstanding shares entitled to vote thereon
unless the articles of incorporation authorize written consent of the holders of
less than all outstanding shares. The Grace Certificate of Incorporation does
not authorize action by less than all such holders and, as a practical matter,
since action by written consent must be unanimous, shareholders of Grace cannot
act by written consent.
FRESENIUS USA
The MBCL and the By-laws of Fresenius USA provide that any action required
or permitted to be taken by the stockholders may be taken without a meeting if
all the stockholders entitled to vote consent in writing and such consents are
filed with the records of the meetings of stockholders. Accordingly, as a
practical matter, since action by written consent must be unanimous,
stockholders of Fresenius USA cannot act by written consent.
FRESENIUS MEDICAL CARE
The German Stock Corporation Law does not permit shareholders to act by
written consent outside of the shareholders' general meeting.
MEETINGS OF SHAREHOLDERS
GRACE
A special meeting of shareholders of Grace may be called only by the Grace
Board, the Chairman or the President.
A quorum for a meeting of the shareholders of Grace generally consists of
the holders of shares constituting a majority of the voting power of the
outstanding shares of Grace entitled to vote. A majority of the votes cast is
generally required for an action by the shareholders of Grace. The NYBCL
provides that these quorum requirements may be increased or decreased by a
change to the Certificate of Incorporation or By-laws of Grace (which may be
effected by the Grace Board), so long as the requirement for a quorum does not
fall below one-third of the shares entitled to vote.
FRESENIUS USA
A special meeting of stockholders of Fresenius USA may be called only by
the President of Fresenius USA or the directors.
A quorum for a meeting of the stockholders of Fresenius USA generally
consists of a majority in interest of all stock issued and outstanding and
entitled to vote at the meeting, except that when the Fresenius USA Series F
Preferred Stock was outstanding, a quorum required a majority of the outstanding
shares of each class of stock. A plurality of the votes cast is required to
elect an officer or director and a majority is generally required to decide
other questions. When the Fresenius USA Series F Preferred Stock was
outstanding, except for (a) the election of directors and (b) certain
extraordinary actions, in which cases the Fresenius USA Common Stock and the
Fresenius USA Series F Preferred Stock voted as separate classes, the Fresenius
USA Common Stock and the Fresenius USA Series F Preferred Stock voted as a
single class on all matters submitted to the stockholders, with each share of
Fresenius USA Series F Preferred Stock having a number of votes equal to the
number of shares of Fresenius USA Common Stock into which it could then be
converted.
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FRESENIUS MEDICAL CARE
A special meeting of shareholders of Fresenius Medical Care may be called
by the FMC Management Board or the FMC Supervisory Board. A special meeting of
shareholders must be called by the FMC Management Board upon request of
shareholders holding in the aggregate shares of at least 5% of the nominal value
of all shares outstanding. The written request stating the purpose and reasons
for the special meeting must be forwarded to the FMC Management Board.
There are no quorum requirements for Fresenius Medical Care. Additionally,
resolutions are passed at a general meeting of the shareholders of Fresenius
Medical Care by a majority of the votes cast, unless a higher vote is required
by law or the Articles of Association of Fresenius Medical Care.
SHAREHOLDER PROPOSALS
GRACE
The By-laws of Grace establish procedures that must be followed for a
shareholder to submit a proposal at an annual meeting of the shareholders of
Grace (other than a proposal submitted under the Commission's shareholder
proposal rules). No proposal for a vote may be submitted to the shareholders by
a shareholder unless such submitting shareholder has timely filed with the
Secretary of Grace a written statement setting forth specified information,
including the name and address of the person making the proposal, the class and
number of shares of capital stock of Grace beneficially owned by such person, a
description of the proposal and the reasons for bringing such business before
the annual meeting, a representation that such person is or will be a holder of
record of stock of Grace entitled to vote at such meeting and intends to appear
in person or by proxy to make the proposal, and any material interest of the
shareholder in such business. If the presiding officer at any shareholders'
meeting determines that any such proposal was not made in accordance with these
procedures or is otherwise not in accordance with the law, he or she will so
declare at the meeting and such defective proposal will not be acted upon.
FRESENIUS USA
The By-laws of Fresenius USA do not establish procedures that must be
followed for a stockholder to submit a proposal at an annual meeting of the
stockholders of Fresenius USA.
FRESENIUS MEDICAL CARE
According to the German Stock Corporation Law, shareholders holding in the
aggregate at least 5% of the nominal value of all outstanding shares or holding
in the aggregate shares totalling the nominal value of at least 1 million
Deutschemarks are entitled to require the FMC Management Board to submit a
proposal at the shareholders' general meeting and to publish this proposal in
the German Federal Gazette (Bundesanzeiger). The articles of association of
Fresenius Medical Care provide that a proposal must also be published in The
Wall Street Journal and The New York Times. The request must be made in writing
stating the purpose and the reasons thereof. Proposals duly published may be
submitted to the shareholders' general meeting for decision. In addition, if the
agenda for the meeting is duly published, then shareholders may propose
individuals for election at the general shareholder meeting, even if they have
not availed themselves of the possibility to have this proposal for election
notified by the FMC Management Board.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
GRACE
Under the NYBCL, subject to the provisions of the NYBCL described under
"-- State Anti-takeover Statutes -- Grace," the recommendation of the Grace
Board and the approval of two-thirds of the outstanding voting power of Grace is
required to effect a merger or consolidation, or to sell, lease or exchange
substantially all of Grace's assets. The NYBCL provides that holders of Grace
Preferred Stock are entitled to vote as a class on a merger or consolidation if
the merger or consolidation would have certain adverse effects on such
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holders, such as limiting their voting rights, changing their shares into
different shares, altering their rights, preferences or limitations, or
subordinating their rights by authorizing shares with superior rights.
FRESENIUS USA
Under the MBCL, the vote of two-thirds of the shares of each class of stock
outstanding and entitled to vote is required to effect a consolidation or merger
or a sale, lease or exchange of all or substantially all the corporation's
property and assets. When it was outstanding, the Fresenius USA Series F
Preferred Stock was entitled to vote separately as a class on such transactions.
Since there are no longer shares of Fresenius USA Series F Preferred Stock
issued and outstanding, a two-thirds vote of the holders of the Fresenius USA
Common Stock is required to effect such transactions.
FRESENIUS MEDICAL CARE
According to German law and the Articles of Association of Fresenius
Medical Care, the following resolutions may be passed only by a majority of at
least 75% of the capital represented and a simple majority of the votes cast at
a shareholders meeting: amendments of the Articles of Association, certain
capital increases, capital decreases, a dissolution of Fresenius Medical Care, a
merger of Fresenius Medical Care into or a consolidation of Fresenius Medical
Care with another stock corporation, a transfer of all Fresenius Medical Care's
assets, a change of Fresenius Medical Care's corporate form, and the elimination
of preemptive rights.
AMENDMENT OF CORPORATE CHARTER AND BY-LAWS
GRACE
An amendment to the Certificate of Incorporation of Grace requires the
approval of both the Grace Board and the majority of voting power of all
outstanding shares of capital stock of Grace. Holders of Grace Preferred Stock
may be entitled to vote as a class on amendments to the Certificate of
Incorporation that would have certain adverse effects on such holders, such as
limiting their voting rights. Except as prohibited by the NYBCL, the Grace Board
may adopt, amend or repeal the Grace By-laws without the assent or vote of the
shareholders. The shareholders may amend or repeal the Grace By-laws by an
affirmative vote of the holders of a majority of the voting power of shares
entitled to vote in the election of directors.
FRESENIUS USA
An amendment to the Restated Articles of Organization of Fresenius USA may
be made upon the vote of a majority of each class of stock outstanding and
entitled to vote, except that an amendment which would impair or diminish the
preferences, voting powers, restrictions, qualifications, special or relative
rights or privileges of any outstanding shares would require a two-thirds vote.
When it was outstanding, the Fresenius USA Series F Preferred Stock voted
separately as a class on most amendments to the Restated Articles of
Organization.
The directors of Fresenius USA may make, amend or repeal the Fresenius USA
By-laws, in whole or in part, except with respect to any provision thereof which
by law or by the Fresenius USA By-laws requires action by the stockholders.
FRESENIUS MEDICAL CARE
An amendment to the Articles of Association of Fresenius Medical Care must
be passed by at least 75% of the capital represented at a meeting of
shareholders.
APPRAISAL RIGHTS
GRACE
The NYBCL provides appraisal rights to holders entitled to vote thereon for
(a) certain mergers and consolidations, (b) dispositions of assets requiring
shareholder approval, and (c) certain amendments to the Certificate of
Incorporation which adversely affects the rights of such holders.
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FRESENIUS USA
A stockholder of Fresenius USA who objects to a duly approved
consolidation, merger or sale, lease, or exchange of all or substantially all of
Fresenius USA's property and assets is entitled to appraisal rights upon
following the procedure set out by the MBCL. Such appraisal rights may also be
triggered by an amendment of the Restated Articles of Organization of Fresenius
USA which adversely affects a stockholder.
FRESENIUS MEDICAL CARE
For certain transactions, appraisal rights are provided to Fresenius
Medical Care's shareholders under the German Stock Corporation Law and the
German Transformation Act (Umwandlungsgesetz). These transactions include (a) a
merger, certain asset sales or a change of corporate form if the shareholder
requesting appraisal rights objected to the transaction at the shareholders'
meeting at which the transaction was approved and thereafter filed a claim
requesting adequate compensation; (b) a control and profit transfer agreement
between a controlling shareholder (e.g., Fresenius AG) and its dependent company
(e.g., Fresenius Medical Care) if the (non-controlling) shareholder files a
claim for adequate compensation within two months after publication of the
registration of the agreement; and (c) the forced withdrawal of minority
shareholders from a corporation upon the corporation's integration with its
parent corporation holding shares representing at least 95% of the par value of
the corporation to be integrated if the shareholder files a claim for adequate
compensation within two months after publication of the registration of the
integration.
FAIR PRICE AND ANTI-GREENMAIL PROVISIONS
GRACE
The NYBCL prohibits, subject to certain exceptions, a corporation that is
subject to Section 912 of the NYBCL from purchasing or agreeing to purchase more
than 10% of its stock from a shareholder for more than the market value thereof
unless such purchase or agreement is approved by shareholders. See "-- State
Anti-takeover Statutes -- Grace."
FRESENIUS USA
Neither the Restated Articles of Organization nor the By-laws of Fresenius
USA contain fair price or anti-greenmail provisions.
FRESENIUS MEDICAL CARE
Neither the German Stock Corporation Law nor Fresenius Medical Care's
organizational documents contain any fair price or anti-greenmail provisions.
However, under the German Stock Corporation Law, a stock corporation like
Fresenius Medical Care is generally prohibited from acquiring its own shares,
except for certain defined purposes; for example, to prevent an immediate and
severe damage to the company.
STOCK RIGHTS PLAN
GRACE
Each share of Grace Common Stock has an attendant Grace Right. The Grace
Rights may have certain anti-takeover effects, but are not, and will not become,
exercisable unless and until certain events occur.
The Grace Rights may be redeemed by Grace at $.025 per Grace Right (payable
in cash, Grace Common Stock or any other form of consideration deemed
appropriate by the Grace Board) at any time through the 10th business day (or
such later business day as may be fixed by the Grace Board) after a public
announcement that a person or group has become an "interested shareholder," as
defined in the Grace Rights Agreement; this right of redemption may be
reinstated if all interested shareholders reduce their holdings to 10% or less
of the outstanding Grace Common Stock. The Grace Rights will expire in January
1997. In contemplation of the Reorganization, the Grace Board authorized the
amendment of the Grace Rights so as to prevent the Grace Rights from becoming
exercisable as a result of such transaction and the other transactions
contemplated by the Reorganization Agreement.
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FRESENIUS USA
Fresenius USA does not have a stock rights plan.
FRESENIUS MEDICAL CARE
Fresenius Medical Care does not intend to adopt a stock rights plan.
STATE ANTI-TAKEOVER STATUTES
GRACE
Section 912 of the NYBCL prohibits a "business combination" (as defined in
Section 912 of the NYBCL, generally including mergers, sales and leases of
assets, issuances of securities and similar transactions) by Grace or a Grace
subsidiary with an "interested shareholder" (as defined in Section 912 of the
NYBCL, generally the beneficial owner of 20% or more of Grace's voting stock)
within five years after the person or entity becomes an interested shareholder,
unless (a) prior to the person or entity becoming an interested shareholder, the
business combination or the transaction pursuant to which such person or entity
became an interested shareholder has been approved by the Grace Board, or (b)
the business combination is approved by the holders of a majority of the
outstanding voting power of Grace, excluding shares held by the interested
shareholder, at a meeting called for such purpose no earlier than five years
after such interested shareholder's stock acquisition date. In addition, Section
912 specifies certain minimum consideration that must be paid in a business
combination. In connection with approving the Reorganization Agreement, the
Grace Board approved the Reorganization, so that it is not subject to the
limitations set forth in Section 912 of the NYBCL.
FRESENIUS USA
Chapter 110F of the Massachusetts General Laws Annotated ("MGLA") regarding
business combinations with interested stockholders provides that a corporation
may not engage in any business combination with any interested stockholder for a
period of three years following the date such stockholder became an interested
stockholder unless (a) the board of directors approved the combination or
transaction which resulted in the stockholder becoming an "interested
stockholder", (b) the interested stockholder owned at least 90% of the voting
stock at the time the transaction commenced or (c) the business combination is
approved by the board of directors and authorized by the vote of at least
two-thirds of the outstanding voting stock which is not owned by the interested
stockholder. Fresenius AG became an interested stockholder of Fresenius USA
(then called Delmed, Inc.) in 1987 when it acquired more than 5% of the
outstanding voting stock of Fresenius USA, so that the Reorganization is not
subject to the restrictions set forth in Section 1 of Chapter 110F of the MGLA.
Massachusetts law contains certain other anti-takeover statutes regarding
the regulation of takeover bids in the acquisition of corporations and the
regulation of control share acquisitions. These statutes are inapplicable to the
Reorganization.
FRESENIUS MEDICAL CARE
German law does not specifically regulate business combinations with
interested stockholders; however, special provisions apply to "dominating
enterprises." An enterprise holding a majority in interest is presumed to
dominate the company in which such interest is held. If no "contract of
domination" (i.e., an agreement pursuant to which the majority shareholder
effectively assumes management of the majority held company and, as a
consequence, takes liability for its obligations) exists, then a dominating
enterprise may not use its influence to cause a dependent stock corporation to
enter into transactions disadvantageous to it or to take or fail to take
measures to its disadvantage except when the disadvantages are compensated for,
and the dominating corporation may be held liable to the dependent corporation
for failure to observe this restriction. Unless a contract of domination is in
effect, the management board (Vorstand) of a dependent corporation must prepare
an annual report on the relations of the corporation with the dominating
enterprise. This report
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must be examined by both the auditors of the dependent corporation and its
supervisory board (Aufsichtsrat). Fresenius AG has no present intention to enter
into a contract of domination with Fresenius Medical Care. Such a contract of
domination would require approval of 75% of the share capital represented at a
meeting. Such report is required to specify all transactions entered into by
Fresenius Medical Care during the previous fiscal year with Fresenius AG or any
of its affiliates (the "FAG Group"), or at the instruction or in the interest of
any of the FAG Group and all other acts which Fresenius Medical Care has
undertaken or refrained from undertaking at the instruction or in the interest
of any of the FAG Group. Such report is required, in the case of a transaction,
to specify any consideration given or received, and in the case of acts
undertaken to state the reasons for such acts and the advantages and
disadvantages for Fresenius Medical Care. Such report is further required, in
the case of a compensation for disadvantages, specify the manner in which such
compensation was made during the fiscal year and for which measures Fresenius
Medical Care has been granted an entitlement. Generally, such report must comply
with the principles of conscientious and accurate accounting. Moreover, the
Fresenius Medical Care Management Board shall, at the end of such report,
comment on whether Fresenius Medical Care, under the circumstances known to the
Fresenius Medical Care Management Board at the date on which Fresenius Medical
Care entered into such transaction or undertook or refrained from undertaking
such act, received adequate consideration for each such transaction or suffered
any disadvantage by reason of undertaking or refraining from undertaking such
act. As a general matter, subject to certain exceptions, as long as Fresenius AG
holds a majority of the capital stock or the voting rights in Fresenius Medical
Care and has the right to determine the composition of the supervisory board of
such company, the FMC Management Board will be required to prepare and provide
such a report and provide such an examination.
LIMITATION ON DIRECTORS' LIABILITY
GRACE
Under Section 402 of the NYBCL, a corporation may limit or eliminate the
personal liability of directors to the corporation or its shareholders for
damages for breach of duty in such capacity. This limitation on liability is not
available for acts or omissions by a director which (a) were in bad faith, (b)
involved intentional misconduct or a knowing violation of law, (c) involved
financial profit or other advantage to which the director was not entitled or
(d) resulted in a violation of a statute prohibiting certain dividend
declarations, certain payments to shareholders after dissolution and particular
types of loans. The Grace Certificate of Incorporation provides for the
limitation on directors' liability as permitted by this statute.
FRESENIUS USA
Section 65 of the MBCL provides that a director or officer must perform his
or her duties in good faith and in a manner he or she reasonably believes to be
in the best interests of the corporation and with such care as an ordinarily
prudent person in a like position would use under similar circumstances. The
fact that a director or officer so performs his or her duties must be a complete
defense to any claim asserted against him or her, whether under Sections 61-64
of the MBCL concerning illegal distributions, certain loans, certain false
material representations and certain false statements, or otherwise, except as
expressly provided by statute, by reason of his or her being or having been a
director or officer.
The Restated Articles of Organization of Fresenius USA provide that, except
to the extent provided by the MBCL, no directors shall be liable for any breach
of fiduciary duty.
FRESENIUS MEDICAL CARE
Under compulsory provisions of the German Stock Corporation Law, a stock
corporation is not allowed to limit or eliminate the personal liability of the
members of either the management board (Vorstand) or the supervisory board
(Aufsichtsrat) for damages due to breach of duty in their official capacity. For
a discussion of the standard of conduct of the management board and the
supervisory board, see "-- Duties of Directors -- Fresenius Medical Care."
Fresenius Medical Care may, however, waive its claims for damages due to a
breach of duty or reach a settlement with regard to such claims if more than
three years have passed after such claims
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have arisen, but only with the approval of the general shareholder meeting,
provided that such waiver may not be granted and such settlement may not be
reached if shareholders holding in the aggregate at least 10% of the nominal
capital file an objection to the protocol. If the claim for damages is based
upon the allegation that the members of the FMC Management Board have, in
violation of their duties, not listed a transaction of Fresenius Medical Care
with Fresenius AG in the dependency report required to be listed therein or have
not stated therein that the transaction with Fresenius AG was detrimental to
Fresenius Medical Care and Fresenius Medical Care was not compensated therefor,
then the above waiver or settlement of the claim is only permitted if the
necessary shareholder approval has been granted by a special vote of the
minority shareholders.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
GRACE
Sections 722 and 723 of the NYBCL provide that a corporation may indemnify
its officers and directors party to any action, suit or proceeding by reason of
the fact that he or she was a director, officer or employee of the corporation
by, among other things, a majority vote of a quorum consisting of directors who
were not parties to such action, suit, or proceeding, provided that such
officers and directors acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation. The
Grace By-laws provide for indemnification of officers and directors as permitted
by this statute.
FRESENIUS USA
Section 67 of the MBCL provides that a corporation may indemnify its
directors, officers, employees or other agents to the extent specified in the
articles of organization, by-laws, or by a majority vote of the stockholders.
The By-laws of Fresenius USA provide for indemnification, to the extent legally
permissible, of each of its directors and officers against all liabilities and
expenses reasonably incurred in connection with his or her defense or
disposition of any action, suit or proceeding in which he or she may be involved
or with which he or she may be threatened by reason being or having been a
director or officer unless such director or officer did not act in good faith in
the reasonable belief that his or her action was in the best interests of the
corporation. Compromise payments pursuant to consent decrees are excluded from
such indemnification under certain circumstances.
FRESENIUS MEDICAL CARE
Under German law, Fresenius Medical Care may indemnify its officers and,
under certain circumstances, German labor law requires a stock corporation to do
so. However, Fresenius Medical Care may not, as a general matter, indemnify
members of the FMC Management Board or the FMC Supervisory Board. A stock
corporation may, however, purchase directors and officers insurance, and
Fresenius Medical Care intends to do so if available at commercially reasonable
rates and on commercially reasonably terms and conditions. Such insurance may be
subject to any mandatory restrictions imposed by German law. In addition,
German, law may permit a corporation to indemnify a member of the management or
supervisory board for attorneys fees incurred if such member is the successful
party in a suit in a country such as the U.S., where winning parties are
required to bear their own costs, if German law would have required the losing
party to pay such member's attorneys' fees had the suit been brought in Germany.
CUMULATIVE VOTING
GRACE
Grace does not permit cumulative voting.
FRESENIUS USA
Fresenius USA does not permit cumulative voting.
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FRESENIUS MEDICAL CARE
The German Stock Corporation Law does not allow cumulative voting without
the approval of the relevant authority in the German state of the stock
corporation's domicile. The Articles of Association of Fresenius Medical Care
will not provide for cumulative voting.
CONFLICT-OF-INTEREST TRANSACTIONS
GRACE
Section 713 of the NYBCL permits contracts or transactions between a
corporation and an interested director if the material facts as to such
director's interest are disclosed in good faith or known to the board or a
committee thereof and the board approves the contract or transaction by a vote
sufficient for such purpose without counting the interested director, or, if
such a vote is not possible, by unanimous vote of disinterested directors. The
NYBCL also provides that such contracts or transactions are also permitted if
the material facts as to such director's interest are disclosed in good faith or
known to the shareholders and are approved by a vote of the shareholders.
FRESENIUS USA
The MBCL does not specifically address "interested party" transactions
other than loans made to directors and officers. See "-- Loans to
Directors -- Fresenius USA." The Restated Articles of Organization of Fresenius
USA permit certain transactions in which directors, officers or stockholders
have certain interests, provided that there has been disclosure of the nature of
the interest and authorization or ratification of the transaction by a majority
of the disinterested directors or by a majority of each class of stockholders
entitled to vote.
FRESENIUS MEDICAL CARE
In any transactions and contracts between Fresenius Medical Care and any
member of the FMC Management Board, Fresenius Medical Care is represented by the
FMC Supervisory Board. Under German statutory law, for as long as Fresenius AG
holds a majority in interest of the FMC Ordinary Shares and Fresenius Medical
Care is dependent on Fresenius AG within the meaning of the applicable German
law (which will be the case immediately following the Reorganization), the FMC
Management Board will be required to prepare an annual dependency report for the
FMC Supervisory Board on the transactions between Fresenius Medical Care and its
majority shareholder Fresenius AG. See "-- State Anti-takeover Statutes." Under
the Pooling Agreement, subject to certain exceptions, transactions between
Fresenius Medical Care and Fresenius AG (or their respective affiliates) will
require the consent of a majority of the Independent Directors on the FMC
Supervisory Board. See "-- State Anti-takeover Statutes."
DIVIDENDS AND OTHER DISTRIBUTIONS
GRACE
The NYBCL generally allows dividends to be paid out of surplus of the
corporation only, so that the net assets of the corporation remaining after such
payment shall be at least equal to the amount of its stated capital.
FRESENIUS USA
Section 61 of the MBCL holds directors jointly and severally liable for the
authorization of dividends in violation of a corporation's articles of
organization or which render the corporation insolvent or is made while the
corporation is insolvent. This liability is subject to certain limitations. See
"-- Limitation on Directors' Liability -- Fresenius USA." The Fresenius USA
Restated Articles of Organization specify that all paid-in-surplus will be
available for any corporate purpose, including the payment of dividends.
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FRESENIUS MEDICAL CARE
According to the German Stock Corporation Law dividends may be paid out of
surplus of the corporation provided that the net assets of the corporation
remaining after such payment are at least equal to the amount of its stated
capital.
ISSUANCE OF RIGHTS OR OPTIONS TO PURCHASE SHARES TO DIRECTORS, OFFICERS AND
EMPLOYEES
GRACE
The NYBCL requires that the issuance to directors, officers and/or
employees of rights or options to purchase shares must be authorized by a
majority of the total voting power of all of Grace's outstanding capital stock.
FRESENIUS USA
Neither the MBCL nor the Restated Articles of Organization of Fresenius USA
specifically provide for stockholder authorization of the issuance of rights or
options to directors, officers and/or employees.
FRESENIUS MEDICAL CARE
Fresenius Medical Care intends to provide the equivalent of stock options
to Fresenius Medical Care management and employees by issuance of convertible
bonds that would be exercisable for FMC Preferred Shares issued under
Conditional Capital. See "MANAGEMENT OF FRESENIUS MEDICAL CARE -- Compensation
of the FMC Management Board and Certain Other Executive Officers -- Stock Option
Plan." However, Fresenius AG knows of no such program that has ever been
implemented by a German corporation or been subject to court review in Germany.
Therefore, no assurance can be given that such program will be accepted by the
courts, particularly because FMC Preferred Shares issued under Conditional
Capital are not subject to preemptive rights of existing shareholders, who may
contest such elimination of preemptive rights. See "DESCRIPTION OF CAPITAL STOCK
OF FRESENIUS MEDICAL CARE -- General."
Stock option plans for employees can also be effected by the acquisition of
the company's own shares by Fresenius Medical Care; such acquisitions are
restricted to 10% of the share capital outstanding at the time of the
acquisition and the shares thus acquired must be issued to the employees within
one year from the date of the acquisition by Fresenius Medical Care. Such
acquired shares cannot be issued to management.
LOANS TO DIRECTORS
GRACE
The NYBCL requires that any loan made by a corporation to any director be
authorized by a vote of the shareholders. For purposes of this authorization,
the shares held by the director who would be the borrower are not entitled to
vote. A loan made in violation of the above conditions shall be a violation of
the duty to the corporation of the directors approving it, but the obligation of
the borrower with respect to the loan shall not be affected thereby.
FRESENIUS USA
Section 62 of the MBCL provides that the directors who vote for, and the
officers who knowingly participate in, any loan from the corporation to an
officer or director will be jointly and severally liable to the corporation for
any portion of such loan which is not repaid unless a majority of disinterested
directors or the holders of a majority of shares entitled to vote for such
directors will have approved and ratified the loan as in the corporate interest.
Section 65 of the MBCL limits the imposition of liability under Section 62 of
the MBCL. See "-- Limitation on Directors' Liability -- Fresenius USA."
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<PAGE> 250
FRESENIUS MEDICAL CARE
The German Stock Corporation Law requires that any loan made by Fresenius
Medical Care exceeding a month's salary to any director or general manager or to
their spouses or minor children must be authorized by a resolution of the FMC
Supervisory Board. Loans made by Fresenius Medical Care to a member of the FMC
Supervisory Board require an affirmative vote of the FMC Supervisory Board. For
purposes of this resolution, the member of the FMC Supervisory Board who would
be the borrower is not entitled to vote.
CLASS ACTION SUITS
GRACE
New York law permits class actions in cases where (a) class is so numerous
that joinder of all members, whether otherwise required or permitted, is
impracticable, (b) there are questions of law or fact common to the class which
predominate over any questions affecting only individual members, (c) the claims
or defenses of the representative parties are typical of the claims or defenses
of the class, (d) the representative parties will fairly and adequately protect
the interests of the class, and (e) a class action is superior to other
available methods for the fair and efficient adjudication of the controversy.
FRESENIUS USA
Massachusetts law permits class action suits if (a) the class is so
numerous that joinder of all members is impracticable, (b) there are common
questions of law or fact, (c) the claims or defenses of the representative
parties are typical of the claims or defenses of the class and (d) the
representative parties will fairly and adequately protect the interests of the
class. A court will permit an action to be maintained as a class action if it
finds that the above requirements are satisfied, common questions of law or fact
predominate over questions affecting only individual members, and a class action
is superior to other methods of adjudication of the controversy.
FRESENIUS MEDICAL CARE
German law does not provide for class actions.
SHAREHOLDER DERIVATIVE AND BREACH OF FIDUCIARY DUTY SUITS
GRACE
Section 626 of the NYBCL permits actions to be brought in the right of a
domestic or foreign corporation by holders of shares or of voting certificates
of the corporation or of a beneficial interest in such shares or certificates.
In such action, the plaintiff must be such a holder at the time of bringing the
action and the plaintiff must have been such a holder at the time of the
transaction complained of or who received such shares by operation of law from
someone who was such a holder at such time.
FRESENIUS USA
Section 46 of the MBCL permits suits by stockholders owning stock in the
corporation at the time of the act or default complained of or by stockholders
who received such stock by operation of law from someone who was a stockholder
at such time. Courts have interpreted Section 46 of the MBCL as permitting such
stockholder derivative suits and breach of fiduciary duty suits.
FRESENIUS MEDICAL CARE
The German Stock Corporation Law does not generally permit shareholder
derivative suits, even in the case of breach of duty by the members of the
management board or the supervisory board. The shareholders' general meeting,
acting by a simple majority of the votes cast, or a minority of the shareholders
holding in the aggregate at least 10% of the nominal capital, are entitled to
request Fresenius Medical Care to claim damages, but are not entitled to assert
any rights on behalf of Fresenius Medical Care. Upon such request, the
corporation will prosecute such claim. The general shareholders meeting may
appoint any disinterested party
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as a special representative for these proceedings. To avoid abuse, shareholders
exercising the minority right described above must establish that they have held
their shares for at least three months prior to the general shareholders meeting
in which they make the request. The shareholder group must reimburse Fresenius
Medical Care for all costs of litigation if such proceedings are successful.
The German Stock Corporation Law does permit certain shareholder suits,
however, if a stock corporation is controlled by another company. According to
Sections 309, 317 and 318 of the German Stock Corporation Law, each shareholder
of the controlled company may, under certain circumstances, claim that the
controlled company's damages are due to breach of duty of the controlling
company or due to directives of the controlling company detrimental to the
controlled company's interests. Since Fresenius AG will control Fresenius
Medical Care through its majority vote, suits by shareholders of Fresenius
Medical Care against Fresenius AG would be permitted under German law.
RIGHT TO INSPECT CORPORATE BOOKS AND RECORDS; RIGHT TO INSPECT SHAREHOLDER LISTS
GRACE
Section 624 of the NYBCL provides a right of inspection of a corporation's
books, records and shareholders lists to any person who shall have been a
shareholder for at least six months immediately preceding his or her demand or
any person holding at least 5% of a class of outstanding shares on at least five
days written demand.
FRESENIUS USA
Massachusetts law provides that Fresenius USA must keep certain corporate
books and records at its principal office in the Commonwealth for inspection by
its stockholders. These books and records are competent evidence in any court in
the Commonwealth. If any officer or agent of the corporation shall refuse to
submit them as evidence, he or she or the corporation shall be liable for actual
damages to the stockholder, and the courts of the Commonwealth shall have
jurisdiction to require the corporation to exhibit such books and records to the
stockholder. It shall be a defense of the corporation that the stockholder
intended to inspect the books and records other than in his interest relative to
the affairs of the corporation.
The Restated Articles of Organization of Fresenius USA provide that no
stockholder shall have any right to examine any property or books, accounts or
other writings of Fresenius USA if there is reasonable ground for belief that
such examination will for any reason be adverse to the interests of Fresenius
USA. Furthermore, a vote of the directors refusing permission is prima facie
evidence that such examination would be adverse to the interests of Fresenius
USA. The Restated Articles of Organization of Fresenius USA also provide that
every permitted examination of books and records will be subject to such
reasonable regulations as the directors may establish with respect to such
examination.
FRESENIUS MEDICAL CARE
The German Stock Corporation Law does not permit shareholders to inspect
corporate books and records. Section 131 of the German Stock Corporation Law,
however, does provide each shareholder with a right to information. German
courts have extended this information right to include information about the
existence and the scope of minority stock ownership, obligating the management
board to give information with respect to ownership of at least 10% of the
voting rights or exceeding 10% of the stated capital or if the ownership is
large in absolute terms (e.g., DM 100 million for large enterprises).
The right to information is a right only to oral information at a
shareholders meeting. Information may be given in writing to shareholders, but
they are neither entitled to receive written information nor to inspect any
documents of the corporation. As a practical matter, shareholders may receive
certain written information about Fresenius Medical Care through its public
filings with the Commercial Register and the Federal Gazette or the other places
for publications of the company.
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SEC REPORTING
GRACE AND FRESENIUS USA
Each of Grace and Fresenius USA is subject to the informational
requirements of the Exchange Act and, in accordance therewith, each files
periodic reports and other information with the Commission. The reports filed by
Grace and Fresenius USA with the Commission include Annual Reports on Form 10-K
and Quarterly Reports on Form 10-Q. Grace and Fresenius USA are also subject to
the Commission's proxy rules and, when soliciting proxies, are required to
distribute proxy statements in conformity with such rules. Proxy statements for
annual meetings must be accompanied or preceded by an annual report to
shareholders containing certain required disclosures. Officers, directors and
10% beneficial owners of Grace Common Stock and Fresenius USA's equity
securities are subject to the reporting requirements and short-swing profit
recovery provisions of Section 16 of the Exchange Act.
FRESENIUS MEDICAL CARE
Fresenius Medical Care will be a "foreign private issuer" as defined in the
Commission's rules and certain disclosure requirements of the Commission's rules
applicable to domestic issuers will not apply to it. Fresenius Medical Care will
not be subject to the Commission's proxy rules or the Commission's rules
requiring the filing of quarterly reports. Annual reports filed by Fresenius
Medical Care with the Commission will contain less detailed disclosure regarding
such matters as management, executive compensation and outstanding options,
beneficial ownership of Fresenius Medical Care's securities and related party
transactions. Also, officers, directors and 10% beneficial owners of Fresenius
Medical Care's equity securities will not be subject to the reporting
requirements and short-swing profit recapture provisions of Section 16 of the
Exchange Act. However, Fresenius Medical Care has agreed that as long as the
Pooling Agreement is in effect, Fresenius Medical Care will file quarterly
reports under cover of Form 6-K, will prepare its annual and quarterly financial
statements in accordance with US GAAP and will file with the Commission and
provide to shareholders (including holders of ADRs) certain materials with
respect to its annual and special meetings of shareholders. See "DESCRIPTION OF
THE POOLING AGREEMENT -- Listing of American Depository Shares; SEC Filings" and
"-- Term."
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AMENDMENT TO THE FRESENIUS USA 1987 STOCK OPTION PLAN
The Fresenius USA Board believes that the granting of stock options is an
effective method of recruiting and retaining valuable management personnel.
Stock options also serve to provide incentive and to strengthen the identity of
interests between key employees, Fresenius USA and the stockholders.
On July 17, 1995, the Fresenius USA Board, subject to approval by the
stockholders, adopted the Fresenius USA Plan Amendment fixing the maximum number
of shares for which options thereunder may be granted to any individual under
the Fresenius USA Plan at 1,000,000 shares. Also on that date, the Compensation
Committee of the Fresenius USA Board (the "Fresenius USA Compensation
Committee") granted options to Dr. Ben Lipps contingent upon stockholder
approval of the Fresenius USA Plan Amendment. Currently, there are 2,000,000
shares available under the Fresenius USA Plan.
THE FRESENIUS USA PLAN
The following summary of the material terms of the Fresenius USA Plan is
qualified in its entirety by the terms of the Fresenius USA Plan, a copy of
which, as proposed to be amended by the Fresenius USA Plan Amendment, is
included as Appendix E to this Joint Proxy Statement-Prospectus. The Fresenius
USA Plan provides for granting to key employees options to purchase Fresenius
USA Common Stock by the Fresenius USA Compensation Committee. The Fresenius USA
Compensation Committee administers the Fresenius USA Plan, determining, among
other things the amount and terms of grants. There are outstanding under the
Fresenius USA Plan non-incentive and incentive stock options, all of which vest
over a period of not more than five years from the date of grant, expire not
more than 10 years from the date of grant and are exercisable at prices not less
than 100% of the fair market value of Fresenius USA Common Stock on the date of
grant. Options granted under the Fresenius USA Plan are exercisable on such
terms as are determined by the Fresenius USA Compensation Committee or the
Fresenius USA Board. In 1990, the Fresenius USA Plan was amended to increase the
number of shares of Fresenius USA Common Stock reserved for issuance from
110,000 shares to 500,000 shares, and, in 1994, the Fresenius USA Plan was
amended to increase the number of shares of Fresenius USA Common Stock reserved
for issuance from 500,000 shares to 2,000,000 shares. As of March 31, 1996,
without giving effect to the Fresenius USA Plan Amendment or to the grant of
options made to Dr. Lipps subject to the approval of the stockholders of
Fresenius USA, 1,284,000 shares were subject to outstanding options under the
Fresenius USA Plan at an average per share exercise price of $6.73. All key
employees of Fresenius USA are eligible to be awarded grants of options under
the Fresenius USA Plan, subject to the determination of the Fresenius USA
Compensation Committee.
The following table summarizes the options granted under the Fresenius USA
Plan in 1995, subject to stockholder approval of the Fresenius USA Plan
Amendment, to the persons specified:
<TABLE>
<CAPTION>
NAME AND POSITION DATE GRANTED SHARES EXERCISE PRICE
- ------------------------------------------------------ ------------- ------- --------------
<S> <C> <C> <C>
Ben J. Lipps.......................................... July 17, 1995 450,000 $12.75
President, Chief Executive Officer and Chief
Operating Officer
All Current Executive Officers as a Group............. July 17, 1995 450,000 $12.75
All Current Directors who are not Executive Officers
as a Group.......................................... 0
All Employees who are not Executive Officers as a
Group............................................... 0
</TABLE>
Based on the closing price of Fresenius USA Common Stock on the AMEX on
July 18, 1996, Dr. Lipps' options have an aggregate value of $2,418,750, equal
to the excess of such closing price over the exercise price of the options.
However, Dr. Lipps may sell such options to Fresenius USA. See "FRESENIUS USA
EXECUTIVE COMPENSATION -- Securities Repurchases."
On May 6, 1996 the Fresenius USA Compensation Committee voted to accelerate
the vesting of all outstanding unvested options under the Fresenius USA Plan
held by persons subject to Section 16(b) of the Exchange Act (comprising Dr.
Lipps and Messrs. Farrell, Schmidt and Walker), thereby making all such options
presently exercisable.
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TERMS OF THE GRANT TO DR. LIPPS
On July 17, 1995, subject to stockholder approval of the Fresenius USA Plan
Amendment, the Fresenius USA Compensation Committee granted to Dr. Lipps options
to purchase 450,000 shares of Fresenius USA Common Stock at $12.75 per share.
These options become exercisable over 10 years, with accelerated exercisability
if certain targets for the price of Fresenius USA Common Stock are satisfied.
Specifically, the options become exercisable as to 50% of these shares on the
day that is the 10th consecutive trading day on which the closing price of
Fresenius USA Common Stock on the AMEX equals or exceeds $16.00, and as to the
remaining 50% on the day that is the 10th consecutive trading day on which such
closing price equals or exceeds $20.00. Because these stock price targets have
been satisfied, all of such options will be exercisable upon approval of the
Fresenius USA Plan Amendment by the stockholders of Fresenius USA. By voting to
approve the Fresenius USA Plan Amendment, holders of Fresenius USA Common Stock
are voting to approve the grant to Dr. Lipps. Fresenius AG has agreed that it
will vote all shares of Fresenius USA Common Stock it beneficially owns in favor
of the Fresenius USA Plan Amendment, thus assuring approval of the Fresenius USA
Plan Amendment.
Because of certain limitations contained in Section 422 of the Code, and
the earlier grants in 1989 and 1993 of other stock options to Dr. Lipps, none of
the options granted to Dr. Lipps in July 1995 (subject to stockholder approval
of the Fresenius USA Plan Amendment) is an "incentive stock option" as defined
in Section 422 of the Code. The tax treatment of options which are not
"incentive stock options" is that, at the time of exercise, the holder of such
an option recognizes income equal to the excess of the fair market value of the
stock received over the exercise price and Fresenius USA has a corresponding
deduction.
EFFECT OF THE AMENDMENT
After giving effect to the Fresenius USA Plan Amendment and the grant to
Dr. Lipps, the Fresenius USA Plan will essentially be unchanged other than the
specification of the maximum number of shares (1,000,000) available for options
granted to any individual under the Fresenius USA Plan. For information with
respect to the treatment of outstanding options to purchase Fresenius USA Common
Stock in the Reorganization, see "THE REORGANIZATION -- Exchange of
Certificates."
For information with respect to the repurchase by Fresenius USA of certain
options granted under the Fresenius USA Plan and shares of Fresenius USA Common
Stock, see "FRESENIUS USA EXECUTIVE COMPENSATION -- Securities Repurchases."
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EXPERTS
The special-purpose, consolidated financial statements of Grace as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 included in this Joint Proxy Statement-Prospectus have been so
included in reliance on the report, which includes explanatory paragraphs
describing the purpose of presenting Grace special-purpose, consolidated
financial statements, of Price Waterhouse LLP, independent accountants, given on
their authority as experts in accounting and auditing.
The consolidated financial statements and financial statement schedule of
Fresenius USA and subsidiaries as of December 31, 1995 and 1994 and for each of
the years in the three-year period ended December 31, 1995 have been included in
this Joint Proxy Statement-Prospectus and in the Registration Statement of which
it forms a part in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The combined financial statements and financial statement schedule of
Fresenius Worldwide Dialysis as of December 31, 1995 and 1994, and for the years
then ended, have been included in this Joint Proxy Statement-Prospectus and in
the Registration Statement of which it forms a part, in reliance upon the report
of KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, independent accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The Fresenius USA Board has appointed the firm of KPMG Peat Marwick LLP,
certified public accountants, as independent accountants for Fresenius USA for
the year 1996.
Representatives of Price Waterhouse LLP and KPMG Peat Marwick LLP are
expected to be present at the Grace Special Meeting and the Fresenius USA
Special Meeting, respectively. These representatives will have an opportunity to
make statements if they so desire and will be available to respond to
appropriate questions.
VALIDITY OF SHARES
The validity of the FMC Ordinary Shares underlying the ADSs to be issued
pursuant to the Reorganization will be passed upon for Fresenius Medical Care by
Norr, Stiefenhofer & Lutz, special German counsel for Fresenius Medical Care,
and the validity of the ADRs evidencing the ADSs offered hereby will be passed
upon by O'Melveny & Myers LLP, special U.S. counsel to Fresenius AG and
Fresenius Medical Care. Dr. Dieter Schenk, a member of the firm of Norr,
Stiefenhofer & Lutz, will be Deputy Chairman of the FMC Supervisory Board.
Ulrich Wagner, a member of the firm of O'Melveny & Myers LLP, is a member of the
Fresenius USA Board. Dr. Alfred Stiefenhofer, a member of the firm of Norr,
Stiefenhofer & Lutz, is one of the executors of the estate of Mrs. Else Kroner
(see "SECURITY OWNERSHIP -- Security Ownership of Certain Beneficial Owners and
Management of Fresenius AG") and is the Chairman of the Fresenius AG Supervisory
Board. The validity of the New Preferred Shares will be passed upon by Robert H.
Beber, Executive Vice President and General Counsel of Grace. Mr. Beber
beneficially owns shares of Grace Common Stock, as well as options to acquire
Grace Common Stock.
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SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder wishing to submit a proposal for inclusion in the Proxy
Statement for the 1997 Grace Annual Meeting of Shareholders pursuant to the
shareholder proposal rules of the Commission must submit the proposal by
December 11, 1996 in order for it to be considered for inclusion in the 1997
Proxy Statement.
If the Reorganization is consummated, Fresenius USA will not convene an
annual meeting of stockholders. If for any reason this Reorganization is not
consummated, stockholder proposals intended to be presented at the Fresenius USA
1997 Annual Meeting of Stockholders must be received at Fresenius USA's
principal executive offices no later than February 1, 1997.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Abbott.................................. 69
Abbott Acquisition...................... 96
Abbott Letter of Credit................. 169
Abbott Warrant.......................... 168
Acquisition Proposal.................... 62
ADRs.................................... C2
ADSs.................................... C2
AMI..................................... 179
Amicon.................................. 44
ANDA.................................... 119
Anniversary Date........................ 183
Apria................................... 116
Approved Capital I...................... 210
Approved Capital II..................... 210
Arrangers............................... 194
AW...................................... 185
Base Rate............................... 194
Baxter.................................. 38
Bennett Action.......................... 141
Bonds................................... 183
CAPD.................................... 81
Cash.................................... 218
CCPD.................................... 81
Claim Refund Form....................... 203
CLIA.................................... 121
Code.................................... 29
Commission.............................. i
Common Directors........................ 226
Comparable Companies.................... 44
Composite Rate.......................... 25
CON..................................... 122
Consent Decree.......................... 25
Contribution............................ C2
Contribution Agreement.................. C2
Coordination of benefits period......... 126
Counsel................................. 197
Covered Period.......................... 140
CS First Boston......................... 7
Court................................... 75
Custodian............................... 217
DCF..................................... 54
Debt.................................... 66
Delivery Order.......................... 217
Delmed.................................. 97
Deposit Agreement....................... 64
Depositary.............................. ii
Deposited Securities.................... 217
Distribution............................ C2
Distribution Agreement.................. C2
<CAPTION>
PAGE
-----
<S> <C>
Distribution Payment.................... 8
Dividend Accrual Period................. 206
DKV..................................... 217
DMERCs.................................. 125
DOJ..................................... 66
Dresdner Securities..................... 47
Drug Law................................ 120
DSD..................................... 1
dual eligible ESRD patients............. 26
DSI..................................... 107
EBIT.................................... 43
EBITDA.................................. 28
Effective Date.......................... 9
Effective Time.......................... 9
entitlement waiting period.............. 126
EPO..................................... 25
ESRD.................................... 24
EU...................................... 120
Excess Shares........................... 79
Exchange Act............................ i
Exchange Agent.......................... 3
Facilities.............................. 155
Facility 1.............................. 194
Facility 2.............................. 194
Facility 3.............................. 194
FAG Group............................... 234
False Claims Act........................ 128
FCO..................................... 10
FDA..................................... 24
FDC Act................................. 119
FDS08................................... 102
First Proposal.......................... 47
Florida Action.......................... 136
FMC Actual Capitalization Adjustment.... 55
FMC Management Board.................... 179
FMC Ordinary Shares..................... C2
FMC Plan................................ 183
FMC Preferred Shares.................... 183
FMC Supervisory Board................... 31
FNMC.................................... C1
FNMC Board.............................. 12
FNMC Common Stock....................... 12
Foundation.............................. 87
Fractional Securities Fund.............. 79
Fresenius AG............................ C2
Fresenius AG Management Board........... 49
Fresenius AG Ordinary Shares............ 87
Fresenius AG Preference Shares.......... 185
Fresenius AG Supervisory Board.......... 185
</TABLE>
245
<PAGE> 258
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fresenius Medical Care.................. C2
Fresenius Parties....................... 66
Fresenius Tax Indemnification
Agreement............................. 69
Fresenius USA........................... C1
Fresenius USA Board..................... C1
Fresenius USA Common Stock.............. C1
Fresenius USA Compensation Committee.... 241
Fresenius USA Dissenting Stockholder.... 77
Fresenius USA Independent Committee..... 6
Fresenius USA Merger.................... C2
Fresenius USA Plan...................... C2
Fresenius USA Plan Amendment............ C2
Fresenius USA Record Date............... 5
Fresenius USA Preferred Stock........... 5
Fresenius USA Public Stockholder
Exchange Ratio........................ 51
Fresenius USA Public Stockholders....... 47
Fresenius USA Special Meetings.......... C1
Fresenius Worldwide Dialysis............ C2
FTC..................................... 10
FUSA Merger Sub......................... C2
FWD Business Subsidiaries............... 69
German GAAP............................. 16
German Securities Law................... 185
GMP..................................... 25
Government Claims....................... 136
Grace................................... C1
Grace Amendment......................... C2
Grace Board............................. C1
Grace Chemicals......................... C2
Grace Common Dissenting Shareholder..... 73
Grace Common Stock...................... C1
Grace Financial Advisors................ 7
Grace Merger............................ C2
Grace Merger Sub........................ C2
Grace Preferred Stock................... C1
Grace Record Date....................... 5
Grace Rights............................ 64
Grace Rights Agreement.................. 64
Grace Special Meeting................... C1
Grace Tax Sharing and Indemnification
Agreement............................. 68
HCFA.................................... 26
HDS..................................... 133
HHS..................................... 23
HIC..................................... 113
Higher Offer............................ 61
HMOs.................................... 27
HNS..................................... 113
HOF..................................... 186
Holders................................. 217
HSR Act................................. 10
IDPN.................................... 26
<CAPTION>
PAGE
-----
<S> <C>
Interested Transactions................. 214
IRS..................................... 11
Joinder Agreement....................... 69
J.P. Morgan............................. 224
Junior Stock............................ 208
Leases.................................. 70
Lenders................................. 194
Letter of Transmittal................... 78
LIBOR................................... 161
LifeChem................................ 24
Liquidation Preference.................. 12
Loan.................................... 183
LTIP.................................... 184
MBCL.................................... 11
MDS..................................... 101
Medical Devices Act..................... 120
Medical Directors....................... 22
Mergers................................. C2
Merrill Lynch........................... 7
Method I................................ 123
Method II............................... 123
MGLA.................................... 233
minority buyout transactions............ 55
Minority Shareholders................... 214
MPG..................................... 1
MSP..................................... 26
Murphy Action........................... 141
NDA..................................... 119
New Grace............................... C2
New Grace Common Stock.................. i
New Grace Prospectus.................... i
New Grace Registration Statement........ i
New Grace Right......................... 198
New Preferred Shares.................... C2
NLAs.................................... 124
NMC..................................... C2
NMC Credit Agreement.................... 28
NMC Credit Facility..................... 194
NMC Distribution........................ 29
NMC Homecare............................ 1
Non-Exclusive Business.................. 71
Non-resident............................ 213
NYBCL................................... 11
NYSE.................................... C3
OBRA 93................................. 26
Obligations............................. 136
OIG..................................... 23
OIG Agreements.......................... 136
OIG Investigation....................... 23
Old FUSA................................ 97
Opinions................................ 197
</TABLE>
246
<PAGE> 259
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Optional Redemption..................... 209
Optional Redemption Date................ 209
Optional Redemption Price............... 209
OSHA.................................... 121
Other Distributions..................... 219
Other Fresenius AG Business............. 71
Other NMC Business...................... 71
Payment Date............................ 12
PC...................................... 89
PCHS.................................... 113
PEN..................................... 26
PHC..................................... 205
PIC..................................... 120
Pooling Agreement....................... 214
Preferred Directors..................... 226
Pre-released ADRs....................... 218
Primary Guarantee....................... 136
Pro Forma Condensed Combined Financial
Information........................... 170
PROPAC.................................. 123
PSP..................................... 85
Public Announcement..................... 206
PVC..................................... 84
Recapitalization........................ C2
Registration Statement.................. i
Releasees............................... 137
Rena-Med................................ 10
Renal Business.......................... 70
Reorganization.......................... C2
Reorganization Agreement................ C2
Resident................................ 213
Retained Facilities..................... 71
Rights.................................. 219
RPD..................................... 25
<CAPTION>
PAGE
-----
<S> <C>
Salomon Brothers........................ 7
Schiwa.................................. 10
Schweinfurt Facility.................... 84
Secondary Guarantee..................... 136
Second Proposal......................... 49
Securities Act.......................... i
Securities Filings...................... 215
Seratronics............................. 98
Services Agreements..................... 72
SG&A.................................... 159
Shared Intellectual Property............ 71
Share Distribution...................... 219
Special Dividend........................ 206
Special Dividend Amount................. 206
Special Meetings........................ C1
Specified Executives.................... 189
St. Wendel Facility..................... 84
Standstill Period....................... 214
Stark I................................. 129
Stark II................................ 129
Supplemental Agreement.................. 69
Supply Agreements....................... 72
Third Proposal.......................... 49
Time of Distribution.................... 2
Transaction Agreements.................. 41
Transfer................................ 76
Transferred Facilities.................. 71
Treaty.................................. 183
US GAAP................................. ii
U.S. Holder............................. 201
Vivra................................... 37
Voting Shares........................... 214
</TABLE>
247
<PAGE> 260
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS OF W. R. GRACE & CO.:
Special-Purpose, Report of Independent Accountants............................ F-3
Special-Purpose, Consolidated Statements of Earnings for the years ended
December 31, 1995, 1994 and 1993............................................. F-4
Special-Purpose, Consolidated Balance Sheets as of December 31, 1995 and
1994......................................................................... F-5
Special-Purpose, Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993............................................. F-6
Notes to Special-Purpose, Consolidated Financial Statements................... F-7
SPECIAL-PURPOSE, CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF W. R. GRACE & CO.:
Special-Purpose, Consolidated Interim Statements of Earnings for the quarters
ended March 31, 1996 and 1995................................................ F-26
Special-Purpose, Consolidated Interim Balance Sheet for the quarter ended
March 31, 1996............................................................... F-27
Special-Purpose, Consolidated Interim Statements of Cash Flows for the
quarters ended March 31, 1996 and 1995....................................... F-28
Notes to Special-Purpose, Consolidated Interim Financial Statements........... F-29
FRESENIUS WORLDWIDE DIALYSIS
COMBINED FINANCIAL STATEMENTS OF FRESENIUS WORLDWIDE DIALYSIS:
Independent Auditors' Report.................................................. F-31
Combined Statements of Operations and Net Assets for the years ended December
31, 1995 and 1994............................................................ F-32
Combined Balance Sheets as of December 31, 1995 and 1994...................... F-33
Combined Statements of Cash Flows for the years ended December 31, 1995 and
1994......................................................................... F-34
Notes to Combined Financial Statements........................................ F-35
COMBINED INTERIM FINANCIAL STATEMENTS OF FRESENIUS WORLDWIDE DIALYSIS:
Interim Combined Statements of Operations and Net Assets for the three months
ended March 31, 1996 and 1995................................................ F-53
Interim Combined Balance Sheet as of March 31, 1996........................... F-54
Interim Combined Statements of Cash Flows for the three months ended March 31,
1996 and 1995................................................................ F-55
Notes to Interim Combined Financial Statements................................ F-56
FRESENIUS USA, INC.
CONSOLIDATED FINANCIAL STATEMENTS OF FRESENIUS USA, INC.:
Independent Auditors' Report.................................................. F-57
Consolidated Balance Sheets as of December 31, 1995 and 1994.................. F-58
Consolidated Statements of Income for the years ended December 31, 1995, 1994
and 1993..................................................................... F-59
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1995, 1994 and 1993...................................................... F-60
</TABLE>
F-1
<PAGE> 261
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993................................................................ F-61
Notes to Consolidated Financial Statements.................................... F-63
CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF FRESENIUS USA, INC.:
Consolidated Balance Sheet at March 31, 1996.................................. F-81
Consolidated Statements of Operations for the three months ended March 31,
1996
and 1995.................................................................... F-82
Consolidated Statements of Cash Flows for the three months ended March 31,
1996
and 1995.................................................................... F-83
Notes to Consolidated Financial Statements.................................... F-84
</TABLE>
F-2
<PAGE> 262
SPECIAL-PURPOSE, REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
W. R. GRACE & CO.
We have audited the accompanying special-purpose, consolidated balance
sheets of W. R. Grace & Co. and its subsidiary (the "Company") as of December
31, 1995 and 1994, and the related consolidated special-purpose, statements of
earnings and cash flows for each of the three years in the period ended December
31, 1995. These special-purpose, consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the special-purpose, consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the special-purpose, consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
special-purpose, consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
special-purpose, consolidated financial statements. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying special-purpose, consolidated financial statements were
prepared on the basis of presentation describe in Note 1, and are not intended
to be a complete presentation of the assets, liabilities, revenues and expenses
of the Company.
In our opinion, the accompanying special-purpose, consolidated financial
statements present fairly, in all material respects, the financial position of
the Company as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995 pursuant to the basis of presentation described in Note 1, in conformity
with generally accepted accounting principles.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 29, 1996
F-3
<PAGE> 263
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
NET REVENUES
Health care services................................. $1,884,748 $1,681,039 $1,292,951
Medical supplies..................................... 147,990 137,165 162,644
---------- ---------- ----------
2,032,738 1,818,204 1,455,595
---------- ---------- ----------
EXPENSES
Cost of health care services......................... 1,067,906 915,887 723,374
Cost of medical supplies............................. 108,187 110,932 116,691
General and administrative expenses.................. 360,960 329,795 238,506
Provision for doubtful accounts...................... 88,858 73,052 59,436
Depreciation and amortization........................ 113,176 95,882 77,790
Research and development............................. 3,957 2,299 5,910
Allocation of Grace Chemicals expenses............... 29,724 32,604 31,766
Interest expense, net, and related financing costs... 25,534 15,873 11,505
Reduction of carrying amounts of assets to estimated
fair values and restructuring costs............... 28,923 27,441 0
---------- ---------- ----------
1,827,225 1,603,765 1,264,978
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES........................... 205,513 214,439 190,617
PROVISION FOR INCOME TAXES............................. 108,616 112,222 86,845
---------- ---------- ----------
NET EARNINGS........................................... $ 96,897 $ 102,217 $ 103,772
========== ========== ==========
Earnings per share..................................... $ 1.01 $ 1.08 $ 1.12
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Financial Statements.
F-4
<PAGE> 264
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 33,530 $ 39,758
Accounts receivable, less allowances of $119,914 and $91,449...... 406,682 294,283
Inventories....................................................... 72,491 81,667
Deferred income taxes............................................. 81,192 71,230
Other current assets.............................................. 51,835 51,547
---------- ----------
Total Current Assets........................................... 645,730 538,485
---------- ----------
Properties and equipment, net....................................... 377,328 312,823
---------- ----------
Other Assets:
Excess of cost over the fair value of net assets acquired and
other intangible assets, net of accumulated amortization of
$247,644 and $201,657.......................................... 954,811 765,747
Other assets and deferred charges................................. 20,275 26,759
---------- ----------
Total Other Assets............................................. 975,086 792,506
---------- ----------
Total Assets........................................................ $1,998,144 $1,643,814
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and capitalized lease
obligations.................................................... $ 183,488 $ 66,784
Accounts payable.................................................. 104,586 92,810
Accrued liabilities............................................... 220,771 215,162
Accrued income taxes.............................................. 12,555 18,596
---------- ----------
Total Current Liabilities...................................... 521,400 393,352
Long-term debt...................................................... 27,903 12,382
Capitalized lease obligations....................................... 7,516 4,323
Deferred income taxes............................................... 48,109 57,422
Other liabilities................................................... 30,441 17,049
---------- ----------
Total Liabilities.............................................. 635,369 484,528
---------- ----------
Commitments and Contingencies (Note 15)
Equity:
Equity............................................................ 1,365,901 1,162,014
Cumulative translation adjustment................................. (3,126) (2,728)
---------- ----------
Total Equity................................................... 1,362,775 1,159,286
---------- ----------
Total Liabilities and Equity........................................ $1,998,144 $1,643,814
========== ==========
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Financial Statements.
F-5
<PAGE> 265
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows Provided by Operating Activities:
Net earnings............................................. $ 96,897 $ 102,217 $ 103,772
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization......................... 113,176 95,882 77,790
Provision for doubtful accounts....................... 88,858 73,052 59,436
Provision for deferred income taxes................... (11,028) (9,575) (2,454)
Loss on disposal of properties and equipment.......... 5,295 4,317 853
Reduction of carrying amounts of assets to estimated
fair values......................................... 18,003 27,441 --
Changes in operating assets and liabilities, net of
effects of purchase acquisitions and foreign exchange:
Increase in accounts receivable....................... (176,444) (139,585) (85,525)
Decrease (increase) in inventories.................... 11,358 (13,637) (4,561)
Decrease (increase) in other current assets........... 3,309 (5,951) (15,875)
Increase in accounts payable.......................... 849 7,771 11,175
Decrease in accrued income taxes...................... (23,533) (3,912) (11,794)
(Decrease) increase in accrued liabilities............ (8,798) 56,099 (30,297)
Increase (decrease) in other long-term liabilities.... 12,709 6,693 (7,476)
Decrease (increase) in other assets and deferred
charges............................................. 1,636 (22,469) (2,069)
Other, net............................................ (2,808) (1,242) (4,013)
--------- --------- ---------
Net cash provided by operating activities................ 129,479 177,101 88,962
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures.................................. (102,894) (84,498) (77,944)
Payments for acquisitions, net of cash acquired....... (252,158) (246,742) (236,481)
Payments for physicians' contract agreements.......... -- (69) (1,981)
Other, net............................................ -- 628 493
--------- --------- ---------
Net cash used in investing activities.................... (355,052) (330,681) (315,913)
--------- --------- ---------
Cash Flows from Financing Activities:
Advances from Grace Chemicals, net.................... 106,990 176,849 245,320
Proceeds on issuance of debt.......................... 382,783 33,407 17,298
Payments on debt and capitalized leases............... (269,683) (36,392) (27,592)
--------- --------- ---------
Net cash provided by financing activities................ 220,090 173,864 235,026
--------- --------- ---------
Effects of changes in foreign exchange rates............... (745) (3,080) 2,011
--------- --------- ---------
(Decrease) increase in cash and cash equivalents........... (6,228) 17,204 10,086
Cash and cash equivalents at beginning of period........... 39,758 22,554 12,468
--------- --------- ---------
Cash and cash equivalents at end of period................. $ 33,530 $ 39,758 $ 22,554
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.............................................. $ 26,787 $ 12,750 $ 9,472
Income taxes.......................................... 28,637 18,814 21,541
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Financial Statements.
F-6
<PAGE> 266
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
General
The special-purpose, consolidated financial statements of W. R. Grace & Co.
("Grace New York") and National Medical Care, Inc. and its subsidiaries ("NMC"
and together with Grace New York, the "Company") have been prepared pursuant to
Section 6.7(a) of the Agreement and Plan of Reorganization, dated as of February
4, 1996 by and between Grace New York and Fresenius AG (the "Reorganization
Agreement"). The Reorganization Agreement contemplates that the following
transactions (the "Reorganization") will occur: (1) NMC, presently a wholly
owned subsidiary of W. R. Grace & Co. -- Conn. ("Grace Chemicals"), a wholly
owned subsidiary of Grace New York, will borrow, or assume, debt in an amount
such that, at the time of the Reorganization, the debt of Grace New York and
NMC, on a consolidated basis, will not exceed $2.36 billion, as adjusted
pursuant to the Reorganization Agreement; (2) the stock of NMC will be
transferred to Grace New York, so that NMC and Grace Chemicals will be sibling
subsidiaries of Grace New York; (3) the stock of Grace Chemicals will be
transferred to a newly formed Delaware subsidiary of Grace New York ("New
Grace") and the shares of New Grace will be spun-off to the Grace New York
shareholders in a pro rata distribution; (4) Grace New York will be
recapitalized such that each Grace New York shareholder will receive 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, will merge with a wholly owned subsidiary of Fresenius
Medical Care AG ("FMC"), and Fresenius AG's worldwide dialysis business ("FWD")
will be contributed as separate subsidiaries of FMC with the result that 44.8%
of the common stock of FMC will be exchanged for the stock held by Grace New
York common shareholders in the merger transaction, and the balance of the
common stock of FMC will be received by Fresenius AG and the shareholders of
Fresenius USA, Inc., its principal U.S. subsidiary, in consideration of the
contribution of FWD to FMC. After the Reorganization, all the Grace New York
common stock will be held by FMC, while the Class D Preferred Stock (which
entitles its holders to a contingent dividend based on the consolidated
performance of FMC in the years 1997-2001) and other previously issued classes
of Grace New York preferred stock will remain outstanding.
The special-purpose, consolidated financial statements exclude all the
assets, liabilities (including contingent liabilities), revenues and expenses of
Grace New York and its subsidiaries other than the assets, liabilities, revenues
and expenses of the Grace New York health care business operated by NMC (the
"NMC Business") prior to the transactions contemplated by the Reorganization
described above. However, the NMC Business does not include certain businesses
owned or investments held partly by Grace Chemicals and partly by NMC, and
previously under the oversight of NMC, that are being retained by Grace
Chemicals in the Reorganization. Grace Chemicals has agreed to indemnify Grace
New York and its affiliates against non-NMC liabilities, which include but are
not limited to liabilities for asbestos litigation, borrowed funds, taxes,
employee-related liabilities, environmental matters, and shareholder suits filed
prior to the Reorganization or attributable to the Reorganization and related
events. See Note 14.
The NMC Business is primarily engaged in (i) providing kidney dialysis
services, (ii) manufacturing and distributing products and equipment for
dialysis treatment and performing clinical laboratory testing and other medical
services, and (iii) providing home infusion therapy, home respiratory and home
health services.
Basis of Consolidation
The special-purpose, consolidated financial statements have been prepared
as if the NMC Business had operated as an independent, stand alone entity for
all periods presented. Such financial statements have been prepared using the
historical basis of accounting and include all of the assets, liabilities,
revenues, expenses and related taxes on income of 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 special-purpose, consolidated financial statements include
balances for goodwill and other
F-7
<PAGE> 267
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 special-purpose, consolidated financial statements
reflect only the borrowings and interest expense of NMC. 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. Also, these
special-purpose, consolidated financial statements exclude dividends paid by
Grace New York to its common and preferred shareholders as such dividends were a
use of funds incurred by the Grace Consolidated Group and not by the NMC
Business on a stand-alone basis.
See Note 12 for a discussion of Equity.
These special-purpose, 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions affecting the reported amounts of assets and liabilities (including
disclosed amounts of contingent assets and liabilities) at the dates of the
consolidated financial statements and the reported revenues and expenses during
the reporting periods. Actual amounts could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of
three months or less when purchased.
Financial Instruments
The Company enters into forward foreign exchange contracts to manage
exposure to fluctuations in currency exchange rates arising from borrowings.
Gains and losses arising from the retranslation of contracts that hedge specific
borrowings are deferred and recorded in net income in the period in which the
related transaction is consummated. Gains and losses arising from the interest
differential on contracts that hedge specific borrowings are recorded as a
component of interest expense over the life of the contract.
Revenue Recognition
Revenues are recognized on the date services and related products are
provided and are recorded at amounts estimated to be received under
reimbursement arrangements with a large number of third-party payors, including
Medicare and Medicaid. The Company establishes appropriate allowances based upon
factors surrounding credit risks of specific third party payors, historical
trends and other information.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Properties and Equipment
Properties and equipment are stated at cost. Significant improvements are
capitalized; repairs and maintenance costs that do not extend the lives of the
assets are charged to expense as incurred. The cost and
F-8
<PAGE> 268
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
accumulated depreciation of assets sold or otherwise disposed of are removed
from the accounts, and any resulting gain or loss is included in income when the
assets are disposed.
The cost of properties and equipment is depreciated over estimated useful
lives on a straight-line basis as follows: buildings -- 20 to 50 years,
equipment and furniture -- 3 to 10 years, and leasehold improvements -- the
shorter of the lease term or useful life. For income tax purposes, depreciation
is calculated using accelerated methods to the extent permitted.
Excess of Cost Over the Fair Value of Net Assets Acquired and Other
Intangible Assets
The Company has adopted the following useful lives and methods to amortize
intangible assets: goodwill -- 40 years on a straight-line basis; patient
relationships and other intangible assets -- over the estimated period to be
benefited, generally from 7 to 25 years; and certain contractual
arrangements -- over the life of the agreements on a straight-line basis.
Impairment
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company reviews the carrying value of its investments for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. The Company considers various
valuation factors including discounted cash flows, fair values and replacement
costs to assess any impairment of goodwill and other long lived assets.
Foreign Currency Translation
The Company follows the provisions of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". The local currency, in all
locations other than Ireland and Mexico, is considered to be the functional
currency. As a result, the balance sheets of the Company's foreign operations,
other than Ireland and Mexico, are translated at the current exchange rate and
statements of earnings are translated at the average exchange rate for the
applicable period. Management has determined that the functional currency of the
Company's Irish and Mexican manufacturing plants is the U.S. dollar since the
majority of their transactions are effected in U.S. dollars. Assets and
liabilities of the Company's Irish and Mexican manufacturing plants are
translated at the current exchange rate, except that properties and equipment
and inventory are translated at historical exchange rates. Statements of
earnings items are translated at average rates of exchange prevailing during the
period, except that depreciation is translated at historical rates.
Net exchange losses resulting from the translation of the Irish and Mexican
manufacturing plant financial statements amounted to $595, $234, and $510 in
1995, 1994, and 1993 respectively, and are included in general and
administrative expenses.
Income Taxes
The results of certain of the companies within the Grace Consolidated Group
have been included in the federal and certain state consolidated income tax
returns of the Company. Income tax expense and certain other tax-related
information included in these financial statements have been calculated as if
the Company were a stand-alone tax payer.
Deferred income taxes are provided for temporary differences between the
reporting of income and expense for financial reporting and tax return purposes.
Deferred tax liabilities or assets at the end of each period are determined
using the tax rates then in effect for the periods when taxes are actually
expected to be paid or recovered. Accordingly, income tax expense provisions
will increase or decrease in the period in which a change in tax rates is
enacted.
F-9
<PAGE> 269
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Research and Development
Research and development costs are expensed as incurred.
Earnings per Share
Primary earnings per share are computed on the basis of the weighted
average number of common shares outstanding. Fully diluted earnings per share
assume the issuance of common stock equivalents related to employee stock
options and, prior to 1994, the conversion of convertible debt (with an increase
in net income for the after-tax interest savings).
NOTE 3. ACQUISITIONS
The Company acquired certain health care service facilities for total
consideration of $252,753 in 1995, $248,123 in 1994, and $240,178 in 1993. These
acquisitions have been accounted for as purchase transactions and, accordingly,
are included in the results of operations from the dates of acquisition. The
excess of the total acquisition costs over the fair value of net assets acquired
was $215,837 in 1995, $210,845 in 1994, and $199,416 in 1993.
Had the acquisitions that occurred during the year ended December 31, 1995
been consummated on January 1, 1994, unaudited pro forma net revenues for 1995
and 1994 would have been $2,102,157 and $1,943,317, respectively, and unaudited
pro forma net earnings would have been $113,676 and $110,706, respectively.
Had the acquisitions that occurred during the year ended December 31, 1994
been consummated on January 1, 1993, unaudited pro forma net revenues for 1994
and 1993 would have been $1,889,069 and $1,673,389, respectively, and unaudited
pro forma net earnings would have been $119,102 and $105,264, respectively.
NOTE 4. OTHER BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Inventories
Raw materials........................................................ $ 9,023 $ 10,016
Manufactured goods in process........................................ 3,035 3,911
Manufactured and purchased inventory available for sale.............. 32,980 36,249
-------- --------
45,038 50,176
Health care supplies................................................. 27,453 31,491
-------- --------
Total........................................................ $ 72,491 $ 81,667
======== ========
Other Current Assets
Miscellaneous accounts receivable.................................... $ 20,984 $ 26,182
Deposits and prepaid expenses........................................ 30,851 25,365
-------- --------
Total........................................................ $ 51,835 $ 51,547
======== ========
</TABLE>
F-10
<PAGE> 270
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Excess of Cost Over the Fair Value of Net Assets Acquired and
Other Intangible Assets
Goodwill, less accumulated amortization of $54,236 and $35,400....... $597,486 $462,265
Patient relationships, less accumulated amortization of $106,169 and
$83,341........................................................... 122,863 144,642
Other intangible assets, less accumulated amortization of $87,239 and
$82,916........................................................... 234,462 158,840
-------- --------
Total........................................................ $954,811 $765,747
======== ========
Accrued Liabilities
Accrued salaries and wages........................................... $ 31,970 $ 28,742
Accrued physician compensation....................................... 22,460 47,700
Accounts receivable credit balances.................................. 37,084 37,760
Accrued operating expenses........................................... 38,378 31,374
Accrued insurance.................................................... 53,124 34,601
Accrued bonus and incentive compensation............................. 11,391 14,264
Other................................................................ 26,364 20,721
-------- --------
Total........................................................ $220,771 $215,162
======== ========
</TABLE>
Accounts receivable credit balances principally reflect overpayments from
third party payors in the process of repayment.
NOTE 5. SALE OF ACCOUNTS RECEIVABLE
During 1991, NMC entered into an agreement to sell up to $180,000 of an
undivided interest in a designated pool of accounts receivable. At December 31,
1995 and 1994, $179,793 had been received pursuant to such sales; these amounts
are reflected as reductions to accounts receivable. Under the terms of the
agreement, new interests in accounts receivable are sold as collections reduce
previously sold accounts receivable. If certain accounts receivable in the pool
prove to be uncollectible, other accounts receivable are submitted (to the
extent available). The costs related to such sales are expensed as incurred and
recorded as interest expense and related financing costs. There were no gains or
losses on these transactions.
NOTE 6. DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- -------
<S> <C> <C>
Third-party debt, primarily bank borrowings, at variable interest rates
(1% - 14%) with various maturities.................................... $207,004 $77,704
Less amounts classified as current...................................... 179,101 65,322
------- -------
$ 27,903 $12,382
======= =======
</TABLE>
F-11
<PAGE> 271
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1996............................................................................ $179,101
1997............................................................................ 25,006
1998............................................................................ 1,233
1999............................................................................ 518
2000............................................................................ 477
2001 and beyond................................................................. 669
-------
Total................................................................... $207,004
=======
</TABLE>
In August 1995, NMC signed an agreement with a bank for a $100,000 line of
credit facility bearing interest at prime rate minus an applicable margin or
LIBOR plus an applicable margin. At December 31, 1995, NMC had an available
balance of $73,500. The line of credit expires on the earlier of April 15, 1996
or the date on which NMC is no longer a subsidiary of Grace Chemicals.
NOTE 7. INCOME TAXES
Earnings were taxed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Domestic................................................... $237,225 $247,488 $194,202
Foreign.................................................... (31,712) (33,049) (3,585)
-------- -------- --------
Total............................................ $205,513 $214,439 $190,617
======== ======== ========
The provision for income taxes was as follows:
Current tax expense
Federal.................................................. $ 91,012 $ 90,557 $ 68,917
State.................................................... 23,271 26,526 17,776
Foreign.................................................. 5,361 4,714 2,606
-------- -------- --------
Total current.................................... 119,644 121,797 89,299
Deferred tax (benefit) expense
Federal.................................................. (9,287) (4,867) (2,887)
State.................................................... (3,271) (4,725) 661
Foreign.................................................. 1,530 17 (228)
-------- -------- --------
Total deferred................................... (11,028) (9,575) (2,454)
-------- -------- --------
Total provision.................................. $108,616 $112,222 $ 86,845
======== ======== ========
</TABLE>
F-12
<PAGE> 272
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- --------
<S> <C> <C>
Allowance for doubtful accounts....................................... $ (35,365) $(29,534)
Insurance liability................................................... (15,220) (10,604)
Deferred compensation................................................. (17,072) (19,032)
Pension and benefit accruals.......................................... (4,061) (1,803)
Accrued interest...................................................... (4,792) (4,237)
Inventory/general reserves............................................ (8,606) (6,646)
Investment basis difference........................................... (9,235) --
Loss carryforwards.................................................... (10,265) (6,467)
--------- --------
Gross deferred tax assets................................... (104,616) (78,323)
Deferred tax assets valuation allowance............................... 19,500 6,467
--------- --------
Deferred tax assets......................................... (85,116) (71,856)
--------- --------
Depreciation and amortization......................................... 50,830 55,724
Other temporary differences........................................... 1,203 2,324
--------- --------
Gross deferred tax liabilities.............................. 52,033 58,048
--------- --------
Net deferred tax assets..................................... $ (33,083) $(13,808)
========= ========
</TABLE>
The provision for income taxes differs from the amount of income taxes
determined by applying the applicable statutory Federal income tax rate to
pretax earnings as a result of the following differences:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate..................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal tax benefit................. 6.3 6.6 6.3
Amortization of goodwill....................................... 2.0 3.3 2.8
Foreign goodwill impairment.................................... -- 4.5 --
Foreign taxes.................................................. 2.4 0.6 0.3
Increase in valuation allowance................................ 6.3 2.0 0.9
Other.......................................................... 0.9 0.3 0.3
---- ---- ----
- - -
Effective tax rate............................................. 52.9% 52.3% 45.6%
===== ===== =====
</TABLE>
The net increases in the valuation allowance for deferred tax assets were
$13,033, $4,257, and $2,210 in 1995, 1994, and 1993, respectively. These
increases relate to a reduction in the carrying amounts of assets, and loss
carryforwards of certain foreign subsidiaries for which related deferred tax
benefits are not expected to be utilized and for which full valuation allowances
have been provided.
Provision has not been made for additional federal, state or foreign taxes
on $20,648 of undistributed earnings of foreign subsidiaries. Those earnings
have been and will continue to be reinvested. The earnings could become subject
to additional tax if they were remitted as dividends, if foreign earnings were
loaned to the Company or a U.S. affiliate, or if the Company should sell its
stock in the subsidiaries. The Company estimates that the distribution of these
earnings would result in $4,398 of additional foreign withholding taxes and
additional federal income taxes to the extent they are not offset by foreign tax
credits.
F-13
<PAGE> 273
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company increased its federal and state deferred tax liability in 1993
as a result of legislation enacted during 1993 increasing the federal corporate
tax rate from 34% to 35% commencing in 1993.
At December 31, 1995 there were approximately $68,634 of foreign net
operating loss carryforwards, the majority of which have no expiration period.
NOTE 8. PROPERTIES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Land and improvements........................................ $ 8,167 $ 7,997
Buildings.................................................... 28,033 27,917
Capitalized lease property................................... 13,098 6,708
Leasehold improvements....................................... 161,282 134,422
Equipment and furniture...................................... 389,626 312,392
Construction in progress..................................... 15,743 15,435
---------- ----------
615,949 504,871
Accumulated depreciation and amortization.................... (238,621) (192,048)
---------- ----------
Properties and equipment, net...................... $ 377,328 $ 312,823
========== ==========
</TABLE>
Depreciation and amortization expense relating to properties and equipment
amounted to $62,686, $53,011, and $43,856 in 1995, 1994 and 1993 respectively.
Leases
Future minimum payments under noncancelable leases (principally for clinics
and offices) as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES TOTAL
-------- ------- --------
<S> <C> <C> <C>
1996.................................................... $ 37,611 $ 5,318 $ 42,929
1997.................................................... 34,190 4,246 38,436
1998.................................................... 27,451 2,095 29,546
1999.................................................... 20,312 1,235 21,547
2000.................................................... 15,448 500 15,948
2001 and beyond......................................... 34,771 1,401 36,172
-------- ------ --------
Total minimum payments.................................. $169,783 14,795 $184,578
======== ========
Less interest and operating costs....................... 2,892
------
Present value of minimum lease payments ($4,387 payable
in 1996).............................................. $11,903
======
</TABLE>
Rental expense for operating leases was $80,356 in 1995, $56,712 in 1994
and $46,229 in 1993. Amortization of properties under capital leases amounted to
$2,872 in 1995, $1,005 in 1994 and $1,057 in 1993.
Lease agreements frequently include renewal options and require that the
Company pay for utilities, taxes, insurance and maintenance expenses. Options to
purchase are also included in some lease agreements, particularly capital
leases.
F-14
<PAGE> 274
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9. IMPAIRMENT OF ASSETS AND RESTRUCTURING COSTS
During the year ended December 31, 1994, the Company reviewed its
investment in its German renal products manufacturing facilities and determined
that goodwill resulting from this 1993 acquisition was permanently impaired.
Accordingly, a charge of $27,441 was recorded during the fourth quarter to
reflect this impairment. During 1995, following several periods of operating
losses, management decided to discontinue its German dialysis machine
manufacturing operation and therefore reviewed the carrying value of its related
investment. This review indicated that its investment was permanently impaired.
Such impairment was recognized one year after the acquisition after the
discovery that misrepresentations were made by the seller. Management considered
the future cash flows resulting from the use of the related assets and
determined that the entire carrying value of such assets, amounting to $7,313,
should be written off. In addition, as a result of this decision, a charge of
$5,000 was recorded in 1995, comprising inventory write-offs, employee
termination benefits and grant repayments. The charge in respect of employee
termination benefits amounted to $910 and primarily represents severance pay and
other benefits associated with the termination of all remaining 35 employees.
Similarly, during 1995 the Company recorded a charge of $16,610, after
management decided to cease its investment in the polysulfone dialyzer
development operations in Ireland. As a result, the carrying value of the fixed
assets used in developing the new dialyzer product line of $10,690, was fully
written off and accruals in the amount of $5,920 for employee termination
benefits, inventory adjustments, grant repayments and other items were made.
Employee termination benefits amounted to $716 and were primarily in respect of
statutory and voluntary termination payments associated with the termination of
17 employees. At December 31, 1995, the remaining net investment of the
operations in Ireland was approximately $4,600. These remaining operations
continue to manufacture and distribute other non-polysulfone product lines and
other NMC products.
Through December 31, 1995, the Company did not make any payments against
its restructuring reserves.
NOTE 10. EMPLOYEE INCENTIVES
Long Term Incentive Programs
The Company has established long-term incentive programs under which
certain key executives of NMC are eligible to receive payments based upon the
cumulative earnings before interest and taxes of NMC, and, in the case of one
executive, the Grace Consolidated Group and the total shareholder return on the
Company's common stock over three-year periods. Provisions for the incentive
pools are made annually and awards are paid to participants at the end of each
three-year period. The earnings for 1995, 1994 and 1993 included charges of
$13,000, $3,500, and $1,876 respectively for costs associated with these
programs.
NMC has an additional long-term incentive program for key executives which
will be terminated as of the effective date of the Reorganization. Under the
terms of the program, payments will be made at the end of each five-year period
commencing in 1994 and ending in 1998 based on a multiple of the average
earnings before interest and taxes of NMC, as adjusted. The earnings for 1995,
1994 and 1993 included charges of $2,914, $3,266 and $6,921 respectively for
costs associated with this program.
Annual Incentive Compensation Plan
NMC has an annual incentive compensation plan under which key employees of
NMC are eligible to receive bonuses if certain corporate objectives are
attained. Normally, awards will not exceed 20% of the eligible employee's base
compensation, but discretionary awards for outstanding contributions are
authorized under the plan. Awards under the plan totaled $2,931, $5,890 and
$5,393 in 1995, 1994 and 1993, respectively.
F-15
<PAGE> 275
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11. PENSION
Substantially all domestic employees are covered by NMC's non-contributory,
defined benefit pension plan. Each year NMC contributes at least the minimum
required by the Employee Retirement Income Security Act of 1974, as amended.
Plan assets consist primarily of publicly traded common stock, fixed income
securities and cash equivalents.
Total pension expense includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period............. $ 3,649 $ 5,495 $ 4,654
Interest cost on projected benefit obligation................. 2,891 2,829 2,470
Actual return on plan assets.................................. (3,721) (3,873) (3,423)
Net amortization and deferral................................. (557) (557) (332)
------- ------ ------
Net pension expense........................................... $ 2,262 $ 3,894 $ 3,369
======= ====== ======
</TABLE>
The funded status of NMC's plan was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation.................................... $ 32,800 $ 20,952
Nonvested benefit obligation................................. 3,540 2,954
-------- --------
Accumulated benefit obligation................................. $ 36,340 $ 23,906
======== ========
Projected benefit obligation................................. $(49,271) $(37,269)
Plan assets at fair value.................................... 43,760 41,577
-------- --------
Plan assets in excess of projected benefit obligation........ (5,511) 4,308
Unrecognized prior service cost.............................. (224) (273)
Unrecognized net (gain) loss................................. 6,656 (125)
Unamortized net transition asset............................. (3,071) (3,583)
-------- --------
(Accrued)prepaid pension cost.................................. $ (2,150) $ 327
======== ========
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 7.25% in 1995 and 7.5% in 1994, and an assumed long-term rate of
compensation increase of 5% in 1995 and 6% in 1994. The assumed long-term rate
of return on plan assets was 9.0% in 1995 and 1994.
NMC does not provide any postretirement benefits to its employees other
than those provided under its pension plan.
F-16
<PAGE> 276
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 12. EQUITY
Because NMC operated as a wholly owned subsidiary of Grace Chemicals, its
equity accounts have been combined and presented as Equity. Subsequent to Grace
Chemicals' acquisition of NMC, NMC operations were largely funded by means of
intercompany accounts with Grace Chemicals. Therefore, Equity also includes
intercompany balances due to Grace Chemicals arising from the funding of NMC as
well as balances related to transactions and other charges and credits between
the NMC Business and Grace Chemicals as more fully described in Note 14. These
special-purpose, consolidated Grace New York financial statements include equity
balances related only to NMC. Therefore, changes within the equity accounts of
Grace New York related to the declaration and payment of dividends to its common
and preferred shareholders, the addition of capital contributions and activity
related to the granting and exercising of stock options and the purchase of
treasury stock have been excluded since such movements related to the entire
Grace Consolidated Group and not to the NMC Business on a stand-alone basis.
Similarly, due to the above transactions, it has not been possible to present
separately within Equity the retained earnings of Grace New York related to NMC.
A summary of changes in Equity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Beginning balance....................................... $1,162,014 $ 882,948 $533,856
Net earnings............................................ 96,897 102,217 103,772
Advances from Grace Chemicals, net...................... 106,990 176,849 245,320
---------- ---------- --------
Ending Balance.......................................... $1,365,901 $1,162,014 $882,948
========== ========== ========
</TABLE>
Cumulative translation adjustments for the three years ended December 31,
1995 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year....................................... (2,728) (2,956) (459)
Translation adjustments.......................................... (398) 228 (2,497)
------- ------- -------
Balance, end of year............................................. (3,126) (2,728) (2,956)
======= ======= =======
</TABLE>
At December 31, 1995, the components of Grace New York's Equity, excluding
Cumulative Translation Adjustment and Retained Earnings, which will remain with
Grace New York after the Reorganization described in Note 1, were as follows:
<TABLE>
<S> <C>
Preferred Stocks, $100 par value
-- 6% Cumulative (1); 40,000 shares authorized; 36,460 outstanding........ $3,646
-- 8% Cumulative Class A (2); 50,000 shares authorized; 16,356
outstanding.............................................................. 1,636
-- 8% Noncumulative Class B (2); 40,000 shares authorized; 21,577
outstanding.............................................................. 2,157
---------
7,439
Common Stock, $1 par value; 300,000,000 shares authorized; 97,375,000
outstanding.................................................................. 97,375
Paid in Capital................................................................ 459,807
Treasury Stock, 53,000 common shares, at cost.................................. (2,389)
---------
$562,232
========
</TABLE>
- ---------------
(1) 160 votes per share.
(2) 16 votes per share.
F-17
<PAGE> 277
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The weighted average number of shares of common stock outstanding during
1995, 1994 and 1993 was 95,822,000, 93,936,000 and 91,461,000, respectively.
Stock Options
Stock options are granted under the stock incentive plans of companies
within the Grace Consolidated Group. At December 31, 1995, options for 5,694,196
shares were outstanding with an average exercise price of $40.45 (of which
4,172,391 were exercisable) and 1,913,163 shares were available for additional
grants. Currently outstanding options expire on various dates between February
1996 and July 2005.
Grace will adopt the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation" in 1996. However, Grace anticipates that it will
continue to follow the measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS
No. 123.
NOTE 13. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
At December 31, 1995 and 1994, the carrying value of financial instruments
such as cash, cash equivalents, accounts receivable, accounts payable and the
current portion of long-term debt approximated their fair values, based on the
short-term maturities of these instruments. At December 31, 1995 and 1994, the
fair value of long-term debt which approximated carrying value was determined
based on expected future cash flows, discounted at market interest rates.
Foreign Currency Contracts
Beginning in 1995, NMC financed working capital requirements for its
Portuguese operations by means of borrowings denominated in currencies other
than the operational currency. NMC hedges its exposure to the foreign exchange
risk associated with these borrowings through the use of forward purchase
contracts, whereby NMC contracts with the same counterparty as the original
borrowing to purchase the currency in which the loan is denominated and sell the
operational currency with a maturity date equivalent to the maturity date of the
underlying borrowings. The value of these borrowings and associated forward
exchange contracts at December 31, 1995 and 1994 amounted to approximately
$48,000 and $14,000, respectively. Management estimates that these transactions
had a favorable impact on NMC's net interest expense for the year ended December
31, 1995 and 1994 of $288 and $24, respectively. Forward purchases of foreign
currency are used solely to manage exposure to fluctuations in foreign currency
rates. The carrying value at December 31, 1995, which equalled fair value based
on exchange rates at December 31, 1995 and 1994 was a liability of $1,078 and
$127, respectively.
Credit Risk
The Company is exposed to credit risk to the extent of potential
nonperformance by counterparties on financial instruments. The counterparties to
the Company's currency exchange contracts comprise a diversified group of major
financial institutions, all of which are rated investment grade. As of December
31, 1995, the Company's credit exposure was insignificant and limited to the
fair value stated above; the Company believes the risk of incurring losses due
to credit risk is remote.
Market Risk
Exposure to market risk on financial instruments results from fluctuations
in currency rates during the periods in which the contracts are outstanding. The
mark-to-market valuations of foreign currency agreements and of associated
underlying exposures are closely monitored at all times. The Company uses
portfolio
F-18
<PAGE> 278
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
sensitivities and stress tests to monitor risk. Overall financial strategies and
the effects of using derivatives are reviewed periodically.
NOTE 14. RELATED PARTY TRANSACTIONS AND ALLOCATIONS
Cash
NMC has utilized Grace Chemicals' centralized cash management services.
Under such service arrangements, excess domestic cash generated by NMC was
invested centrally by Grace Chemicals. Additionally, disbursing operations were
funded centrally by Grace Chemicals.
Corporate Services
In accordance with SAB 55, Grace Chemicals has allocated a portion of its
domestic corporate expenses to its business units, including NMC. These expenses
have included management and corporate overhead; benefit administration; risk
management/insurance administration; tax and treasury/cash management services;
environmental services; litigation administration services; and other support
and executive functions. Allocations and charges were based on either a direct
cost pass through or a percentage allocation for such services provided based on
factors such as net sales, management time, or headcount. Such allocations and
charges totaled $13,782, $10,853 and $9,423 for the years ended December 31,
1995, 1994 and 1993, respectively.
Domestic research and development expenses of Grace Chemicals related to
NMC's business and allocated to NMC in accordance with SAB 55 totaled $15,942,
$21,751 and $22,343 for 1995, 1994 and 1993, respectively.
Management believes that the basis used for allocating corporate services
is reasonable and that the terms of these transactions would not materially
differ from those that would result from transactions among unrelated parties.
Grace Chemicals has also charged NMC for its share of domestic workers'
compensation, employee life, medical and dental, and other general business
liability insurance premiums and claims which have all been handled by Grace
Chemicals on a corporate basis. These charges have been based on NMC's actual
and expected future experience, including actual payroll expense, and totaled
$34,784, $41,871 and $40,177 for 1995, 1994 and 1993, respectively, and have
been included in either cost of health care services or general and
administrative expenses, depending upon the nature of the employee's or insured
asset's function.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Contingent Non-NMC Liabilities of Grace New York
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.
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
F-19
<PAGE> 279
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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 totalling approximately $4,900 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.
The results of the investigation and its impact, if any, 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.
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. HCFA further proposed that its new instruction be
effective retroactive to August 1993, the effective date of OBRA 93.
Consequently, NMC 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 totalling approximately $120,000
as of December 31, 1995. 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
F-20
<PAGE> 280
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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 are consistent with published
Medicare coverage guidelines and ultimately will be approved for payment. Such
claims represent substantial accounts receivable of NMC, amounting to
approximately $93,000 (net of a reserve of $21,000) and $28,000 (net of a
reserve of $6,000) as of December 31, 1995 and 1994, respectively, and currently
increasing at the rate of approximately $6,000 per month. 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 is expected to become
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 would make 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, plans to seek to effect certain changes
in the new policy and NMC is developing 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.
F-21
<PAGE> 281
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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. In addition, in December 1994, a
subsidiary of NMC received a subpoena from a federal grand jury in the Eastern
District of Virginia investigating the contractual relationships between
subsidiaries of NMC that provide dialysis services and third parties that
provide medical directorship and related services to those subsidiaries. Legal
and consulting compliance costs relating to the U.S. Food and Drug
Administration warning letter and import alerts were approximately $6.9 million
in 1994. 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.
The Company also is subject to claims and suits arising in the ordinary
course of business, such as malpractice claims, the ultimate resolution of which
would not, in the Company's opinion, have a material adverse effect on the
Company's financial condition or results of operations.
Insurance
The Company is largely self-insured through an arrangement with Grace
Chemicals for group health, workers compensation, medical malpractice, auto and
general liability. Provisions for losses expected under these programs are
recorded currently based upon Grace Chemicals' and NMC's estimates of the
aggregate liability for claims incurred.
NOTE 16. SIGNIFICANT CUSTOMER RELATIONS
Approximately 62% of the Company's net revenues are paid by and subject to
regulations under governmental programs, primarily Medicare and Medicaid. The
Company maintains reserves for losses related to these programs, including
uncollectible accounts receivable, and such losses have been within management's
expectations.
F-22
<PAGE> 282
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 17. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS
The table below provides information pertaining to the Company's operations
by geographic area.
<TABLE>
<CAPTION>
UNITED
STATES EUROPE OTHER TOTAL
----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net revenues....................... 1995 $ 1,868,882 $125,153 $ 38,703 $2,032,738
1994 1,724,508 79,569 14,127 1,818,204
1993 1,395,552 58,598 1,445 1,455,595
Earnings before income taxes....... 1995 234,860 (32,415) 3,068 205,513
1994 247,361 (36,654) 3,732 214,439
1993 197,958 (8,296) 955 190,617
Assets............................. 1995 1,675,667 242,393 80,084 1,998,144
1994 1,440,866 178,749 24,199 1,643,814
1993 1,114,260 123,145 7,920 1,245,325
</TABLE>
The table below provide information pertaining to the Company's two
industry segments.
<TABLE>
<CAPTION>
LESS:
HEALTH CARE MEDICAL INTERSEGMENT
SERVICES SUPPLIES SALES TOTAL
----------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net Revenues.......................... 1995 1,884,748 300,001 152,011 2,032,738
1994 1,681,039 279,474 142,309 1,818,204
1993 1,292,951 279,927 117,283 1,455,595
Earnings before income taxes.......... 1995 223,094 (17,581) -- 205,513
1994 254,772 (40,333) -- 214,439
1993 188,271 2,346 -- 190,617
Assets................................ 1995 1,855,907 142,237 1,998,144
1994 1,484,753 159,061 1,643,814
1993 1,065,230 180,095 1,245,325
Capital expenditures.................. 1995 99,905 2,989 102,894
1994 78,538 5,960 84,498
1993 68,712 9,232 77,944
Depreciation and amortization of
properties and equipment............ 1995 57,783 4,903 62,686
1994 47,769 5,242 53,011
1993 38,504 5,352 43,856
</TABLE>
F-23
<PAGE> 283
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 18. QUARTERLY SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1995
Net revenues.................................... $478,058 $506,683 $505,459 $542,538
Cost of health care services and medical
supplies...................................... 276,601 289,008 290,409 320,075
Operating expenses.............................. 147,884 145,733 167,549 164,432
Interest expense, net........................... 5,750 5,791 5,387 8,606
-------- -------- -------- --------
Total expenses................................ 430,235 440,532 463,345 493,113
-------- -------- -------- --------
Earnings before Income Taxes.................... 47,823 66,151 42,114 49,425
Provision for Income Taxes...................... 21,807 30,111 21,865 34,833
-------- -------- -------- --------
Net earnings.................................... $ 26,016 $ 36,040 $ 20,249 $ 14,592
======== ======== ======== ========
1994
Net revenues.................................... $390,618 $443,177 $479,121 $505,288
Cost of health care services and medical
supplies...................................... 234,149 255,189 262,990 274,491
Operating expenses.............................. 116,224 136,504 137,810 170,535(1)
Interest expense, net........................... 3,394 3,197 3,233 6,049
-------- -------- -------- --------
Total expenses................................ 353,767 394,890 404,033 451,075
-------- -------- -------- --------
Earnings before Income Taxes.................... 36,851 48,287 75,088 54,213
Provision for Income Taxes...................... 17,931 23,227 34,215 36,849
-------- -------- -------- --------
Net earnings.................................... $ 18,920 $ 25,060 $ 40,873 $ 17,364
======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes a charge of $27,441 to reflect the impairment of the goodwill in
the Company's German renal products manufacturing facilities (Note 9).
NOTE 19. SUBSEQUENT EVENT -- GUARANTEE (UNAUDITED)
Fresenius Medical Care and Grace New York have agreed to provide the United
States government, upon consummation of the Reorganization described in Note 1,
with a joint and several guarantee of payment of the obligations, if any,
arising out of the investigation by the OIG described in Note 15. In support of
this guarantee, NMC has agreed to deliver to the government, on or prior to the
consummation of the Reorganization, an irrevocable standby letter of credit in
the amount of $150 million.
F-24
<PAGE> 284
THIS PAGE INTENTIONALLY OMITTED
F-25
<PAGE> 285
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
NET REVENUES
Health care services............................................... $488,371 $444,480
Medical supplies................................................... 39,920 33,578
---------- ----------
528,291 478,058
---------- ----------
EXPENSES
Cost of health care services....................................... 287,531 251,788
Cost of medical supplies........................................... 27,902 24,813
General and administrative expenses................................ 101,447 92,251
Provision for doubtful accounts.................................... 21,486 19,399
Depreciation and amortization...................................... 30,628 25,915
Research and development........................................... 686 771
Allocation of Grace Chemicals expenses............................. 2,017 9,548
Interest expense, net, and related financing costs................. 7,004 5,750
---------- ----------
478,701 430,235
---------- ----------
EARNINGS BEFORE INCOME TAXES......................................... 49,590 47,823
PROVISION FOR INCOME TAXES........................................... 23,145 21,807
---------- ----------
NET EARNINGS......................................................... $ 26,445 $ 26,016
========== ==========
Earnings per share................................................... $ 0.27 $ 0.27
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
F-26
<PAGE> 286
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1996
----------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 33,855
Accounts receivable, less allowances of $122,249............................. 430,013
Inventories.................................................................. 72,458
Deferred income taxes........................................................ 90,280
Other current assets......................................................... 64,252
----------
Total Current Assets...................................................... 690,858
----------
Properties and equipment, net.................................................. 384,163
----------
Other Assets:
Excess of cost over the fair value of net assets acquired and other
intangible assets, net of accumulated amortization of $260,599............ 962,831
Other assets and deferred charges............................................ 21,625
----------
Total Other Assets........................................................ 984,456
----------
Total Assets................................................................... $2,059,477
==========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and capitalized lease obligations.......... $ 158,202
Accounts payable............................................................. 110,499
Accrued liabilities.......................................................... 190,948
Accrued income taxes......................................................... 13,573
----------
Total Current Liabilities................................................. 473,222
Long-term debt................................................................. 22,321
Capitalized lease obligations.................................................. 5,969
Deferred income taxes.......................................................... 64,618
Other liabilities.............................................................. 34,702
----------
Total Liabilities......................................................... 600,832
----------
Commitments and Contingencies (Note 3)
Equity:
Equity....................................................................... 1,461,714
Cumulative translation adjustment............................................ (3,069)
----------
Total Equity.............................................................. 1,458,645
----------
Total Liabilities and Equity................................................... $2,059,477
==========
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
F-27
<PAGE> 287
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash Flows Provided by Operating Activities:
Net earnings........................................................ $ 26,445 $ 26,016
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization.................................... 30,629 25,915
Provision for doubtful accounts.................................. 21,486 19,399
Provision for deferred income taxes.............................. (1,911) (5,918)
Loss on disposal of properties and equipment..................... 1,136 399
Changes in operating assets and liabilities, net of effects of
purchase acquisitions and foreign exchange:
Increase in accounts receivable.................................. (43,070) (19,864)
Decrease (increase) in inventories............................... 249 (4,505)
Increase in other current assets................................. (12,347) (13,043)
Increase (decrease) in accounts payable.......................... 5,764 (17,231)
Increase in accrued income taxes................................. 10,350 10,781
Decrease in accrued liabilities.................................. (30,841) (21,116)
Increase in other long-term liabilities.......................... 4,261 4,103
Increase in other assets and deferred charges.................... (1,930) (1,495)
Other, net....................................................... 361 (3,410)
--------- ---------
Net cash provided by operating activities........................... 10,582 31
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures............................................. (24,584) (27,682)
Payments for acquisitions, net of cash acquired.................. (24,681) (40,117)
Payments for physicians' contract agreements..................... -- (2,900)
--------- ---------
Net cash used in investing activities............................... (49,265) (70,699)
--------- ---------
Cash Flows from Financing Activities:
Advances from Grace Chemicals, net............................... 69,367 44,127
Proceeds on issuance of debt..................................... 94,332 18,192
Payments on debt and capitalized leases.......................... (126,746) (4,364)
--------- ---------
Net cash provided by financing activities........................... 36,953 57,955
--------- ---------
Effects of changes in foreign exchange rates.......................... 2,055 (3,619)
--------- ---------
Increase (decrease) in cash and cash equivalents...................... 325 (16,332)
Cash and cash equivalents at beginning of period...................... 33,530 39,758
--------- ---------
Cash and cash equivalents at end of period............................ $ 33,855 $ 23,426
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................... $ 6,828 $ 5,944
Income taxes..................................................... 3,665 3,574
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
F-28
<PAGE> 288
W.R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The Special-Purpose, Consolidated Interim Financial Statements of W. R.
Grace & Co. ("Grace New York") and National Medical Care, Inc. and its
subsidiaries ("NMC" and together with Grace New York, the "Company") have been
prepared by the Company in accordance with the accounting policies stated in the
historical Special-Purpose, Consolidated Financial Statements and should be read
in conjunction with the Notes to Special-Purpose, Consolidated Financial
Statements appearing therein. In the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation have been included in the interim financial statements. The results
for the three month period ended March 31, 1996 may not necessarily be
indicative of the results for the fiscal year ending December 31, 1996.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
MARCH
31, 1996
--------
<S> <C>
Raw materials................................................................. $ 9,127
Manufactured goods in process................................................. 2,354
Manufactured and purchased inventory available for sale....................... 32,472
--------
43,953
Health care supplies.......................................................... 28,505
--------
Total................................................................. $ 72,458
========
</TABLE>
NOTE 3. COMMITMENTS AND CONTINGENCIES
See Note 15 to the historical Special-Purpose, Consolidated Financial
Statements.
F-29
<PAGE> 289
THIS PAGE INTENTIONALLY OMITTED
F-30
<PAGE> 290
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Fresenius Aktiengesellschaft
Bad Homburg v.d. Hohe, Germany:
We have audited the accompanying combined balance sheets of Fresenius
Worldwide Dialysis, a business unit of Fresenius Aktiengesellschaft, Bad Homburg
v.d. Hohe, Germany, as of December 31, 1995 and 1994 and the related combined
statements of operations and net assets and cash flows for the years then ended.
In connection with our audits of the combined financial statements, we have also
audited the accompanying financial statement schedule. These combined financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Fresenius
Worldwide Dialysis as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic combined financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
April 25, 1996
Frankfurt am Main, Germany
F-31
<PAGE> 291
FRESENIUS WORLDWIDE DIALYSIS
COMBINED STATEMENTS OF OPERATIONS AND NET ASSETS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(THOUSANDS, UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Net sales.............................................................. $896,540 $719,843
Cost of sales.......................................................... 514,080 419,378
-------- --------
Gross profit......................................................... 382,460 300,465
Operating expenses:
Selling, general and administrative.................................. 242,990 195,227
Research and development............................................. 17,292 16,937
-------- --------
Operating income..................................................... 122,178 88,301
Other (income) expense:
Interest income...................................................... (1,252) (1,446)
Interest expense..................................................... 14,316 12,009
Other, net........................................................... (6,289) (6,084)
-------- --------
Income before income taxes........................................... 115,403 83,822
Income tax expense..................................................... 40,577 29,179
-------- --------
Income before minority interest...................................... 74,826 54,643
Minority interest...................................................... 5,111 2,550
-------- --------
Net income........................................................... 69,715 52,093
Net assets at beginning of the year.................................... 261,337 200,030
Foreign currency translation adjustments............................... 13,797 16,153
Gain on sales of stock by subsidiary................................... -- 6,805
Net activity with Fresenius............................................ (39,224) (13,744)
-------- --------
Net assets at end of the year.......................................... $305,625 $261,337
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-32
<PAGE> 292
FRESENIUS WORLDWIDE DIALYSIS
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(THOUSANDS, UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
ASSETS
1995 1994
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 12,091 $ 11,973
Trade accounts receivable, less allowance for doubtful accounts of
$12,718 in 1995 and $12,702 in 1994............................... 183,878 157,218
Inventories, net..................................................... 182,738 150,495
Prepaid expenses and other current assets............................ 15,048 14,435
Deferred taxes....................................................... 2,019 2,183
-------- --------
Total current assets......................................... 395,774 336,304
Property, plant and equipment, net..................................... 134,767 116,807
Intangible assets, net................................................. 67,260 68,014
Investments in affiliates.............................................. 19,121 9,398
Deferred taxes......................................................... 2,710 --
Other assets........................................................... 24,386 12,518
-------- --------
$644,018 $543,041
======== ========
LIABILITIES AND NET ASSETS (EQUITY)
Current liabilities:
Accounts payable..................................................... $ 38,360 $ 27,813
Accrued expenses..................................................... 63,194 55,147
Short-term borrowings................................................ 109,444 85,678
Current portion of long-term debt and capital lease obligations...... 20,195 19,146
Income taxes payable................................................. 922 3,225
Other current liabilities............................................ 21,312 16,356
-------- --------
Total current liabilities.................................... 253,427 207,365
Long-term payable, less current portion................................ 1,275 1,861
Long-term debt and capital lease obligations, less current portion..... 38,812 34,522
Non-current borrowing from affiliate................................... 274 274
Other liabilities...................................................... 3,322 4,323
Pension liability...................................................... 16,767 13,286
Deferred taxes......................................................... -- 878
Minority interest...................................................... 24,516 19,195
-------- --------
Total liabilities............................................ 338,393 281,704
-------- --------
Net assets............................................................. 305,625 261,337
-------- --------
$644,018 $543,041
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE> 293
FRESENIUS WORLDWIDE DIALYSIS
COMBINED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1995 AND 1994
(THOUSANDS, UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................ $ 69,715 $ 52,093
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation and amortization........................................... 41,693 34,945
Change in deferred tax.................................................. (3,398) 3,996
Gain on sale of fixed assets............................................ (997) 152
Changes in assets and liabilities:
Trade accounts receivable, net.......................................... (18,948) (12,198)
Inventories, net........................................................ (25,014) (15,808)
Prepaid expenses and other current assets............................... 292 (2,939)
Other assets............................................................ (10,815) (6,061)
Accounts payable and accrued expenses................................... 16,728 13,783
Other current and non-current liabilities............................... 2,399 (3,928)
Income taxes payable.................................................... (2,507) (683)
-------- --------
Net cash provided by operating activities.......................... 69,148 63,352
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment................................ (92,906) (59,545)
Proceeds from sale of property, plant and equipment....................... 42,673 1,803
Acquisitions and capital increases in affiliates.......................... (10,087) (5,972)
-------- --------
Net cash used in investing activities................................... (60,320) (63,714)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings....................................... $149,405 $123,208
Repayments of short-term borrowings....................................... (129,052) (119,672)
Decrease in long-term payable............................................. (586) (556)
Proceeds from long-term debt and capital lease obligations................ 20,163 15,058
Principal payments of long-term debt and capital lease obligations........ (20,264) (21,750)
Proceeds from issuance of common stock.................................... 1,939 16,322
Net activity with Fresenius............................................... (36,894) (14,727)
Change in minority interest............................................... 6,229 2,550
-------- --------
Net cash used in financing activities.............................. (9,060) 433
-------- --------
Net (decrease) increase in cash and cash equivalents........................ (232) 71
Effect of exchange rates on cash and cash equivalents....................... 350 511
Cash and cash equivalents at beginning of year.............................. 11,973 11,391
-------- --------
Cash and cash equivalents at end of year.................................... $ 12,091 11,973
======== ========
Supplementary cash flow information:
Cash paid for interest.................................................... $ 17,109 13,684
======== ========
Cash paid for income taxes................................................ $ 38,070 28,496
======== ========
Supplementary schedule of non-cash financing activities:
Acquisition of equipment through obligations under capital leases......... $ 9,071 7,383
======== ========
Disposal of assets under capital leases................................... $ 255 135
======== ========
Acquisition of license technology in exchange for inventory and debt...... $ -- $ 908
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE> 294
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS
(THOUSANDS, UNLESS OTHERWISE INDICATED)
1. BASIS OF PRESENTATION
On February 4, 1996, Fresenius Aktiengesellschaft, Bad Homburg v.d. Hohe,
Germany, ("Fresenius") and W. R. Grace & Co. ("Grace") entered into an Agreement
and Plan of Reorganization (the "Reorganization Agreement") under which they
agreed to combine Fresenius' Worldwide Dialysis businesses ("FWD" or the
"Company") with the health care business of Grace conducted by its subsidiary
National Medical Care, Inc. ("NMC"). Pursuant to the Reorganization Agreement,
Fresenius will contribute FWD into a wholly owned dormant subsidiary,
Sterilpharma GmbH, which will, thereafter, change its name to "Fresenius Medical
Care AG" ("FMC"). The Reorganization Agreement further provides that, subsequent
to the spin-off to Grace's common shareholders of the subsidiaries comprising
Grace's non-health care business, a subsidiary of FMC will be merged into Grace
(whose name will be changed to "Fresenius National Medical Care, Inc.") and the
common stock of Grace will be exchanged for ordinary shares of FMC.
Under the terms of the Reorganization Agreement, Fresenius will contribute
FWD's operations located principally in the following countries to FMC:
<TABLE>
<S> <C>
Germany Austria
Belgium Brazil(2)
France(1)(2) Italy(1)
Japan The Netherlands
Spain Switzerland
United Kingdom(2) United States of America
</TABLE>
(1) Includes Fresenius shared production facilities which will be
transferred to FMC and at which FMC will manufacture products for
Fresenius. See Shared Production Facilities below.
(2) Excludes Fresenius shared production facilities at which Fresenius will
manufacture products for FWD under contractual arrangements. See Shared
Production Facilities below.
The accompanying combined financial statements have been prepared in
accordance with United States generally accepted accounting principles ("U.S.
GAAP") on a basis which reflects the combined historical financial statements of
FWD, including Sterilpharma GmbH, assuming that the Company, currently a
business unit of Fresenius, was organized for all periods presented as follows
as a separate legal entity, owning certain net assets and certain subsidiaries
and associated companies of Fresenius.
(a) Shared Production Facilities
The Company shares certain manufacturing facilities with Fresenius' non-FWD
businesses. In connection with the Reorganization Agreement, in each situation
where facilities are currently shared (see above), post-Reorganization Agreement
ownership of the location or manufacturing facility (collectively, the
"Facility") will be retained by Fresenius or contributed to FWD. The
accompanying combined balance sheets include, for those Facilities which will be
retained by FWD, land, buildings, related manufacturing assets; raw materials
and work-in-process inventories; and accounts payable and accrued expenses
related to those fixed assets and inventory. In addition, the balance sheets
exclude the land, buildings, related manufacturing assets; raw materials and
work-in-process inventories; and accounts payable and accrued expenses related
to those fixed assets and inventory for Facilities which will be retained by
Fresenius.
Production and related services rendered by FWD at shared Facilities to
Fresenius are effectively allocated to Fresenius at fully absorbed cost and,
accordingly, are accounted for as an inventory transfer through the statement of
operations. Such production rendered by Fresenius at shared Facilities on behalf
of FWD are also effectively allocated to FWD at fully absorbed cost. For the
years ended December 31, 1995 and 1994, the aggregate costs that were allocated
to Fresenius by FWD for production and related services at shared facilities
were $14,628 and $13,417, respectively, while the aggregate production costs
that were
F-35
<PAGE> 295
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
allocated to FWD from Fresenius for the years ended December 31, 1995 and 1994
were $35,700 and $33,001, respectively. Prior to the transaction contemplated by
the Reorganization Agreement, the Company will enter into contractual agreements
with Fresenius to commit to sell to and purchase from Fresenius production at
amounts to be negotiated.
(b) Real Estate Located in Germany
Under the terms of the Reorganization Agreement, certain land and
manufacturing and office buildings located in Germany will be retained by
Fresenius and leased to FWD under operating lease agreements. Accordingly, such
land and buildings have been excluded from the accompanying combined balance
sheets. The accompanying combined statements of operations include for the year
ended December 31, 1995 and 1994, $1,575 and $1,025, respectively, of
depreciation expense related to such facilities representing an assumed charge
to FWD from Fresenius for the use of the land and buildings. Subsequent to
consummation of the transaction contemplated by the Reorganization Agreement,
FWD will pay Fresenius $12,000 per year, escalated annually based upon the
German commercial practices for similar real estate, representing a fair market
value rental for such properties.
(c) Shared Services
Fresenius has provided services to and incurred costs on behalf of the
Company. In addition, FWD has provided certain services to Fresenius. The costs
of such services, including, but not limited to, administrative services,
management information services, employee benefit administration, legal and
environmental consultation and administration, insurance, central purchasing,
tax services, treasury services, and accounting and reporting have been
allocated to the Company. The allocation of the costs and expenses for services
from Fresenius to FWD's operations was $51,203 and $45,529 for the years ended
December 31, 1995 and 1994, respectively. The allocation of the costs and
expenses for services from FWD to Fresenius was $20,093 and $13,405 for the
years ended December 31, 1995 and 1994, respectively. The foregoing amounts
include Fresenius AG's charges to Fresenius USA, Inc. ("FUSA") for services
provided for the years ended December 31, 1995 and 1994 of $2,020 and $107,
respectively. These allocations were based upon service contracts between the
relevant parties as well as upon methods that management believes are
reasonable, including the use of time estimates, headcount and transaction
statistics, and similar activity-based data. In the opinion of management of the
Company, such expenses are indicative of the actual expenses that would have
been incurred if the Company had been operating as an independent entity. Prior
to consummation of the transaction contemplated by the Reorganization Agreement,
the Company is expecting to enter into service agreements with Fresenius to
continue to receive the foregoing services at amounts to be negotiated.
(d) Intercompany Receivables and Payables and Cash and Cash Equivalents
In accordance with the terms of the Reorganization Agreement, intercompany
receivables and payables between FWD and Fresenius will not be contributed to
FMC but will remain with Fresenius. Accordingly, in the accompanying combined
balance sheets, intercompany receivables and payables between FWD and Fresenius
have been accounted for within net assets.
In addition, under the terms of the Reorganization Agreement, cash and cash
equivalents will not be transferred to FWD but will remain with Fresenius.
Accordingly, except in situations where 100% of a legal entity is being
contributed into FMC, no cash or cash equivalents have been included in the
accompanying combined statement of net assets. In connection with the
transaction contemplated by the Reorganization Agreement, the remaining cash
included in the accompanying statement of net assets will be transferred to
Fresenius.
F-36
<PAGE> 296
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
The business of the Company is the development, manufacture and
distribution of equipment and related products for all forms of kidney dialysis
treatment and the providing of kidney dialysis treatment and related services.
(b) Principles of Combination
The combined financial statements include the accounts of FWD as described
in Note 1. All significant intercompany transactions and balances have been
eliminated. The equity method of accounting is used for investments in
associated companies (20% to 50% owned).
(c) Cash and Cash Equivalents
Cash and cash equivalents represent cash and certificates of deposit with
original maturity dates of three months or less at origination.
(d) Inventories
Inventories are stated at the lower of cost (determined by using the
average or first-in, first-out method) or market value.
(e) Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Property and equipment
under capital leases are stated at the present value of future minimum lease
payments at the inception of the lease.
Deprecation on property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the assets ranging from
10 to 50 years for buildings and improvements and 3 to 15 years for machinery
and equipment. Equipment held under capital leases and leasehold improvements
are amortized using the straight-line method over the shorter of the lease term
or the estimated useful life of the asset.
The Company capitalizes interest on borrowed funds during construction
periods. Interest capitalized during 1995 and 1994 was $1,069 and $779,
respectively.
(f) Other Assets
In 1995, FUSA completed construction of a dialyser plant addition to its
manufacturing facility in Ogden, Utah. Included in other assets are $6,375 of
validation costs, net of accumulated amortization of $267, incurred to qualify
the products and the associated manufacturing processes for approval by the U.S.
Food and Drug Administration. Such costs are being amortized on a straight-line
basis over an estimated useful life of 3 years upon commencement of
manufacturing.
(g) Intangible Assets
Intangible assets consist of goodwill (the excess of cost over net assets
acquired), manufacturing technology, patents, distribution rights, licenses and
other intangible assets. Intangible assets are amortized on a straight-line
basis over the estimated useful lives of the assets ranging from four to
twenty-five years.
The Company assesses the recoverability of intangible assets by determining
whether the amortization of the asset's balance over its remaining useful life
can be recovered through projected undiscounted cash flows.
F-37
<PAGE> 297
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
(h) Derivative Financial Instruments
Forward currency contracts -- Gains and losses on forward currency
contracts that are designated and effective as hedges of existing assets,
liabilities and firm commitments are deferred and recognized along with the
effects of the hedged transaction. Gains and losses on other forward currency
contracts are recognized at each reporting period.
Interest rate swaps -- Interest rate agreements that are designated as a
hedge of a debt or other long-term obligations are accounted for on an accrual
basis. That is, the interest payable and interest receivable under the swaps
terms are accrued and recorded as an adjustment to the interest or rent expense
of the designated liability or obligations.
Amounts due from and payable to the counterparties of interest rate swaps
are recorded on an accrual basis at each reporting date on amounts computed by
reference to the respective interest rate swap contract. Realized gains and
losses that occur from the early termination or expiration of contracts are
recorded in income over the remaining period of the original swap agreement.
(i) Foreign Currency Translation
For purposes of these combined financial statements, the U.S. Dollar has
been used as the reporting currency. The financial statements of entities in
other currencies than U.S. Dollars have been translated into U.S. Dollars in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation". Assets and liabilities of entities with
"functional" currencies other than the U.S. Dollar are translated at the year
end rate of exchange. Income and expense and cash flow items are translated at
the average exchange rate for the year. The resulting translation adjustments
are recorded directly to Net Assets.
(j) Revenue Recognition Policy
Revenues are recognized when title to the product has passed to the buyer,
either at the time of shipment or upon receipt by the customer.
(k) Research and Development Expenses
Research and development expenses are expensed as incurred.
(l) Income Taxes
The Company represents a business unit of Fresenius. In Germany the Company
is a division of Fresenius and as such does not file separate income tax
returns. This is also true in Austria, Great Britain, Belgium, Japan and Brazil.
In such cases, the Company's income tax provision is computed as if it were a
separate company. In the United States, Switzerland, France, Italy, the
Netherlands and Spain, the Company operates as a separate subsidiary of
Fresenius and, as such, files income tax returns in such countries. Income taxes
payable in the accompanying balance sheets relates solely to tax liabilities of
the Company's subsidiaries in countries where the subsidiary files an income tax
return.
In accordance with SFAS No. 109, "Accounting for Income Taxes", deferred
tax assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Current taxes in Germany are computed on the basis of
the
F-38
<PAGE> 298
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
assumption that all current earnings are distributed currently. Deferred taxes
in Germany are calculated using the "undistributed earnings" tax rate.
(m) Sale of Stock by Subsidiaries
The excess or deficiency of the proceeds from the sales of shares of a
subsidiary and the Company's basis in the shares of the subsidiary is recognized
by the Company as a capital transaction directly in net assets.
(n) Use of Estimates
The preparation of combined financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(o) Concentration of Credit Risk
The Company is engaged in the manufacture and sale of products for all
forms of kidney dialysis equipment principally to health care providers
throughout the world. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers.
(p) Minority Interest
Minority interest represents the separate public ownership of the
outstanding shares of FUSA of 29.1%.
(q) Net Assets
At each balance sheet date presented, net assets represent the excess of
assets over liabilities to unrelated third-parties of the business units
included in FWD discussed in Note 1 to these combined financial statements.
Intercompany transactions and charges between FWD and Fresenius have also,
effectively, been accounted for within net activity with Fresenius. For the
years ended December 31, 1995 and 1994 the net activity with Fresenius resulting
from intercompany transactions and charges was credits of $9,960 and $19,321,
respectively.
3. RELATED PARTY TRANSACTIONS
(a) Sales to Non-FWD Businesses
During the years ended December 31, 1994 and 1995, FWD recognized $19,112
and $10,954 of sales to non-FWD businesses of Fresenius.
(b) Financial Support
Fresenius has provided substantial financial support to FUSA, a majority
owned entity included within FWD. This support has included guarantees of
letters of credit in connection with FUSA's previously outstanding industrial
revenue bonds, providing credit support to assist in securing lines of credit,
participating in and assisting with foreign exchange contracts as well as
various miscellaneous general management assistance.
F-39
<PAGE> 299
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
(c) Registration Rights Agreement
Fresenius and FUSA are party to a Registration Rights Agreement, dated
February 24, 1993. This agreement grants Fresenius demand registration rights
with respect to all shares of FUSA common stock held by Fresenius on February
24, 1993 or issuable to Fresenius upon conversion of shares of FUSA Series F
preferred stock or exercise of a warrant for 1,700,000 shares issued to
Fresenius in connection with an acquisition (collectively, the "Registrable
Shares"). FUSA is to pay all expenses in connection with the first such
registration. A holder of Registrable Shares may also request that FUSA include
its Registrable Shares in registration statements filed by FUSA in connection
with a public offering of common stock on behalf of FUSA and/or another holder
of FUSA common stock.
(d) Note Payable to FNA
In 1991, FUSA used the $11,900 proceeds from the exercise of stock options
by Fresenius to reduce its original indebtedness to Fresenius North America,
Inc. ("FNA"), a wholly owned subsidiary of Fresenius, to $7,874. During 1992,
FUSA issued additional shares of common stock to Fresenius for $7,600, the
proceeds of which were used to further reduce FUSA's note payable to FNA. The
balances outstanding on the note payable to FNA was $274 at December 31, 1995
and 1994.
(e) Other
FUSA provides various administrative services and advances to Fresenius
Pharma U.S.A., Inc. ("Fresenius Pharma"), another wholly owned subsidiary of
Fresenius. There were no receivables related to these services from Fresenius
Pharma at December 31, 1995 and 1994. During 1992, FUSA acquired from Fresenius
Pharma the rights to distribute within North America certain transplantation
pharmaceutical products of Fresenius. FUSA incurred no costs for the
distribution rights under this agreement.
Pursuant to a series of agreements with Seratonics, Inc. ("Seratonics") and
Andersen Group, Inc., entered into in 1985 and extended and amended in 1995,
FUSA manages, and acts as sole distributor for the dialyzer reuse business of
Seratronics. These arrangements required FUSA to make minimum net payments of
$100 per year to Seratronics through February 1995, and starting in March 1995
require FUSA to make minimum payments of $50 per quarter through February 29,
2000. As of February 1995, FUSA has the right to acquire the assets and
liabilities of the dialyzer reuse business for a nominal purchase price and, if
it exercises this option, its obligation to make the quarterly payments
discussed above ends. During 1995 FUSA, as distributor, purchased dialyzer reuse
systems and supplies from Seratronics for an aggregate purchase price of
approximately $1,600. The results of operations and the assets and liabilities
of the Seratronics' reuse business are included in FUSA's combined financial
statements. The President and Chief Executive Officer of FUSA is also the
President and Chief Executive Officer of Seratronics. A director of FUSA is the
President of Andersen Group, Inc. which owns a majority of the outstanding
capital stock of Seratronics. A portion of the salary of the President and Chief
Executive Officer of FUSA is paid each year by Seratronics.
A member of FUSA's Board of Directors is also a partner in a law firm which
provided certain legal services for FUSA and Fresenius. FUSA paid the law firm
approximately $259 and $6 in 1995 and 1994, respectively.
F-40
<PAGE> 300
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
4. INVENTORIES
As of December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Raw materials and purchased components................. $ 69,102 $ 53,216
Work in process........................................ 33,667 22,687
Finished goods......................................... 84,546 77,888
--------- ---------
187,315 153,791
Reserves............................................... (4,577) (3,296)
--------- ---------
Inventories, net............................. $182,738 $150,495
========= =========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
As of December 31, property, plant and equipment consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Land................................................. $ 1,025 $ 1,392
Buildings and improvements........................... 38,252 26,452
Machinery and equipment.............................. 198,412 157,821
Machinery, equipment and rental equipment
under capitalized leases........................... 36,376 37,044
Rental equipment..................................... 20,919 19,751
Loaned equipment..................................... 2,784 2,353
Construction in progress............................. 17,069 25,633
--------- --------
314,837 270,446
Accumulated depreciation and amortization............ (180,070) (153,639)
--------- --------
Property, plant and equipment, net......... $ 134,767 $ 116,807
========= ========
</TABLE>
Depreciation and amortization expense for property, plant and equipment,
including amounts related to the real estate in Germany (see Note 1), amounted
to $38,218 and $32,554 for the years ended December 31, 1995 and 1994,
respectively.
Included in property, plant and equipment as of December 31, 1995 and 1994,
was $14,619 and $11,521, respectively, of peritoneal dialyses cycler machines
which the Company leases to customers with end-stage renal disease on a
month-to-month basis and $3,888 and $2,591, respectively of hemodialyses
machines which the Company leases to physicians under operating leases. Rental
income for the peritoneal dialyses cycler machines was $2,203 and $1,586 for the
years ended December 31, 1995 and 1994, respectively. Identification of the
rental income from the Company's leasing of hemodialyses machines is not
practicable as the Company's return on the machines is received through
contractual arrangements whereby a premium is charged for other support
equipment sold during the life of the lease.
Accumulated depreciation related to machinery, equipment and rental
equipment under capital leases was $18,601 and $23,148 at December 31, 1995 and
1994, respectively.
F-41
<PAGE> 301
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
6. INTANGIBLE ASSETS
As of December 31, intangible assets consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Goodwill............................................... $ 60,417 $ 56,283
Manufacturing technology............................... 15,629 15,629
Patents................................................ 6,211 6,009
Distribution rights.................................... 2,356 1,876
Other.................................................. 6,212 5,792
--------- ---------
90,825 85,589
Accumulated amortization............................... (23,565) (17,575)
--------- ---------
Intangible assets, net....................... $ 67,260 $ 68,014
========= =========
</TABLE>
Amortization expense for intangible assets amounted to $5,052 and $3,415
for the years ended December 31, 1995 and 1994, respectively.
7. SHORT-TERM BORROWINGS
Short-term borrowings of $109,444 and $85,678 at December 31, 1995 and
1994, respectively, represent amounts borrowed by certain of the Company's
subsidiaries under lines of credit with commercial banks of $84,206 and $85,678,
respectively, and, in 1995, an amount borrowed by a subsidiary from Fresenius of
$25,238. The external borrowings bear interest at prevailing interest rates in
the country of the borrowing. The borrowing from Fresenius bears interest at
4.25% per annum.
At December 31, 1995 FWD had available lines of credit, principally
short-term, of approximately $93,000, of which $73,000 was utilized and $20,000
was unused. These lines of credit are generally secured by the Company's
accounts receivable and contain various covenants including, but not limited to,
requirements for maintaining defined levels of working capital, net worth,
capital expenditures and various financial ratios.
8. LONG-TERM PAYABLE
In connection with a 1993 acquisition, FUSA entered into an obligation
relating to the purchase of Optum(R) devices. During 1993, FUSA fulfilled this
obligation by taking possession of these Optum(R) devices and entering into a
long-term payable agreement. This long-term payable is recorded at its net
present value with an imputed interest rate of 5.68%. As of December 31, 1995,
the long-term portion of the note payable was $1,275 due over the next three
years.
F-42
<PAGE> 302
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
As of December 31, long-term debt and capital lease obligations consisted
of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Term loan(a)........................................... $ 18,750 $ 25,000
Note payable, discounted to present value(b)........... 6,724 8,731
Allocation of Fresenius corporate debt(c).............. 4,116 --
Other.................................................. 5,695 4,603
Capital leases(d)...................................... 23,722 15,334
------- -------
59,007 53,668
Less current maturities................................ (20,195) (19,146)
------- -------
$ 38,812 $ 34,522
======= =======
</TABLE>
- ---------------
(a) In connection with the purchase of certain assets, FUSA entered into a term
loan agreement with a commercial bank to borrow $25,000 at an interest rate
of 5.68% per annum. The loan is repayable in annual installments of $6,250
through February 1998. The loan is guaranteed by Fresenius.
(b) In consideration for proprietary technology acquired, FUSA issued a note
payable due in annual installments of $2,500 through 1998. The obligation
has been recorded at its net present value, using an imputed interest rate
of 5.68%. The note is secured by a standby letter of credit expiring March
31, 1998, totaling $10,000. FUSA pays a commitment fee of 0.5% per annum on
the outstanding letter of credit.
(c) Under the terms of the Reorganization Agreement, as of December 31, 1995,
the Company was permitted $170,000 of total long-term and short-term debt,
as defined in the Agreement. Accordingly, at December 31, 1995 the Company
had outstanding $165,884 of long-term and short-term debt specifically
identified to FWD and $4,116 of allocated debt of Fresenius. Interest
expense for the allocated debt has been recorded based upon Fresenius'
intercompany borrowing rate of 4.25%.
(d) Future minimum lease payments under capital leases as of December 31, 1995
are:
For the years ended December 31:
<TABLE>
<S> <C>
1996............................................................ $ 12,091
1997............................................................ 8,459
1998............................................................ 5,164
1999............................................................ 1,406
2000............................................................ 3
--------
27,123
Amounts representing interest................................... (3,401)
--------
Present value capital lease obligations........................... 23,722
Current portion of capital lease obligations...................... (10,008)
--------
Capital lease obligations, less current portion................... $ 13,714
========
</TABLE>
Interest rates on the capital lease obligations at December 31, 1995, range
from 9% to 12% and were imputed based on the lower of the Company's incremental
borrowing rate at the inception of the lease or the lessor's implicit rate.
F-43
<PAGE> 303
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
Aggregate annual payments applicable to the term loan, note payable and
other borrowings for the five years subsequent to December 31, 1995 are:
<TABLE>
<S> <C>
1996....................................................... $ 9,947
1997....................................................... 9,622
1998....................................................... 9,162
1999....................................................... 392
2000....................................................... 211
Thereafter................................................. 1,835
------
$31.169
======
</TABLE>
10. NET ASSETS
During 1994 the Company's subsidiary FUSA successfully completed a public
offering of 3,450,000 shares of its common stock, realizing net proceeds of
approximately $15,989, after expenses. As a result of such offering the
Company's ownership percentage in FUSA declined from 79.69% to 70.9%. In
connection with such transaction the Company recorded a gain of $6,805 directly
against Net Assets (Equity).
11. COMMITMENTS
Operating Leases
The Company leases facility space and machinery and equipment under various
lease agreements expiring at dates through 1998.
In March 1995, FUSA entered into a sale leaseback arrangement with a bank
which covers the sale by FUSA of approximately $19.0 million of certain new
equipment of FUSA's dialyzer manufacturing facility at its Ogden, Utah plant to
the bank, and the leaseback of the equipment under a four year operating lease
that has renewal options and a purchase option at fair market value. Although
the rent payments on the lease are variable based on the three-month LIBOR, FUSA
has effectively fixed its rent expense through the use of interest rate swap
agreements (see Note 12). In December 1995, an additional $8.0 million of
similar new equipment which was sold and leased back under the above referenced
four-year renewable lease. If FUSA elects not to purchase the equipment or renew
the lease at the end of the lease term, FUSA will be obligated to pay a
termination fee of up to $20,250, to be offset by sales proceeds from FUSA
remarketing the equipment.
Future minimum rental payments under noncancelable operating leases as of
December 31, 1995 are:
For the years ended December 31:
<TABLE>
<S> <C>
1996....................................................... $ 9,444
1997....................................................... 7,840
1998....................................................... 6,143
1999....................................................... 4,656
2000....................................................... 3,468
</TABLE>
In addition, upon consummation of the transaction contemplated by the
Reorganization Agreement, FWD will be obligated for lease payments of $12,000
per year in connection with the German real estate (see Note 1).
F-44
<PAGE> 304
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
Purchase Commitments
Under the terms of purchase agreements, the Company is obligated to
purchase certain raw materials. The minimum purchase commitments under the
agreements are:
<TABLE>
<S> <C>
1996....................................................... $29,337
1997....................................................... 24,242
-------
$53,579
=======
</TABLE>
The Company has commitments at December 31, 1995 to expend approximately
$15,400 to complete the construction of a production facility.
12. FINANCIAL INSTRUMENTS
Foreign Exchange Contracts
The Company uses foreign exchange contracts as a hedge against foreign
exchange risks associated with the settlement of foreign currency denominated
payables and firm commitments.
At December 31, 1995 the Company had purchased foreign exchange contracts
for the sale of currencies for Deutschemarks of $67,876 and the purchase of U.S.
Dollars for Deutsche Marks of $10,394. The fair value of the Company's foreign
exchange contract is not material.
Interest Rate Swap Agreements
At December 31, 1995 and 1994, FUSA had interest rate swap agreements
outstanding with a commercial bank for notional amounts of $17,400 and $7,634,
respectively. These agreements effectively change FUSA's interest rate exposure
on its operating lease payments to fixed rates of 8.02.% and 5.60%,
respectively. The interest rate swap agreements outstanding as of December 31,
1995 expire in March 1999. While neither the Company nor FUSA anticipates
nonperformance by counterparties, FUSA is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap agreements.
The fair value of the interest rate swaps is the estimated amount that FUSA
would receive or pay to terminate the swap agreements. This estimate is
subjective in nature and involves uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. As of December 31, 1995,
the cost to terminate the swap agreements is estimated to be $1,190.
13. COMMON STOCK OPTIONS
FUSA has stock option plans (the "Plans") which grant employees and
officers the option to purchase FUSA common stock. At December 31, 1995, a total
of 2,764,420 shares of FUSA common stock is reserved for issuance of stock
options already granted or available for future grant. During 1995, all stock
options were granted with an exercise price equal to fair market value on the
date of grant.
The 1976 Plan
FUSA's 1976 Stock Option Plan (the "1976 Plan") provided for the purchase
of FUSA common stock by officers and key employees of FUSA. The 1976 Plan
provided for non-incentive stock options, all of which vested over a period not
to exceed four years from the date of grant and expire not more than ten years
from the date of grant. No options have been granted under the 1976 Plan after
December 1986.
F-45
<PAGE> 305
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
The 1985 Plan
FUSA's 1985 Special Stock Option Plan (the "1985 Plan") provided for the
grant of non-incentive options to certain employees as compensation for an
unanticipated two-week shutdown which occurred in 1985. All options under the
1985 Plan were granted in 1985, vested in 1986. The 1985 Plan expired in 1995.
The 1987 Plan
FUSA's 1987 Stock Option Plan (the "1987 Plan") currently provides for
granting non-incentive and incentive stock options to key employees of FUSA. The
stock options outstanding under the 1987 Plan vest in a period not to exceed
four years and expire not more than ten years from the date of grant. Options
granted under the 1987 Plan are exercisable on such other terms as determined by
the Compensation Committee of the FUSA Board of Directors or by the FUSA Board
of Directors.
In July, the Board of Directors of FUSA granted options to the President of
FUSA to purchase 450,000 shares of FUSA common stock under the 1987 Plan. These
options vest upon the earlier of (a) FUSA common stock attaining certain market
prices, or (b) on June 30, 2002. As of December 31, 1995, options to purchase
225,000 shares of the total 450,000 shares of FUSA common stock have vested.
The 1989 Plan
In 1989, the Board of Directors approved the 1989 Special Stock Option Plan
(the "1989 Plan"). All options granted under the 1989 Plan expire starting in
August 1996 through May 1997 and are immediately exercisable upon issuance. No
options were granted under the 1989 Plan after 1991.
The Directors' Plan
In June 1994, the stockholders of FUSA approved a Directors' Stock Option
Plan (the "Directors' Plan"), pursuant to which each current non-employee
director of FUSA received a grant of options for 30,000 shares of common stock
vesting at a rate of 10,000 per year in each of 1994, 1995 and 1996. Two
directors who are also either officers and/or directors of Fresenius declined to
accept any options under the Directors' Plan.
Future non-employee directors will receive a grant of options for 30,000
shares of FUSA common stock upon their election. The options will vest at a rate
of 10,000 per year on the first, second, and third anniversaries of the
director's initial election.
During 1995, the Directors' Plan was amended to permit each director to
elect whether to receive all or none of the directors' fees due to that director
during a calendar year in the form of options. All options received in lieu of
directors' fees vest 100% upon grant. With respect to each directors' fee
payable in options, a non-employee director will receive an option for a number
of shares of the Company's common stock determined by the following formula:
(amount of directors' fee otherwise payable in cash) divided by (60% of the
exercise price of the option), where the exercise price of the option is the
closing price of FUSA's stock on the date the directors' fee would otherwise be
paid. The options will expire ten years from the date of grant.
In connection with the Reorganization Agreement, it is anticipated that the
FUSA stock options will be transferred into FMC options.
F-46
<PAGE> 306
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
SHARES AVERAGE
(IN THOUSANDS) PRICE RANGE
-------------- ------------
<S> <C> <C>
Balance at December 31, 1993.................... 1,930 $1.88- 9.38
Granted....................................... 135 7.38- 7.50
Exercised..................................... 118 3.63- 7.13
Canceled or expired........................... 19 5.63- 7.50
----- ------------
Balance at December 31, 1994.................... 1,928 1.88- 9.38
Granted....................................... 461 12.75-17.25
Exercised..................................... 260 1.88- 9.38
----- ------------
Balance at December 31, 1995.................... 2,129 $3.13-17.25
===== ============
Exercisable at December 31, 1995................ 1,362 $3.13-15.25
===== ============
</TABLE>
Stock option balances at December 31, 1995 and 1994, respectively and
exercisable at December 31, 1995 do not include 20,500 options with options
prices ranging from $32.00 to $88.70 These options expire August 4, 1996.
14. COMMON STOCK WARRANTS
During 1993, FUSA issued a stock warrant for the purchase of 1,750,000
shares of FUSA common stock, at an exercise price of $8 per share expiring in
2003, as partial consideration for the acquisition of a renal dialysis business.
In addition FUSA issued a warrant to Fresenius for the purchase of 1,700,000
shares of FUSA's common stock, at an exercise price of $8 per share expiring in
2003, as compensation for providing credit support to FUSA. In 1994, FUSA issued
a second warrant to Fresenius for the purchase of 50,000 shares of FUSA's common
stock, at an exercise price of $10.5685 per share expiring in 2004, as
compensation for providing credit support to the Company. At December 31, 1995,
FUSA had 3,500,000 shares of common stock reserved for the exercise of stock
warrants.
15. INCOME TAXES
Income before income taxes is attributable to the following geographic
locations:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Germany................................................. $ 88,007 $57,532
United States........................................... 12,953 7,877
Other................................................... 14,443 18,413
-------- -------
$115,403 $83,822
======== =======
</TABLE>
F-47
<PAGE> 307
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
Income tax expense (benefit) for the years ended December 31 consisted of
the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Current:
German corporation and trade income taxes.............. $38,503 $24,003
United States income taxes............................. 1,304 846
------- -------
$39,807 24,849
Deferred:
Germany................................................ 667 (2,041)
United States.......................................... (4,666) --
------- -------
(3,999) (2,041)
Other.................................................... 4,769 6,371
------- -------
$40,577 $29,179
======= =======
</TABLE>
German corporation tax law applies a split rate, imputation system to the
income taxation of a corporation and its shareholders. Upon distribution of
retained earnings in the form of a dividend, shareholders subject to German tax
receive an income tax credit for taxes paid by the corporation on such
distributed earnings. In addition, the corporation receives a tax refund to the
extent such earnings had been initially subjected to a corporation income tax in
excess of 30%. The tax refund is also distributed to the shareholder.
In general, retained German corporate income is initially subject to a
federal corporation income tax of 45% (the "undistributed earnings rate").
Effective January 1, 1995, a surcharge of 7.5% on the federal corporate tax rate
of 45% was introduced. Giving effect to the surcharge, the federal corporate tax
rate for 1995 increases to 48.375%.
Upon distribution of retained earnings to stockholders, the German
corporate income tax rate on the distributed earnings is adjusted to 30% (the
"distributed earnings rate") by receiving a refund for taxes previously paid on
income in excess of 30%. This refund is passed on to the shareholders through a
gross up of the dividend from the corporation. For 1995, the distributed
earnings rate is increased to 32.25% as a result of the surcharge.
For purposes of computing income tax expense for the Company's German
operations, a complete distribution of each year's earnings is assumed. As such,
the refund of tax described above is reflected in the income tax expense
reconciliation presented below.
F-48
<PAGE> 308
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
For the years ended December 31, 1995 and 1994, income tax expense differed
from the amounts computed by applying the German federal corporation income tax
rates of 48.375% and 45%, respectively, to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Computed "expected" income tax expense at the
undistributed earnings rate........................... $ 55,826 $37,720
Increase (decrease) in income taxes resulting from:
Items not deductible for tax purposes................. 319 183
Tax credit for assumed dividend distributions of each
years earnings..................................... (12,183) (6,470)
Trade income taxes, net of German federal corporation
income tax benefit................................. 7,220 3,818
Foreign tax rate differential......................... (11,246) (6,208)
Other................................................. 641 136
------- ------
Provision for Income Taxes.............................. $ 40,577 $29,179
======= ======
Effective Tax Rate...................................... 35.2% 34.8%
======= ======
</TABLE>
The tax effects of the temporary differences that give rise to deferred tax
assets and liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory, primarily due to additional costs
inventoried
for tax purposes and inventory reserve accounts... $ 2,705 $ 2,394
Reserves for financial accounting purposes, not
currently
tax deductible.................................... -- 981
Capital leases, principally due to capitalization of
costs
for tax purposes.................................. 5,079 6,181
Net operating loss carryforwards..................... 13,075 17,336
Other................................................ 3,029 2,642
------ ------
Total gross deferred tax assets...................... $ 23,888 $ 29,534
Less: Valuation allowance............................ (14,740) (23,471)
------ ------
Net deferred tax assets.............................. $ 9,148 $ 6,063
------ ------
Deferred tax liabilities:
Accounts receivable, primarily due to allowance for
doubtful accounts................................. $ (664) $ (1,192)
Reserves for financial accounting purposes,
not currently taxable............................. (21) --
Plant and equipment, principally due to differences
in depreciation................................... (3,734) (3,566)
------ ------
Total gross deferred tax liabilities................. $ (4,419) $ (4,758)
------ ------
Net deferred tax asset (liability)................... $ 4,729 $ (1,305)
====== ======
</TABLE>
The valuation allowance at December 31, 1995 and 1994 decreased by $8,731
and $2,625, respectively. During 1995, the valuation allowance was reduced to
reflect the deferred tax asset utilized to reduce current
F-49
<PAGE> 309
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
income taxes and to recognize a deferred tax asset of $4,594 for one of the
Company's subsidiaries. The recognized deferred tax asset is based upon expected
utilization of net operating loss carryforwards that the Company expects will
more likely than not be realized through the results of future operations.
At December 31, 1995, the Company has net operating losses ("NOL's") and
tax credit carryforwards available to certain subsidiaries amounting to
approximately $38,445. The majority of the NOL's expire in varying amounts
beginning in 1998 through 2006. The NOL's are also subject to certain annual
cumulative limitations.
16. EMPLOYEE BENEFIT PLANS
The Company participates in various Fresenius pension plans. Plan benefits
are generally based on employee years of service and final salary. Consistent
with normal business custom in the Federal Republic of Germany, Fresenius'
pension obligations are unfunded.
The combined pension expense for 1995 and 1994 for the principal pension
plans included the following components:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Service cost -- benefits earned during the period.......... $1,347 $1,045
Interest cost on projected benefit obligation.............. 938 741
Net amortization and deferral.............................. 111 98
----- -----
Net pension expense........................................ $2,396 $1,884
===== =====
</TABLE>
The following table sets forth the combined funded status of the Company's
position in Fresenius' principal pension plans recognized in Fresenius' balance
sheets as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
ACCUMULATED
BENEFITS IN
EXCESS OF ASSETS
-------------------
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.............................. $ 7,667 $ 5,891
Non-vested benefit obligation.......................... 4,560 3,776
-------- --------
Accumulated benefit obligation......................... $12,227 $ 9,667
======== ========
Projected benefit obligation........................... 15,657 12,409
Unrecognized net gain.................................. 552 486
Unrecognized transition asset (obligation)............. (866) (922)
-------- --------
Accrued pension cost................................... $15,343 $11,973
======== ========
</TABLE>
The actuarial information was determined in 1995 and 1994 using an assumed
discount rate of 7.0% and an assumed long-term rate of compensation increase of
4.0% (for employees older than the age of 35 a compensation increase rate of
5.0% was used).
In addition to the principal pension plans of Fresenius certain of the
Company's combined affiliates offer separate retirement plans. The total accrued
pension cost for these plans was $1,424 and $1,313 at December 31, 1995 and
1994, respectively.
FUSA employees are eligible to join FUSA's 401(k) Savings Plan once they
have achieved a minimum of one year of service, 1,000 hours of service and
attained the age of 18. Under the provisions of FUSA's
F-50
<PAGE> 310
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
401(k) Plan, FUSA contributes 2% of eligible employee base salary to the FUSA
401(k) Plan. FUSA's obligation to the FUSA 401(k) Plan was approximately $420
and $540, respectively, for the years ended December 31, 1995 and 1994.
17. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in various
legal actions. In the opinion of management, based upon the advice of counsel,
the resolution of these legal matters will not have a material effect upon the
Company or its financial condition.
18. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 121
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". SFAS No. 121 is effective for financial statements
for fiscal years beginning after December 31, 1995. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the Company estimates
the future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows is less than
the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that the Company expects to hold and use should be based on the fair
value of the asset. Adoption of this statement in 1996 is not expected to affect
the Company's accounting treatment for long-lived assets.
SFAS 123
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 is effective beginning January 1, 1996 and applies
to all transactions in which an entity acquires goods or services by issuing
equity instruments such as common stock, except for employee stock ownership
plans. SFAS No. 123 establishes a new method of accounting for stock-based
compensation arrangements with employees which is fair value based. The
statement encourages (but does not require) employers to adopt the new method in
place of the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees". Companies may continue to apply the
accounting provisions of APB No. 25 in determining net income, however, they
must apply the disclosure requirements of SFAS No. 123.
If the Company adopts the fair value based method of SFAS No. 123, a higher
compensation cost would result for the Company's contingent or variable stock
options plans. The Company will adopt the disclosure provisions of SFAS No. 123
on January 1, 1996. Such adoption is not expected to impact operating results.
F-51
<PAGE> 311
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
19. BUSINESS SEGMENT INFORMATION
The Company operates in three general geographic areas. Information on the
Company's geographic operations is set forth in the table below:
<TABLE>
<CAPTION>
1995 UNITED REST OF ELIMINATION TOTAL
GERMANY STATES THE ----------- -------
------- ------- WORLD
$ $ ------- $ $
$
<S> <C> <C> <C> <C> <C>
REVENUES
Third parties............... 375,793 302,447 218,300 -- 896,540
Transfers between geographic
areas.................... 168,186 2,517 41,022 (211,725) --
------- ------- ------- --------- -------
TOTAL REVENUES................ 543,979 304,964 259,322 (211,725) 896,540
======= ======= ======= ========= =======
Export sales from Germany..... 127,544 -- -- -- 127,544
======= ======= ======= ========= =======
Net income.................... 48,837 11,204 9,674 -- 69,715
======= ======= ======= ========= =======
Identifiable assets........... 230,373 232,778 180,867 -- 644,018
======= ======= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
1994 UNITED REST OF ELIMINATION TOTAL
GERMANY STATES THE ----------- -------
------- ------- WORLD
$ $ ------- $ $
$
<S> <C> <C> <C> <C> <C>
REVENUES
Third parties............... 279,626 250,314 189,903 -- 719,843
Transfers between geographic
areas.................... 136,175 4,029 33,835 (174,039) --
------- ------- ------- ----------- -------
TOTAL REVENUES................ 415,801 254,343 223,738 (174,039) 719,843
Export sales from Germany..... 88,238 -- -- -- 88,238
======= ======= ======= ======== =======
Net income.................... 35,570 4,481 12,042 -- 52,093
======= ======= ======= ======== =======
Identifiable assets........... 197,404 193,700 151,937 -- 543,041
======= ======= ======= ======== =======
</TABLE>
F-52
<PAGE> 312
FRESENIUS WORLDWIDE DIALYSIS
INTERIM COMBINED STATEMENTS OF OPERATIONS AND NET ASSETS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net sales.......................................................... $235,060 $207,981
Cost of sales...................................................... 132,854 115,729
-------- --------
Gross profit.................................................. 102,206 92,252
Operating expenses:
Selling, general and administrative........................... 60,832 54,299
Research and development...................................... 3,647 3,349
-------- --------
Operating income.............................................. 37,727 34,604
Other (income) expense:
Interest income............................................... (1,153) (749)
Interest expense.............................................. 3,977 3,329
Other, net.................................................... (1,523) (700)
-------- --------
Income before income taxes.................................... 36,426 32,724
Income tax expense................................................. 13,067 12,462
-------- --------
Income before minority interest............................... 23,359 20,262
Minority interest.................................................. 1,694 1,102
-------- --------
Net income.................................................... 21,665 19,160
Net assets at beginning of the period.............................. 305,625 261,337
Foreign currency translation adjustments........................... (5,873) 16,568
Net activity with Fresenius........................................ 18,442 (18,640)
-------- --------
Net assets at end of the period.................................... $339,859 $278,425
======== ========
</TABLE>
See accompanying notes to combined interim financial statements.
F-53
<PAGE> 313
FRESENIUS WORLDWIDE DIALYSIS
INTERIM COMBINED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 31,398
Trade accounts receivable, less allowance for doubtful accounts of $12,718 in
1995 and $11,917 in 1996.................................................... 184,324
Inventories, net............................................................. 187,292
Prepaid expenses and other current assets.................................... 19,702
Deferred taxes............................................................... 4,467
---------
Total current assets............................................... 427,183
Property, plant and equipment, net................................................ 138,754
Intangible assets, net............................................................ 65,636
Investments in affiliates......................................................... 18,786
Deferred Taxes.................................................................... 3,409
Other assets...................................................................... 24,991
---------
$ 678,759
========
LIABILITIES AND NET ASSETS (EQUITY)
Current liabilities:
Accounts payable............................................................. $ 36,804
Accrued expenses............................................................. 62,883
Short-term borrowings........................................................ 128,842
Current portion of long-term debt and capital lease obligations.............. 18,544
Income taxes payable......................................................... 2,390
Other current liabilities.................................................... 15,727
---------
Total current liabilities.......................................... 265,190
Long-term payable, less current portion........................................... 1,275
Long-term debt and capital lease obligations, less current portion................ 21,065
Non-current borrowing from affiliate.............................................. 274
Other liabilities................................................................. 6,517
Pension liability................................................................. 16,904
Deferred taxes.................................................................... 805
Minority interest................................................................. 26,870
---------
Total liabilities.................................................. 338,900
---------
Net assets........................................................................ 339,859
---------
$ 678,759
========
</TABLE>
See accompanying notes to interim combined financial statements.
F-54
<PAGE> 314
FRESENIUS WORLDWIDE DIALYSIS
INTERIM COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
(THOUSANDS, UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 21,665 $ 19,160
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.............................. 10,268 9,020
Change in deferred tax..................................... (2,963) (1,642)
Gain on sale of fixed assets............................... (222) (352)
Changes in assets and liabilities:
Trade accounts receivable, net............................. (2,918) (9,904)
Inventories, net........................................... (7,423) (5,748)
Prepaid expenses and other current assets.................. (4,922) 1,461
Other assets............................................... (1,072) (4,134)
Accounts payable and accrued expenses...................... 478 5,637
Other current and non-current liabilities.................. (1,642) (1,154)
Income taxes payable....................................... 1,502 694
-------- --------
Net cash provided by operating activities............. 12,751 13,038
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...................... (17,792) (14,250)
Proceeds from sale of property, plant and equipment............. 2,429 13,909
Acquisitions and capital increases in affiliates................ (191) (1,025)
-------- --------
Net cash used in investing activities................. (15,554) (1,366)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings............................. 48,433 58,626
Repayments of short-term borrowings............................. (27,823) (47,301)
Proceeds from long-term debt and capital lease obligations...... 5,682 6,389
Principal payments of long-term debt and capital lease
obligations.................................................... (24,792) (12,622)
Proceeds from issuance of common stock.......................... 851 276
Net activity with Fresenius..................................... 18,252 (18,661)
Change in minority interest..................................... 1,694 1,102
-------- --------
Net cash used in financing activities................. 22,297 (12,191)
-------- --------
Net increase (decrease) in cash and cash equivalents................. 19,494 (519)
Effect of exchange rates on cash and cash equivalents................ (187) 653
Cash and cash equivalents at beginning of period..................... 12,091 11,973
-------- --------
Cash and cash equivalents at end of period........................... $ 31,398 $ 12,107
======== ========
</TABLE>
See accompanying notes to interim combined financial statements.
F-55
<PAGE> 315
FRESENIUS WORLDWIDE DIALYSIS
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared in
accordance with United States generally accepted accounting principles ("U.S.
GAAP") on a basis which reflects the combined historical financial statements of
Fresenius Worldwide Dialysis businesses ("FWD" or the "Company"), including
Sterilpharma GmbH, assuming that the Company, currently a business unit of
Fresenius AG, was organized for all periods presented as a separate legal
entity, owning certain net assets and certain subsidiaries and associated
companies of Fresenius. The accompanying interim combined financial statements
as of March 31, 1996 and 1995 should be read in conjunction with the combined
financial statements for the years ended December 31, 1995 and 1994,
respectively, and the notes thereto contained elsewhere in this Joint Proxy
Statement-Prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
The business of the Company is the development, manufacture and
distribution of equipment and related products for all forms of kidney dialysis
treatment and the providing of kidney dialysis treatment and related services.
(b) Inventories
Inventories are stated at the lower of cost (determined by using the
average or first-in first-out method) or market value.
The inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
Raw Materials and purchased components.................................... $ 62,337
Work in process........................................................... 23,633
Finished goods............................................................ 106,441
-------
192,411
Reserves.................................................................. (5,119)
-------
Inventories, net.......................................................... $ 187,292
=======
</TABLE>
(c) Other Assets
In 1995, Fresenius USA, Inc. completed construction of a dialysis plant
addition to its manufacturing facility in Ogden, Utah. Included in other assets
are $7,989 of validation costs, net of accumulated amortization of $557,
incurred to qualify the products and the associated manufacturing processes for
approval by the U.S. Food and Drug Administration. Such costs are being
amortized on a straight-line basis over an estimated useful life of 3 years upon
commencement of manufacturing.
(d) Management Representation
The accompanying interim combined financial statements which are unaudited
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments (consisting only
of normal recurring adjustments) which, in the opinion of management, are
necessary for a fair statement of the results for the interim period presented.
Operating results for the three month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the year.
F-56
<PAGE> 316
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders Fresenius USA, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Fresenius
USA, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fresenius
USA, Inc. and subsidiaries as of December 31, 1995 and 1994 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Francisco, California
February 2, 1996
F-57
<PAGE> 317
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 2,330 $ 2,315
Trade accounts receivable, less allowance for doubtful accounts of
$1,324
in 1995 and $1,744 in 1994........................................ 57,052 42,671
Inventories, net..................................................... 65,706 52,704
Prepaid expenses and other current assets............................ 3,258 1,893
Deferred taxes....................................................... 4,594 --
-------- --------
Total current assets......................................... 132,940 99,583
-------- --------
Property, plant and equipment, net..................................... 48,492 45,956
Intangible assets, net................................................. 36,863 39,498
Other assets, net...................................................... 6,626 311
-------- --------
$224,921 $185,348
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 16,276 $ 13,128
Accounts payable to affiliates, net.................................. 41,229 33,361
Accrued expenses..................................................... 13,577 12,214
Short-term borrowings................................................ 33,149 22,330
Short-term borrowings from Fresenius AG.............................. 3,650 4,380
Current portion of long-term debt and capital lease obligations...... 11,703 9,496
Income taxes payable................................................. 365 95
-------- --------
Total current liabilities.................................... 119,949 95,004
-------- --------
Note payable, less current portion..................................... 1,275 1,861
Note payable to FNA.................................................... 274 274
Long-term debt and capital lease obligations, less current portion..... 24,821 27,637
-------- --------
Total liabilities............................................ 146,319 124,776
-------- --------
Commitments and contingencies (notes 12, 13, 16, 19 and 21)
Stockholders' equity:
Series F preferred stock, authorized 600 shares, $1.00 par value, 200
shares issued and outstanding..................................... 200 200
Common stock, authorized 40,000 shares, $.01 par value, issued and
outstanding 21,465 shares in 1995 and 21,205 shares in 1994....... 215 212
Capital in excess of par value....................................... 141,136 139,510
Currency translation adjustment...................................... (80) (94)
Accumulated deficit.................................................. (62,869) (79,256)
-------- --------
Total stockholders' equity................................... 78,602 60,572
-------- --------
$224,921 $185,348
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-58
<PAGE> 318
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................. $304,964 $254,344 $205,960
Cost of sales.............................................. 212,102 175,766 140,960
-------- -------- --------
Gross profit.......................................... 92,862 78,578 65,000
Operating expenses:
Selling, general and administrative...................... 72,547 64,643 54,213
Research and development................................. 2,289 1,846 1,500
-------- -------- --------
Operating income...................................... 18,026 12,089 9,287
Other expense (income):
Interest income.......................................... (218) (303) (204)
Interest expense......................................... 5,142 4,498 4,835
Equity in earnings of Fresenius Brent.................... -- -- (86)
Other, net............................................... 149 17 149
-------- -------- --------
Income before income taxes............................ 12,953 7,877 4,593
Income tax expense (benefit)............................... (3,434) 723 900
-------- -------- --------
Net income............................................ $ 16,387 $ 7,154 $ 3,693
======== ======== ========
Net income per common and common equivalent share:
Primary............................................... $.61 $.32 $.18
======== ======== ========
Fully diluted......................................... $.59 $.31 $.18
======== ======== ========
Weighted average number of shares of common stock and
common stock equivalents used to compute net income per
common and common equivalent share:
Primary............................................... 26,647 23,926 20,660
======== ======== ========
Fully diluted......................................... 27,844 23,926 20,660
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE> 319
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- --------------- CAPITAL
NUMBER NUMBER IN EXCESS CURRENCY TOTAL
OF OF OF PAR TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT VALUE ADJUSTMENT DEFICIT EQUITY
------ ------ ------ ------ --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992............ 200 $200 17,169 $172 $ 120,796 $ (28) $ (90,103) $ 31,037
Conversion of note receivable into
common stock....................... -- -- 468 4 1,705 -- -- 1,709
Issuance of common stock warrants.... -- -- -- -- 449 -- -- 449
Proceeds from issuance of common
stock.............................. -- -- -- -- 162 -- -- 162
Currency translation adjustment...... -- -- -- -- -- (44) -- (44)
Net income........................... -- -- -- -- -- -- 3,693 3,693
--- ---- ------ ---- ------- ----- -------- -------
Balances, December 31, 1993............ 200 200 17,637 176 123,112 (72) (86,410) 37,006
Proceeds from issuance of common
stock in public offering........... -- -- 3,450 35 16,142 -- -- 16,177
Proceeds from issuance of common
stock through exercise of
options............................ -- -- 118 1 511 -- -- 512
Loan receivable for exercise of stock
option............................. -- -- -- -- (255) -- -- (255)
Currency translation adjustment...... -- -- -- -- -- (22) -- (22)
Net income........................... -- -- -- -- -- -- 7,154 7,154
--- ---- ------ ---- ------- ----- -------- -------
Balances, December 31, 1994............ 200 200 21,205 212 139,510 (94) (79,256) 60,572
Common stock offering costs.......... -- -- -- -- (188) -- -- (188)
Proceeds from issuance of common
stock through exercise of
options............................ -- -- 260 3 1,605 -- -- 1,608
Repayment of loan receivable for
exercise of stock option........... -- -- -- -- 209 -- -- 209
Currency translation adjustment...... -- -- -- -- -- 14 -- 14
Net income........................... -- -- -- -- -- -- 16,387 16,387
--- ---- ------ ---- ------- ----- -------- -------
Balances, December 31, 1995............ 200 $200 21,465 $215 $ 141,136 $ (80) $ (62,869) $ 78,602
=== ==== ====== ==== ======= ===== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE> 320
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 16,387 $ 7,154 $ 3,693
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 10,591 8,772 6,893
Equity in earnings of Fresenius Brent................. -- -- (86)
Deferred tax benefit.................................. (4,666) -- --
Gain on sale of fixed assets.......................... -- (46) (75)
Stock warrant issued to Fresenius AG as compensation
for credit support.................................. -- -- 75
Changes in operating assets and liabilities:
Trade accounts receivable, net...................... (14,381) (2,679) (14,090)
Accounts receivable from affiliated companies,
net.............................................. -- -- 1,820
Inventories, net.................................... (13,410) (9,199) (6,800)
Other current and non-current assets................ (1,219) 696 (837)
Accounts payable and accrued expenses............... 4,511 (299) 12,514
Income taxes payable................................ 270 (358) 453
Increase in net operating assets resulting from the
acquisition of Fresenius Brent................... -- -- 782
-------- -------- --------
Net cash (used in) provided by operating
activities..................................... (1,917) 4,041 4,342
-------- -------- --------
Cash flows from investing activities:
Purchase of Abbott's renal dialysis business............. -- -- (31,000)
Expenditures for the direct costs of acquisitions........ -- -- (737)
Purchases of property, plant and equipment............... (37,106) (25,963) (8,226)
Dispositions of property, plant and equipment............ 1,312 429 --
Proceeds from sale of property, plant and equipment...... -- 46 128
Validation cost expenditures............................. (6,642) -- --
-------- -------- --------
Net cash used in investing activities............ (42,436) (25,488) (39,835)
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE> 321
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Changes in accounts payable to affiliates, net........... $ 7,868 $ 5,083 $ 5,386
Proceeds from short-term borrowings...................... 55,949 17,911 10,264
Proceeds from capital lease financing.................... 9,103 -- --
Proceeds from sale/leaseback of equipment................ 26,970 -- --
Repayment of short-term borrowings....................... (45,130) (9,785) (2,430)
(Repayments of) proceeds from long-term payable.......... (586) (556) 2,417
Proceeds from long-term borrowings....................... -- -- 25,000
Principal payments of long-term debt and capital
lease obligations..................................... (11,435) (10,877) (1,178)
Proceeds from issuance of common stock................... 1,629 16,689 162
Loan receivable for exercise of stock option............. -- (255) --
-------- -------- --------
Net cash provided by financing activities........ 44,368 18,210 39,621
-------- -------- --------
Net increase (decrease) in cash............................ 15 (3,237) 4,128
Cash at beginning of year.................................. 2,315 5,552 1,424
-------- -------- --------
Cash at end of year........................................ $ 2,330 $ 2,315 $ 5,552
======== ======== ========
Supplementary cash flow information:
Cash paid for interest, net of amounts capitalized....... $ 4,848 $ 2,793 $ 3,237
======== ======== ========
Cash paid for income taxes............................... $ 966 $ 1,126 $ 477
======== ======== ========
Supplementary schedule of non-cash activities:
Acquisition of equipment through obligations under
capital leases........................................ $ 1,248 $ 1,094 $ 1,231
======== ======== ========
Disposal of assets under capital leases.................. $ 255 $ 135 $ --
======== ======== ========
Acquisition of license technology in exchange for
inventory
and debt.............................................. $ -- $ 908 $ --
======== ======== ========
Note payable issued as partial consideration for the
Abbott acquisition.................................... $ -- $ -- $ 10,629
======== ======== ========
Issuance of common stock warrants........................ $ -- $ -- $ 449
======== ======== ========
Common stock issued upon conversion of the note
receivable from Fresenius Brent....................... $ -- $ -- $ 1,709
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE> 322
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
Fresenius USA, Inc. and subsidiaries (the "Company") is a manufacturer and
distributor of medical products and systems for sale primarily in the United
States and Canada for the treatment of kidney failure by hemodialysis and by
peritoneal dialysis. The Company is one of only two companies in the United
States offering a full line of both hemodialysis and peritoneal dialysis
machines and disposable products. These products are used to cleanse a patient's
blood of waste products and fluids normally eliminated by properly functioning
kidneys. The Company also sells cell separation products designed for the
therapeutic removal of diseased blood components as well as collection of donor
blood components for transfusion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Fresenius
USA, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at the lower of cost (determined by using the
first-in, first-out method) or market value.
(d) Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Property and equipment
under capital leases are stated at the present value of future minimum lease
payments at the inception of the lease.
Depreciation on property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the assets ranging from
three to thirty years. Property and equipment held under capital leases and
leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
The Company capitalizes interest on borrowed funds during construction
periods. Interest capitalized during 1995, 1994 and 1993 was $526, $481, and
$22, respectively.
(e) Intangible Assets
Intangible assets consist of goodwill (the excess cost over net assets
acquired), manufacturing technology, patents, distribution rights, licenses and
other intangible assets. Intangible assets are amortized on a straight-line
basis over the estimated useful lives of the assets ranging from four to
twenty-five years.
The Company assesses the recoverability of intangible assets by determining
whether the amortization of the asset's balance over its remaining life can be
recovered through projected undiscounted future cash flows.
F-63
<PAGE> 323
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Other Assets
In 1995, the Company completed construction of a dialyzer plant addition to
its manufacturing facility in Ogden, Utah. Included in other assets are $6,375
of validation costs, net of accumulated amortization of $267, incurred to
qualify the products and the associated manufacturing processes for approval by
the U.S. Food and Drug Administration. Such costs are being amortized on a
straight-line basis over an estimated useful life of 3 years upon commencement
of manufacturing.
(g) Derivative Financial Instruments
Forward currency contracts -- Gains and losses on forward currency
contracts that are designated and effective as hedges of existing assets,
liabilities and firm commitments are deferred and recognized along with the
effects of the hedged transaction.
Interest rate swaps -- Interest rate agreements that are designated as a
hedge of debt or other long-term obligations are accounted for on an accrual
basis. That is, the interest payable and interest receivable under the swaps
terms are accrued and recorded as an adjustment to the interest or rent expense
of the designated liability or obligation.
Amounts due from and payable to the counterparties of interest rate swaps
are recorded on an accrual basis at each reporting date based on amounts
computed by reference to the respective interest rate swap contract. Realized
gains and losses that occur from the early termination or expiration of
contracts are recorded in income over the remaining period of the original swap
agreement.
(h) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. Net assets of the subsidiaries with "functional"
currencies other than the U.S. dollar are translated at the year-end rate of
exchange. Income and expense items are translated at the average exchange rate
for the year. The resulting translation adjustments are recorded as a separate
component of stockholders' equity.
(i) Revenue Recognition Policy
Revenues are recognized when title to the product has passed to the buyer,
either at the time of shipment or upon receipt by the customer.
(j) Research and Development Expenses
Research and development expenses are expensed as incurred.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
(l) Net Income Per Common and Common Equivalent Share
Net income per common share was computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during each year based on the modified treasury stock method. Stock
options, common stock warrants, and the Series F preferred stock are considered
to be common stock equivalents.
F-64
<PAGE> 324
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The application of the treasury stock method is modified when the
outstanding number of common shares which would be issued if all outstanding
options and warrants and their equivalents were exercised exceeds 20% of the
number of common shares outstanding at the end of the period. When this 20% test
is met, the treasury stock method is first applied to purchase no more than 20%
of the number of common shares outstanding at the end of the period. The balance
of any proceeds remaining is then applied to reduce debt with appropriate
recognition given for any interest expense savings net of income tax expense.
These calculations are aggregated to determine whether the effect on net income
per common share is dilutive or antidilutive. When dilutive, all of the
calculations are utilized when computing net income per common share.
The computation of fully diluted income per common share would also include
the effect of converting other outstanding securities such as convertible debt,
when the effect is dilutive, and the additional dilution related to stock
options when the market price at the end of the period is higher than the
average price for the period.
(m) Major Customers and Concentrations of Credit Risk
Trade receivables are financial instruments which potentially expose the
Company to concentrations of credit risk. As of December 31, 1995, approximately
10% of the recorded trade receivables were concentrated with a major customer.
To reduce credit risk, the Company performs ongoing credit evaluations of its
customers' financial condition. The Company does not require collateral on
credit sales to its customers. Revenues from the major customer constituted 12%
of total revenues for the year ended December 31, 1995.
(n) Reclassifications
Certain reclassifications not affecting the Company's net income have been
made to the 1994 and 1993 consolidated financial statements to conform to the
1995 presentation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 123
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 is effective beginning January 1, 1996 and applies
to all transactions in which an entity acquires goods or services by issuing
equity instruments such as common stock, except for employee stock ownership
plans. SFAS No. 123 establishes a new method of accounting for stock-based
compensation arrangements with employees which is fair value based. The
statement encourages (but does not require) employers to adopt the new method in
place of the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees". Companies may continue to apply the
accounting provisions of APB No. 25 in determining net income, however, they
must apply the disclosure requirements of SFAS No. 123. If the Company adopts
the fair value based method of SFAS No. 123, a higher compensation cost would
result for fixed stock option plans and a different compensation cost will
result for the Company's contingent or variable stock option plans. The Company
will adopt the disclosure provisions of SFAS No. 123 on January 1, 1996. Such
adoption is not expected to impact operating results.
SFAS No. 121
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of ". SFAS No. 121 is effective for financial statements for
fiscal years beginning after December 31, 1995. SFAS No. 121 requires that long-
lived assets and certain identifiable intangibles to be held and used by the
Company be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may
F-65
<PAGE> 325
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that the Company expects to hold and use should be based on the fair
value of the asset. Adoption of this statement in 1996 is not expected to effect
the Company's accounting treatment for long-lived assets.
4. INVESTMENTS AND ACQUISITIONS
Investment in Fresenius Brent
On January 17, 1990, the Company formed a joint venture ("Fresenius Brent")
with Medihold Ltd. to market and sell the Company's medical products in Canada.
The Company's initial investment in Fresenius Brent, a Canadian operation, was
$200 Canadian dollars (approximately $168 U.S.). This investment was accounted
for using the equity method through May 1993. The Company's 1992 investment
balance differed from the Company's 50% underlying equity in Fresenius Brent due
to the elimination of intercompany profits remaining in Fresenius Brent's ending
inventories.
During May 1993, the Company purchased the remaining 50% equity in
Fresenius Brent from Medihold Ltd. in exchange for a $1,709 convertible note.
The excess of the purchase price over the fair value of the net assets acquired
of $1,318 has been recorded as goodwill and is being amortized on a
straight-line basis over 20 years. In July 1993, the note was converted into
434,000 shares of the Company's common stock.
The balance sheet of Fresenius Brent has been included in the Company's
consolidated financial statements as of December 31, 1995 and 1994. The results
of operations of Fresenius Brent have been included in the consolidated
financial statements since May 1, 1993. All significant intercompany balances
and transactions have been eliminated.
Critikon(R) Purchase
On July 15, 1992, the Company purchased from Critikon(R), Inc., a
subsidiary of Johnson and Johnson, certain patents, inventory and other assets
used in connection with its RATEMINDER(R) fluid delivery product line for
approximately $3,700. The $3,700 purchase price included a cash payment of $500
and an obligation of $3,200 paid as inventory is used. At December 31, 1995, the
Company owed $1,565 to be paid as inventory is used. The acquisition has been
accounted for using the purchase method of accounting.
Abbott Acquisition
On February 24, 1993, the Company purchased from Abbott Laboratories
("Abbott") certain assets used in connection with its renal dialysis business in
the United States, Australia and New Zealand for a total purchase price of
$41,857. As consideration for the purchase, the Company paid $31,000 in cash,
issued a term note payable for $10,629, and granted a common stock warrant for
the purchase of 1,750,000 shares of the Company's common stock which was valued
at $228. The common stock issuable upon exercise of the warrant is subject to
certain registration rights. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the results of operations from
the acquisition have been included in the Company's consolidated financial
statements from February 24, 1993 (see Note 23). The excess of the purchase
price over the fair value of the net identifiable assets acquired of $19,378 has
been recorded as
F-66
<PAGE> 326
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
goodwill and is being amortized on a straight-line basis over 25 years. The
assets acquired from Abbott consisted of the following:
<TABLE>
<S> <C>
Rental equipment................................................... $ 3,000
Manufacturing technology........................................... 15,629
Patents............................................................ 2,500
Distribution rights................................................ 1,250
Covenant not to compete............................................ 100
Goodwill........................................................... 19,378
-------
$41,857
=======
</TABLE>
With respect to the products acquired from Abbott, the Company has retained
the exclusive rights in the United States (the rights to Canada and Mexico were
retained by Abbott), has granted Fresenius Aktiengesellschaft (Fresenius AG) a
non-exclusive sublicense with respect to these products in Central and South
America, Australia and New Zealand and an exclusive (with respect to the
Company) sublicense with respect to all other areas acquired from Abbott,
including Europe in exchange for the credit support provided by Fresenius AG to
finance the acquisition.
5. INVENTORIES
As of December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Raw materials and purchased components................. $ 32,192 $ 23,071
Work in process........................................ 10,504 4,237
Finished goods......................................... 25,707 27,464
-------- --------
68,403 54,772
Reserves............................................... (2,697) (2,068)
-------- --------
Inventories, net..................................... $ 65,706 $ 52,704
======== ========
</TABLE>
Depreciation expense for demo and evaluation inventory was $408 for the
year ended December 31, 1995 which was charged to the inventory reserve. There
was no depreciation expense for this inventory in 1994 or 1993.
F-67
<PAGE> 327
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
As of December 31, property, plant and equipment consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Land................................................... $ 344 $ 325
Buildings and improvements............................. 19,013 10,353
Machinery and equipment................................ 29,071 14,596
Machinery, equipment and rental equipment under
capital leases....................................... 9,816 11,429
Rental equipment....................................... 17,031 17,160
Loaned equipment....................................... 2,784 2,353
Construction in progress............................... 2,693 16,286
------- --------
80,752 72,502
Accumulated depreciation and amortization.............. (32,260) (26,546)
------- --------
Property, plant and equipment, net................... $ 48,492 $ 45,956
======= ========
</TABLE>
Depreciation and amortization expense for property, plant and equipment
amounted to $7,281, $6,541 and $5,140 for the years ended December 31, 1995,
1994 and 1993, respectively.
Included in property, plant and equipment as of December 31, 1995 and 1994,
was $14,619 and $11,521, respectively, of net rental equipment. The rental
equipment consists of peritoneal dialysis cycler machines which the Company
leases to customers with end stage renal disease on a month-to-month basis.
Rental income for this equipment was $1,767, $2,203 and $1,586 for the years
ended December 31, 1995, 1994 and 1993, respectively.
Included in property, plant and equipment as of December 31, 1995 were
approximately $2 million of engineering charges from Fresenius AG associated
with construction of the dialyzer plant in Odgen, Utah.
Accumulated depreciation related to machinery, equipment and rental
equipment under capital leases was $2,588 and $9,094 at December 31, 1995 and
1994, respectively.
7. INTANGIBLE ASSETS
As of December 31, intangible assets consisted of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Goodwill................................................. $20,795 $20,795
Manufacturing technology................................. 15,629 15,629
Patents.................................................. 3,421 3,421
Distribution rights...................................... 1,250 1,250
Other.................................................... 2,927 2,927
------- -------
44,022 44,022
Accumulated amortization................................. (7,159) (4,524)
------- -------
Intangible assets, net................................. $36,863 $39,498
======= =======
</TABLE>
Amortization expense for intangible assets amounted to $2,635, $2,231 and
$1,753 for the years ended December 31, 1995, 1994 and 1993, respectively.
F-68
<PAGE> 328
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SHORT-TERM BORROWINGS
Short-term borrowings of $33,149 and $22,330 at December 31, 1995 and 1994,
respectively, represent amounts borrowed under lines of credit with six
commercial banks. The Company pays commitment fees ranging from 1/8% - 1/4%
per annum on the unused portion of the commitments. The weighted average
interest rate on short-term borrowings outstanding as of December 31, 1995 and
1994 was 6.55% and 5.48%, respectively. The lines of credit at December 31, 1995
expire through May 1996 and are expected to be renewed by the Company. In March
1995, the Company replaced a $15.0 million line of credit supported by Fresenius
AG with a $20.0 million line of credit from a commercial bank independent of
support from Fresenius AG. This line of credit is secured by the Company's
accounts receivable and contains various covenants including, but not limited
to, requirements for maintaining defined levels of working capital, net worth,
capital expenditures and various financial ratios.
The Company had lines of credit totaling $47,000 of which $13,851 remains
available to be borrowed at December 31, 1995. Fresenius AG has provided credit
support for $27,000 of these lines of credit (see Note 19).
9. SHORT-TERM BORROWINGS FROM FRESENIUS AG
At December 31, 1995 and 1994, short-term borrowings under a line of credit
from Fresenius AG consist of $3,650 and $4,380, respectively. As of December 31,
1995, the total borrowing available under the line of credit is $3,650 with a
weighted average interest rate of 7.563%. The line expires in the first quarter
of 1996 and is expected to be renewed by the Company.
10. NOTE PAYABLE
In connection with the Abbott acquisition, the Company entered into an
obligation relating to the purchase of Optum(R) devices. During 1993, the
Company fulfilled this obligation by taking possession of these Optum(R) devices
and entering into a note payable agreement. This note payable was discounted
with an imputed interest rate of 5.68%. As of December 31, 1995, the long-term
portion of the discounted note payable was $1,275 due over the next three years.
11. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
As of December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Term loan(a)............................................ $ 18,750 $25,000
Note payable, discounted to present value(b)............ 6,724 8,731
Capital leases(c)....................................... 10,562 2,814
Other, discounted to present value...................... 488 588
------- -------
36,524 37,133
Less current maturities................................. (11,703) (9,496)
------- -------
$ 24,821 $27,637
======= =======
</TABLE>
- ---------------
(a) In connection with the purchase of certain assets from Abbott, the Company
entered into a term loan with a commercial bank to borrow $25,000 at 5.68%
per annum, due quarterly. The loan is due in annual installments of $6,250
beginning February 1995 and each year thereafter through February 1998. The
term loan is guaranteed by Fresenius AG.
F-69
<PAGE> 329
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) In consideration for proprietary technology acquired from Abbott, the
Company paid $5,000 to Abbott in cash at closing and issued a note to Abbott
for $12,500 due in annual installments of $2,500 beginning February 1994
through February 1998. The remaining obligation has been discounted with an
imputed interest rate of 5.68%. This note is secured by a standby letter of
credit expiring March 31, 1998, totaling $10,000. The Company must pay a
commitment fee of 0.5% per annum due quarterly on the outstanding letter of
credit.
(c) Future minimum lease payments under capital leases as of December 31, 1995
are:
<TABLE>
<S> <C>
For the years ended December 31:
1996............................................................. $ 4,143
1997............................................................. 3,647
1998............................................................. 3,210
1999............................................................. 1,406
2000............................................................. 3
-------
12,409
Amount representing interest (at 9% - 10%)....................... (1,847)
-------
Present value of capital lease obligations....................... 10,562
Current portion of capital lease obligations..................... (3,203)
-------
Capital lease obligations, less current portion.................. $ 7,359
=======
</TABLE>
Aggregate annual payments applicable to long-term debt for the three years
subsequent to December 31, 1995 are:
<TABLE>
<S> <C>
For the years ended December 31:
1996............................................................. $ 8,500
1997............................................................. 8,673
1998............................................................. 8,789
-------
$25,962
=======
</TABLE>
12. COMMITMENTS
Operating Leases
The Company leases facility space and machinery and equipment under various
lease agreements expiring at dates through 1998.
On March 31, 1995, the Company entered into a sale leaseback arrangement
with a bank which covers the sale by the Company of approximately $19.0 million
of certain new equipment of the Company's dialyzer manufacturing facility at its
Ogden, Utah plant to the bank and the leaseback of the equipment under a four
year operating lease that has renewal options and a purchase option at fair
market value. Although the rent payments on the lease are variable based on the
three-month LIBOR, the Company has effectively fixed its rent expense through
the use of interest rate swap agreements (see Note 13). On December 29, 1995, an
additional $8.0 million for similar new equipment was sold and leased back under
the above referenced four year renewable lease. If the Company elects not to
purchase the equipment or renew the lease at the end of the lease term, the
Company will be obligated to pay a termination fee of up to $20,250 to be offset
by sales proceeds from the Company remarketing the equipment.
F-70
<PAGE> 330
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense under operating leases was $2,626, $1,462 and $2,428 for the
years ended December 31, 1995, 1994 and 1993, respectively. Future minimum
rental payments under noncancelable operating leases, including the effective
fixed payments under the above leaseback, as of December 31, 1995 are:
For the years ended December 31:
<TABLE>
<S> <C>
1996............................................................... $ 3,801
1997............................................................... 2,909
1998............................................................... 2,429
1999............................................................... 1,104
2000............................................................... 257
--------
$10,500
========
</TABLE>
Purchase Commitments
Under the terms of the purchase agreement with Abbott, the Company is
obligated to purchase stated quantities of Inpersol(R) dialysis solutions,
saline solutions and other renal dialysis ancillary products. Over the next two
years, the minimum purchase commitments under the agreement are approximately
$22 million annually.
13. FINANCIAL INSTRUMENTS
Foreign Exchange Contracts
The Company has entered into foreign exchange contracts as a hedge against
foreign currency exchange risks associated with the settlement of deutschemark
denominated trade payables to Fresenius AG. Gains and losses on these contracts
are offset against foreign exchange gains or losses realized on the settlement
of those payables.
At December 31, 1995, the Company had contracts to purchase 48.0 million
Deutschemarks at a fixed rate on the date of settlement. The contracts mature at
various dates through 1996. The fair value of the foreign exchange contracts is
the estimated amount that the Company would receive or pay to terminate the
agreements. As of December 31, 1995, the cost to terminate the foreign exchange
contracts is estimated to be insignificant.
Interest Rate Swap Agreements
At December 31, 1995, the Company had two interest rate swap agreements
outstanding with a commercial bank for notional amounts of $17,400 and $7,634,
respectively. These agreements effectively change the Company's rent expense on
its variable payment operating lease to fixed rates based on 8.02% and 5.60%,
respectively. The interest rate swap agreements outstanding as of December 31,
1995 expire in March, 1999. While the Company does not anticipate nonperformance
by counterparties, the Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap agreement.
The fair value of the interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the swap agreements. This estimate is
subjective in nature and involves uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. As of December 31, 1995,
the cost to terminate the swap agreements is estimated to be $1,190.
F-71
<PAGE> 331
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. STOCKHOLDERS' EQUITY
Common Stock Offering
During 1994, the Company successfully completed a public offering of
3,450,000 shares of its common stock, realizing proceeds, after payment of
expenses, of approximately $16,177. During the first quarter of 1995, the
Company paid an additional $188 of expenses related to the cost of the public
offering.
Preferred Stock
The 200,000 shares of Series F preferred stock were issued to Fresenius AG
in October 1987 and is presently convertible into 3,129,883 shares of common
stock. The holder is entitled to elect a majority of the Company's directors and
is entitled to preference in liquidation over common stockholders of $100 per
Series F share, but is not entitled to receive dividends. The holder is entitled
to an adjustment in the number of common shares into which the Series F
preferred stock is convertible under certain circumstances.
15. COMMON STOCK OPTIONS
The Company has four stock option plans (the "Plans") which grant employees
and officers the option to purchase the Company's common stock. At December 31,
1995, a total of 2,764,420 shares of the Company's common stock were reserved
for issuance of stock options already granted or available for future grant, of
which 635,525 shares were available for future issuance. During 1995, all stock
options were granted with an exercise price equal to fair market value on the
date of grant.
The 1976 Plan
The Company's 1976 Stock Option Plan (the "1976 Plan") provided for the
purchase of the Company's common stock by officers and key employees of the
Company. The 1976 Plan provided for non-incentive stock options, all of which
vested over a period not to exceed four years from the date of grant and expire
not more than ten years from the date of grant. No options were granted under
the 1976 Plan after December 1986.
The 1985 Plan
The Company's 1985 Special Stock Option Plan (the "1985 Plan") provided for
the grant of non-incentive options to certain employees as compensation for an
unanticipated two-week shutdown which occurred in 1985. All options under the
1985 Plan were granted in 1985 and vested in 1986. The 1985 Plan expired in
1995.
The 1987 Plan
The Company's 1987 Stock Option Plan (the "1987 Plan") currently provides
for granting non-incentive and incentive stock options to key employees of the
Company. In general the stock options outstanding under the 1987 Plan vest in a
period not to exceed four years and expire not more than ten years from the date
of grant. However, certain options granted under the 1987 Plan are exercisable
on such other terms as determined by the Compensation Committee or the Board of
Directors of the Company.
In July 1995, the Board of Directors of the Company granted options to the
President of the Company to purchase 450,000 shares of the Company's common
stock under the 1987 plan subject to shareholder approval of an amendment to the
1987 Plan to provide that the maximum number of shares for which options maybe
granted under the 1987 Plan to any individual during the remaining term of the
1987 Plan shall be limited to 1,000,000 shares. These options vest upon the
earlier of (a) the Company's common stock attaining certain market prices, or
(b) on June 30, 2002. As of December 31, 1995, options to purchase 225,000
shares of the total 450,000 shares of the Company's common stock have vested.
F-72
<PAGE> 332
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1989 Plan
In 1989, the Board of Directors approved the 1989 Special Stock Option Plan
(the "1989 Plan") effectively replacing another plan which has since terminated.
All options granted under the 1989 Plan expire starting in August 1996 through
May 1997 and are immediately exercisable upon issuance. No options were granted
under the 1989 Plan after 1991.
The Directors' Plan
In June 1994, the stockholders of the Company approved a Directors' Stock
Option Plan (the "Directors' Plan"), pursuant to which each current non-employee
director of the Company received a grant of options for 30,000 shares of common
stock vesting at a rate of 10,000 per year in each of 1994, 1995, and 1996. Two
directors who are also either officers and/or directors of Fresenius AG declined
to accept any options under the Directors' Plan. Future non-employee directors
will receive a grant of options for 30,000 shares of common stock upon their
election. The options will vest at a rate of 10,000 per year on the first,
second, and third anniversaries of the director's initial election.
During 1995, the Directors' Plan was amended to permit each director to
elect whether to receive all or none of the directors' fees due to that director
during a calendar year in the form of options. All options received in lieu of
directors' fees vest 100% upon grant. With respect to each directors' fee
payable in options, a non-employee director will receive an option for a number
of shares of the Company's common stock determined by the following formula:
(Amount of directors' fee otherwise payable in cash) divided by (60% of the
exercise price of the option), where the exercise price of the option is the
closing price of the Company's stock on the date the directors' fee would
otherwise be paid. The number of shares determined by application of this
formula will be rounded to the nearest whole share. The options will expire ten
years from the date of grant.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
SHARES AVERAGE
(IN THOUSANDS) PRICE RANGE
-------------- -------------
<S> <C> <C>
Balance at December 31, 1992.................... 964 $ 1.88-$9.38
Granted....................................... 1,232 5.25- 7.38
Exercised..................................... 32 3.63- 7.13
Canceled or expired........................... 234 6.25- 9.38
----- -------------
Balance at December 31, 1993.................... 1,930 1.88- 9.38
Granted....................................... 135 7.38- 7.50
Exercised..................................... 118 3.63- 7.13
Canceled or expired........................... 19 5.63- 7.50
----- -------------
Balance at December 31, 1994.................... 1,928 1.88- 9.38
Granted....................................... 461 12.75-17.25
Exercised..................................... 260 1.88- 9.38
----- -------------
Balance at December 31, 1995.................... 2,129 $ 3.13-$17.25
===== =============
Exercisable at December 31, 1995................ 1,362 $ 3.13-$15.25
===== =============
</TABLE>
Stock option balances for the years ended December 31, 1995, 1994 and 1993,
respectively and exercisable at December 31, 1995 do not include options to
purchase 20,500 shares with options prices ranging from $32.00 to $88.70 per
share. These options expire August 4, 1996.
F-73
<PAGE> 333
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMON STOCK WARRANTS
During 1993, the Company issued a stock warrant for the purchase of
1,750,000 shares of the Company's common stock, at an exercise price of $8 per
share expiring in 2003, to Abbott as partial consideration for the acquisition
of Abbott's renal dialysis business. In addition, the Company issued a warrant
to Fresenius AG for the purchase of 1,700,000 shares of the Company's common
stock, at an exercise price of $8 per share expiring in 2003, as consideration
for certain past comfort letters given in support of certain short-term
borrowings and Fresenius AG's commitment to provide up to $40 million of credit
support in connection with the Abbott acquisition. In 1994, the Company issued a
second warrant to Fresenius AG for the purchase of 50,000 shares of the
Company's common stock, at an exercise price of $10.5685 per share expiring in
2004, as consideration for providing credit support to the Company. At December
31, 1995, the Company had 3,500,000 shares of common stock reserved for the
exercise of stock warrants.
17. INCOME TAXES
Income tax expense (benefit) for the years ended December 31 consisted of
the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- ----
<S> <C> <C> <C>
Current:
Federal income taxes........................ $ 313 $ 226 $212
Foreign income taxes........................ (72) (123) 88
State income taxes.......................... 991 620 600
Deferred...................................... (4,666) -- --
------- ---- ---
Total............................... $(3,434) $ 723 $900
======= ==== ===
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, income tax expense
differed from the amounts computed by applying the federal income tax rate of
34% to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense............... $ 4,404 $ 2,678 $ 1,562
Increase (decrease) in income taxes resulting
from:
Items not deductible for tax purposes....... 287 610 1,239
Change in valuation allowance............... (4,404) -- --
Utilization of net operating loss
carryforwards for which no tax benefit
had previously been recognized........... (4,332) (2,920) (2,385)
State taxes, net of federal income tax
benefit.................................. 683 478 396
Foreign income taxes........................ (72) (123) 88
-------- ------ ------
$(3,434) $ 723 $ 900
======== ====== ======
</TABLE>
F-74
<PAGE> 334
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the temporary differences that give rise to deferred tax
assets and liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets (liabilities):
Inventory, primarily due to additional costs
inventoried for tax purposes pursuant to the Tax
Reform Act of 1986 and inventory reserve
accounts.......................................... $ 1,248 $ 1,069
Accounts receivable, primarily due to allowance for
doubtful accounts................................. 516 679
Compensated absences, principally due to accrual for
financial accounting reporting purposes........... 330 326
State taxes.......................................... 337 185
Product warranty, principally due to accrual for
financial accounting reporting purposes........... 135 135
Capital leases, principally due to capitalization of
costs for tax purposes............................ (138) 346
Alternative minimum tax credit carryforward.......... 721 388
Net operating loss carryforwards..................... 13,055 17,336
Plant and equipment, principally due to differences
in depreciation................................... 1,429 1,466
Intangibles, principally due to amortization pursuant
to
Tax Reform Act of 1993............................ 1,547 1,454
Other................................................ 134 87
-------- --------
Total gross deferred tax assets.............. 19,314 23,471
Less: Valuation allowance............................ (14,720) (23,471)
-------- --------
Net deferred tax assets...................... $ 4,594 $ --
======== ========
</TABLE>
The valuation allowance for the years ended December 31, 1995 and 1994
decreased by $8,751 and $2,625, respectively. During 1995, the Company reduced
the valuation allowance to reflect the deferred tax asset utilized in 1995 to
the extent of current income taxes and to recognize a deferred tax asset of
$4,594. The recognized deferred tax asset is based upon expected utilization of
net operating loss carryforwards that the Company expects will more likely than
not be realized through the results of future operations.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $38,397 for federal income tax reporting purposes. The net
operating losses expire in varying amounts beginning in 1998 through 2006. The
ability of the Company to use the carryforwards to offset taxes on its future
income is also subject to certain annual cumulative limitations.
18. EMPLOYEE BENEFIT PLANS
Employees are eligible to join the Company's 401(k) Savings Plan once they
have achieved a minimum of one year of service, 1,000 hours of service, and
attained the age 18. Under the provisions of the Company's 401(k) Savings Plan,
the Company contributes 2% of eligible employee base salary to the Company's
401(k) Savings Plan. The Company's obligation to the Company's 401(k) Savings
Plan was approximately $420, $540 and $376, respectively for the years ended
December 31, 1995, 1994 and 1993.
F-75
<PAGE> 335
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH FRESENIUS AG
Majority Stockholder
Fresenius AG and Fresenius Securities, Inc. ("FSI") currently hold
13,793,442 shares of the Company's common stock; 200,000 shares of the Company's
Series F preferred stock which are convertible into 3,129,883 shares of common
stock; and warrants to purchase 1,750,000 shares of the Company's common stock.
As of December 31, 1995, Fresenius AG beneficially owned 70.9% of the Company's
common stock.
Distribution Agreement
The Company has a paid-up license to Fresenius AG's know-how relating to
certain peritoneal dialysis products, including those incorporating the
Safe-Lock(R) technology, in the United States, Canada and Mexico. The Company
and Fresenius AG are also parties to an agreement pursuant to which Fresenius AG
has confirmed that the Company acts as the sole North American distributor for
Fresenius AG products related to end-stage renal disease treatment by
hemodialysis and to intensive medicine and infection control applications,
excluding pharmaceutical and certain other products, and has granted to the
Company first negotiation rights with respect to products covered by the
agreement which Fresenius AG proposes to have manufactured in North America.
In the ordinary course of the Company's business, the Company and Fresenius
AG and certain subsidiaries of Fresenius AG enter into various transactions
involving the purchase and sale of dialysis systems and supplies for
distribution by the Company. The prices charged to the Company under the
distribution agreement are negotiated each year by the Company and Fresenius AG
based on Fresenius AG's estimated costs and desired profit margins, and
generally have not exceeded the average of the prices charged to Fresenius AG's
other affiliated distributors (except for costs attributable to the manufacture
of products for sale primarily in the United States). The Company believes that
these prices are no less favorable to the Company than the Company could obtain
with unaffiliated third parties. However, the only source of supply for several
of the Company's products is Fresenius AG, and there can be no assurance that
the prices negotiated will enable the Company to maintain its profit margins on
these products.
Under its distribution agreement with Fresenius AG, Fresenius AG
indemnifies the Company for any claims of bodily injury or property damage
alleged to have arisen from the possession, use or operation of Fresenius AG's
products purchased pursuant to the agreement, and while the Company is obligated
to provide installation, training, repair, warranty and maintenance services for
these products, Fresenius AG reimburses the Company for material costs
associated with warranty repairs. The distribution agreement is stated to
terminate on the earlier of December 31, 2011 or the date that Fresenius AG
ceases to be able to elect 51% of the Company's board of directors, unless a
cause for early termination arises.
Intensive Care Agreement
The Company and Fresenius AG are parties to a distribution and
manufacturing agreement for certain of Fresenius AG's intensive care and
diagnostic products, including the Fresenius AS 104 Cell Separator. The
Intensive Care Agreement was entered into during 1994 for an initial term of
five years and will continue thereafter from year to year unless terminated. The
company is given both exclusive and non-exclusive rights to manufacture and
distribute certain products in North and South America. If the Company fails to
meet certain sales goals during the five year initial term, Fresenius AG has the
option to terminate the agreement with respect to one or more products or to
convert the Company's exclusive rights with respect to one or more products to a
non-exclusive right. It will be decided before the Effective Date (as defined in
the Joint Proxy Statement-Prospectus) whether such agreement will be continued
in connection with the Reorganization (as defined in the Joint Proxy
Statement-Prospectus).
F-76
<PAGE> 336
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Technology License Agreement
Pursuant to a technology license and know-how agreement, Fresenius AG has
granted the Company an exclusive North American license for the technology,
processes and know-how necessary to manufacture polysulfone dialyzers. Beginning
January 1, 1996, the Company will pay a royalty to Fresenius AG of 4.5% of the
Company's net sales of the dialyzers so produced by the Company for a ten-year
period, after which the Company will have a paid-up exclusive license. Fresenius
AG may make this license non-exclusive if it ceases to own a majority of the
Company's common stock. The agreement may be terminated by Fresenius AG upon
specified defaults, and in addition, may be terminated if a majority of the
voting power of the Company is acquired by a company engaged in the treatment,
research, development, manufacture or sale of products for treatment of renal
disease.
Financial Support
Fresenius AG has provided substantial financial support to the Company.
This support has included participating in letters of credit in connection with
the Company's previously outstanding industrial revenue bonds, providing credit
support in the form of letters of support and guarantees to the banks to assist
the Company in securing lines of credit and other debt, participating in and
assisting with the Company's foreign exchange contracts as well as various
miscellaneous general management assistance.
As full consideration for these services, the Company granted Fresenius AG
certain warrants (see Note 16) and agreed to pay Fresenius AG a quarterly fee of
$42 for the period from July 1992 to June 1994.
Registration Rights Agreement
Fresenius AG and the Company are party to a Registration Rights Agreement,
dated February 24, 1993. This agreement grants Fresenius AG demand registration
rights with respect to all shares of common stock held by Fresenius AG or
certain of its subsidiaries on February 24, 1993 or issuable to them upon
conversion of shares of Series F preferred stock or exercise of a warrant for
1,700,000 shares issued to Fresenius AG in connection with the Abbott
acquisition (collectively, the "Registrable Shares"). The Company is to pay all
expenses in connection with the first such registration; the holder(s) is
responsible for the expenses of subsequent registrations. A holder of
Registrable Shares may also request that the Company include its Registrable
Shares in registration statements filed by the Company in connection with a
public offering of common stock on behalf of the Company and/or another holder
of common stock.
Trade Transactions with Fresenius AG
As of December 31, net amounts due to Fresenius AG and affiliates, were as
follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Trade accounts payable................................... $41,847 $34,588
Trade accounts receivable................................ (618) (1,227)
------- -------
Accounts payable to affiliates, net...................... $41,229 $33,361
------- -------
</TABLE>
Effective January 1, 1992, trade payables to Fresenius AG and its wholly
owned subsidiaries were due in 150 days. Amounts not paid in 150 days bear
interest at an annual rate of 5.5%. During 1995 and 1994, the Company paid no
interest related to the trade payables.
F-77
<PAGE> 337
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended December 31, the Company had the following trade
transactions with Fresenius AG:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Purchases from Fresenius AG................... $90,627 $63,507 $52,442
Sales to Fresenius AG......................... 2,517 4,029 4,197
Warranty costs charged by the Company to
Fresenius AG for purchased materials........ 911 836 343
Miscellaneous charges by the Company to
Fresenius AG................................ 54 107 322
</TABLE>
In 1995, 1994 and 1993, Fresenius AG granted the Company purchase price
credits of $8.4 million, $1.4 million, and $0, respectively, which were credited
against cost of goods sold throughout the year.
Note Payable to FNA
In 1991, the Company used the proceeds of $11,900 from the exercise of
stock options by Fresenius AG and FSI to reduce its original indebtedness to
Fresenius North America, Inc. ("FNA"), a wholly owned subsidiary of Fresenius
AG, from $19,774 to $7,874. During 1992, the Company issued additional shares of
common stock to Fresenius AG for $7,600, the proceeds of which were used to
further reduce the Company's note payable to FNA. The balance outstanding on the
note payable to FNA was $274 at December 31, 1995 and 1994.
Other
The Company provides various administrative services and advances to
Fresenius Pharma U.S.A., Inc. ("Fresenius Pharma"), another wholly owned
subsidiary of Fresenius AG. There were no receivables related to these services
from Fresenius Pharma at December 31, 1995 and 1994. During 1992, the Company
acquired from Fresenius Pharma the rights to distribute within North America
certain transplantation pharmaceutical products of Fresenius AG. The Company
incurred no costs for the distribution rights under this agreement.
Pursuant to a series of agreements with Seratronics, Inc. ("Seratronics")
and Andersen Group, Inc., entered into in 1985 and extended and amended in 1995,
the Company manages, and acts as sole distributor for the dialyzer reuse
business of Seratronics. These arrangements require the Company to make minimum
net payments of $100 per year to Seratronics through February 1995, and starting
in March 1995 require the Company to make minimum payments of $50, per quarter
through February 29, 2000, when the agreements expire by their terms. As of
February 1995, the Company has the right to acquire the assets and liabilities
of the reuse business for a nominal purchase price and, if it exercises this
option, its obligation to make the quarterly payments discussed above ends.
During 1995 and 1994, the Company, as distributor, purchased dialyzer reuse
systems and supplies from Seratronics totaling approximately $1.9 million and
$1.6 million, respectively. The results of operations and the assets and
liabilities of the Seratronics' reuse business are included in the Company's
consolidated financial statements. The President and Chief Executive Officer of
the Company is also the President and Chief Executive Officer of Seratronics. A
director of the Company is the President of Andersen Group, Inc. which owns a
majority of the outstanding capital stock of Seratronics. A portion of the
salary of the President and Chief Executive Officer of the Company is paid each
year by Seratronics.
A member of the Company's Board of Directors is also a partner in a law
firm which provided certain legal services for the Company and Fresenius AG. The
Company paid the law firm approximately $259, $6, and $52 in 1995, 1994 and
1993, respectively.
F-78
<PAGE> 338
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................................. $68,176 $76,744 $78,933 $81,111
Gross profit............................... 21,136 22,956 23,331 25,439
Operating income........................... 4,088 4,180 4,622 5,136
Net income................................. 3,318 3,473 3,747 5,849
Net income per common share................ $ .13 $ .13 $ .14 $ .21
Weighted average number of shares of
primary and fully dilutive common stock
and common stock equivalents............. 25,872 26,694 27,215 27,925
</TABLE>
The Company recognized additional income tax benefit in the fourth quarter
resulting from an adjustment to its deferred tax asset valuation allowance.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................................. $59,689 $61,139 $65,370 $68,146
Gross profit............................... 18,552 19,222 19,708 21,096
Operating income........................... 3,036 3,047 3,291 2,715
Net income................................. 1,537 1,519 1,978 2,120
Net income per common share................ $ .07 $ .07 $ .08 $ .09
Weighted average number of shares of
primary and fully dilutive common stock
and common stock equivalents............. 20,953 21,525 24,745 25,542
</TABLE>
Increased demand in the fourth quarter for hemodialysis products
necessitated additional air freight and overtime expenses resulting in lower
operating income in the fourth quarter. In addition, adjustments were recorded
in the fourth quarter to decrease income taxes and interest expense as estimates
were revised based on new information.
21. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in various
legal actions. In the opinion of management, based upon the advice of counsel,
the resolution of these legal actions will not have a material effect upon the
Company's results of operations or liquidity or its financial condition.
22. SUBSEQUENT EVENT
In February 1996, the Company announced that Fresenius AG had entered into
a definitive agreement (the "Agreement") with W.R. Grace & Co. ("Grace") to
combine Fresenius AG's worldwide dialysis business, including the Company, with
Grace's National Medical Care, Inc. to create a fully integrated dialysis
company. The Agreement provides that an aggregate of 55.2% of the shares of the
combined company, to be called "Fresenius Medical Care AG", will be issued to
Fresenius AG and the Company's public shareholders provided that Fresenius AG
must retain at least 51% of the shares of the combined company and that Grace
shareholders will acquire the remaining 44.8%. Fresenius AG agreed with Grace
that the Company would become a wholly owned subsidiary of Fresenius Medical
Care AG and that, when the economic terms of the participation of the Company's
minority shareholders in the transaction have been established, Fresenius AG
will vote its shares of the Company in favor of the transaction.
F-79
<PAGE> 339
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. ABBOTT ACQUISITION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations is
presented for the year ended December 31, 1993 and gives effect to the Abbott
acquisition transaction as if it occurred on January 1, 1993, after giving
effect to certain adjustments, including amortization of intangible assets,
additional depreciation expense, increased interest expense on debt related to
the acquisition, and related income tax effects. The pro forma consolidated
statement of operations should be read in conjunction with the related notes
that follow and are not necessarily indicative of what the actual results of
operations of the Company would have been had the transaction occurred on
January 1, 1993, nor does it purport to indicate the future results of
operations of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------------------
BEFORE
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTED
----------- ----------- --------
(UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales........................................ $ 205,960 $ 4,682(a) $210,642
Cost of sales.................................... 140,960 2,258(b) 143,218
-------- ------ --------
Gross profit........................... 65,000 2,424 67,424
Operating expenses:
Selling, general and administrative............ 54,213 1,549(c) 55,762
Research and development....................... 1,500 -- 1,500
Litigation settlements......................... -- -- --
-------- ------ --------
Operating income....................... 9,287 875 10,162
Other income:
Interest income................................ 204 -- 204
Interest expense............................... (4,835) (358)(d) (5,193)
Other, net..................................... (63) -- (63)
-------- ------ --------
Income before income taxes............. 4,593 517 5,110
Income tax expense............................... (900) (50)(e) (950)
-------- ------ --------
Net income............................. $ 3,693 $ 467 $ 4,160
======== ====== ========
Net income per common share...................... $ .18 $ .20
======== ========
Weighted average number of shares of common stock
and common stock equivalents................... 20,660 20,660
======== ========
</TABLE>
- ---------------
(a) Net Sales
To reflect the estimated increase in sales as a result of the purchase
transaction.
(b) Cost of Sales
To reflect the estimated increase in cost of sales as a result of the
purchase transaction.
(c) Selling, General and Administrative Expenses
To reflect the estimated increase in selling, general and administrative
expenses resulting from the purchase.
(d) Interest Expense
To reflect increase in interest expense for additional debt financing.
(e) Income Tax Expense
To reflect increase in income tax expense as a result of projected
additional net income.
F-80
<PAGE> 340
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
MARCH 31,
1996
---------
<S> <C>
Current assets:
Cash............................................................................ $ 2,352
Trade accounts receivable, net.................................................. 52,306
Inventories..................................................................... 67,282
Prepaid expenses and other current assets....................................... 6,522
Deferred income taxes........................................................... 5,611
--------
Total current assets.................................................... 134,073
Property, plant, and equipment, net............................................... 48,985
Intangible assets................................................................. 36,175
Other assets...................................................................... 7,573
--------
Total assets............................................................ $ 226,806
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 14,668
Accounts payable to affiliates, net............................................. 40,581
Accrued expenses................................................................ 13,650
Short-term borrowings........................................................... 35,949
Short-term borrowings -- Fresenius AG........................................... 3,102
Current portion long-term debt and capital lease obligations.................... 11,788
Income taxes payable............................................................ 832
--------
Total current liabilities............................................... 120,570
Long-term payable, less current portion........................................... 1,275
Note payable to Fresenius North America........................................... 274
Long-term debt and capital lease obligations, less current portion................ 19,895
--------
Total liabilities....................................................... 142,014
Stockholders' equity:
Series F preferred stock, $1.00 par value....................................... 200
Common stock, $.01 par value.................................................... 216
Capital in excess of par value.................................................. 141,986
Currency translation adjustment................................................. (87)
Accumulated deficit............................................................. (57,523)
--------
Total stockholders' equity.............................................. 84,792
--------
$ 226,806
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-81
<PAGE> 341
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
<S> <C> <C>
Net sales.............................................................. $81,062 $68,176
Cost of sales.......................................................... 55,566 47,040
------- -------
Gross profit................................................. 25,496 21,136
Operating expenses:
Selling, general, administrative, and research and development....... 18,949 17,048
------- -------
Operating income............................................. 6,547 4,088
Other expenses (income):
Interest income...................................................... (17) (7)
Interest expenses.................................................... 1,418 1,281
Other, net........................................................... 62 25
------- -------
Income before income taxes................................... 5,084 2,789
Income tax benefit..................................................... (262) (529)
------- -------
Net income................................................... $ 5,346 $ 3,318
======= =======
Net income per common and common equivalent share:
Primary.............................................................. $ .19 $ .13
======= =======
Fully diluted........................................................ $ .19 $ .13
======= =======
Weighted average number of shares of common stock and common stock
equivalents used to compute net income per common and common
equivalent share:
Primary.............................................................. 27,884 25,717
======= =======
Fully diluted........................................................ 27,936 25,872
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-82
<PAGE> 342
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities.................... $ 5,523 $ (4,659)
Cash flows from investing activities:
Purchases of property, plant and equipment........................... (1,760) (9,297)
Proceeds from sales/leaseback of property, plant and equipment....... -- 11,768
Validation cost expenditures......................................... (1,347) --
------- --------
Net cash provided by (used in) investing activities.................. (3,107) 2,471
Cash flows from financing activities:
Principal payments under debt and capital lease obligations.......... (8,994) (8,458)
Proceeds from capital lease financing arrangement.................... 4,153 4,000
Change in accounts payable to affiliates, net........................ (648) 5,524
Proceeds from short-term borrowings.................................. 10,000 18,280
Change in short-term borrowings -- Fresenius AG...................... (548) 70
Repayment of short-term borrowings................................... (7,200) (16,880)
Proceeds from issuance of common stock, net.......................... 851 276
------- --------
Net cash provided (used in) by financing activities.................. (2,386) 2,812
Effect of exchange rates on cash....................................... (8) 2
------- --------
Net increase in cash and cash equivalents............................ 22 626
Cash and cash equivalents at beginning of period....................... 2,330 2,315
------- --------
Cash and cash equivalents at end of period............................. $ 2,352 $ 2,941
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-83
<PAGE> 343
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS
Fresenius USA, Inc. and subsidiaries (the "Company") is a manufacturer and
distributor of medical products and systems for sale primarily in the United
States and Canada for the treatment of kidney failure by hemodialysis and by
peritoneal dialysis. The Company is one of only two companies in the United
States offering a full line of both hemodialysis and peritoneal dialysis
machines and disposable products. These machines and products are used to
cleanse a patient's blood of waste products and fluids normally eliminated by
properly functioning kidneys. The Company also sells cell separation products
designed for the therapeutic removal of diseased blood components as well as
collection of donor blood components for transfusion.
(2) INVENTORIES
Inventories are stated at the lower of cost (determined by using first-in,
first-out method) or market value, and consist of the following as of March 31,
1996 (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
Raw materials...................................................... $32,870
Work in process.................................................... 9,733
Finished goods..................................................... 27,835
-------
70,438
Reserves........................................................... (3,156)
-------
Inventories, net................................................... $67,282
=======
</TABLE>
(3) OTHER ASSETS
In 1995, the Company completed construction of a dialyzer plant addition to
its manufacturing facility in Ogden, Utah. At March 31, 1996, included in other
assets are $7,989 of validation costs, net of accumulated amortization of $557,
incurred to qualify the products and the associated manufacturing processes for
approval by the U.S. Food and Drug Administration. Such costs are being
amortized on a straight-line basis over an estimated useful life of 3 years upon
commencement of manufacturing.
(4) INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $38.4 million for federal income tax reporting purposes. The net
operating losses expire in varying amounts beginning in 1998 through 2006. The
ability of the Company to use carryforwards to offset taxes on its future income
is also subject to certain annual cumulative limitations. The Company believes
that it has sufficient net loss carryforwards to offset any 1996 net income for
federal income tax reporting purposes.
(5) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common share was computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during each period based on the treasury stock method or the
modified treasury stock method. Stock options, common stock warrants, and the
Series F preferred stock are considered to be common stock equivalents.
F-84
<PAGE> 344
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996 AND 1995
(UNAUDITED)
The application of the treasury stock method is modified when the
outstanding number of the common shares which would be issued if all outstanding
options and warrants and their equivalents were exercised exceeds 20% of the
number of common shares outstanding at the end of the period. When this 20% test
is met, the treasury stock method is first applied to purchase no more than 20%
of the number of common shares outstanding at the end of the period. The balance
of any proceeds remaining is then applied to reduce debt with appropriate
recognition given for any interest expense savings net of income tax expense.
These calculations are aggregated to determine whether the effect on net income
per common share is dilutive or antidilutive. When dilutive, all of the
calculations are utilized when computing net income per common share.
The computation of fully diluted income per share would also include the
effect of converting other outstanding securities, when the effect is dilutive,
and the additional dilution related to stock options when the market price at
the end of the period is higher than the average price for the period.
(6) RECENT DEVELOPMENT
On February 4, 1996, W. R. Grace & Co. ("Grace") and Fresenius AG entered
into a definitive agreement (the "Reorganization Agreement") to combine Grace's
National Medical Care, Inc. ("NMC") with Fresenius AG's worldwide dialysis
business, including the Company (the "Reorganization"). The Reorganization
Agreement provides that an aggregate of 55.2% of the shares of the combined
company, to be called Fresenius Medical Care AG, will be issued to Fresenius AG
and the Company's public shareholders provided that Fresenius AG must retain at
least 51% of the shares of the combined company, and that Grace shareholders
will acquire the remaining 44.8%. Fresenius AG agreed with Grace that a wholly
owned subsidiary of Fresenius Medical Care AG would be merged with and into the
Company, with the Company the surviving Corporation (the "Company Merger"), as a
result of which the Company would become a wholly-owned subsidiary of Fresenius
Medical Care AG and that, when the economic terms of the participation of the
Company's minority shareholders in the transaction have been established,
Fresenius AG will vote its shares of the Company in favor of the transaction.
On May 8, 1996, Fresenius AG and the Company jointly announced that an
agreement had been reached between Fresenius AG and a committee of independent
directors of the Company (the "Independent Committee") on the terms on which the
public stockholders of the Company will participate in the Reorganization and
the Company Merger. The Reorganization and the Company Merger were approved by
the Board of Directors of the Company on May 8, 1996.
Under the terms of the agreement with the Independent Committee, the public
shareholders of the Company were to receive the equivalent of 1.15 ordinary
shares of Fresenius Medical Care AG, based on the assumption that Fresenius
Medical Care AG would have 217,170,000 shares outstanding. It is currently
intended that Fresenius Medical Care AG will have an aggregate of 70,000,000
ordinary shares outstanding (instead of 217,170,000 as originally proposed) and
that U.S. stockholders will receive American Depository Shares ("ADSs") each
evidencing one-third of an ordinary share of Fresenius Medical Care AG. Thus,
the public shareholders of the Company will receive, on a fully diluted basis,
approximately 1.112 ADSs of Fresenius Medical Care AG for each share of Company
Common Stock. The agreement with the Independent Committee also assumes that the
Company will reacquire outstanding stock options or other equity securities,
such that Fresenius AG's fully diluted interest in Fresenius Medical Care AG is
not reduced below 50.3%. Accordingly, the public stockholders of the Company, on
a fully diluted basis, will receive 4.9% of Fresenius Medical Care AG's shares
outstanding after the closing.
F-85
<PAGE> 345
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996 AND 1995
(UNAUDITED)
(7) MANAGEMENT REPRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments which, in the
opinion of management, consist only of normal and recurring adjustments that are
necessary for a fair statement of the results for the interim periods presented.
Operating results for the three month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the year.
Certain information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to such rules and regulations. It is
suggested that these consolidated condensed financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
contained in the Company's Form 10-K for the year ended December 31, 1995.
F-86
<PAGE> 346
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF FEBRUARY 4, 1996
BY AND BETWEEN
W. R. GRACE & CO.
AND
FRESENIUS AG
<PAGE> 347
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS
A. Defined Terms.................................................................... A-7
B. Newco............................................................................ A-7
C. The Contribution................................................................. A-7
D. The Distribution................................................................. A-7
E. The Recapitalization............................................................. A-7
F. The Mergers...................................................................... A-7
G. Financing........................................................................ A-7
H. Intention of the Parties......................................................... A-8
I. Approvals....................................................................... A-8
ARTICLE I
THE REORGANIZATION; CLOSING; EFFECTIVE TIME
Section 1.1. The Distribution, Newco and the Contribution........................... A-9
Section 1.2. The Recapitalization and the Mergers................................... A-9
Section 1.3. Effective Time......................................................... A-9
Section 1.4. Closing................................................................ A-9
ARTICLE II
CERTIFICATE OF INCORPORATION AND BY-LAWS
Section 2.1. Grace Certificate of Incorporation..................................... A-10
Section 2.2. Grace By-laws.......................................................... A-10
Section 2.3. Fresenius USA Articles of Organization................................. A-10
Section 2.4. Fresenius USA By-laws.................................................. A-10
ARTICLE III
DIRECTORS AND OFFICERS
Section 3.1. Grace Directors........................................................ A-10
Section 3.2. Grace Officers......................................................... A-10
Section 3.3. Fresenius USA Directors................................................ A-10
Section 3.4. Fresenius USA Officers................................................. A-10
ARTICLE IV
MERGER CONSIDERATION; CONTRIBUTION CONSIDERATION;
CONVERSION OR CANCELLATION OF SHARES IN THE MERGERS
Section 4.1. Grace Merger Consideration; Conversion or Cancellation of Grace Capital
Stock.............................................................................. A-10
Section 4.2. Fresenius USA Merger Consideration; Conversion or Cancellation of
Fresenius USA Capital Stock............................................ A-11
Section 4.3. Fresenius AG Consideration............................................. A-12
Section 4.4. Exchange of Old Certificates for New Certificates...................... A-12
(a) Appointment of Exchange Agent...................................... A-12
(b) Exchange Procedures................................................ A-12
(c) Fractional Shares.................................................. A-12
(d) Distributions with Respect to Unexchanged Shares................... A-13
(e) No Transfers....................................................... A-13
</TABLE>
A-1
<PAGE> 348
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(f) No Liability....................................................... A-13
(g) Withholding Rights................................................. A-13
(h) Transfer Taxes..................................................... A-14
(i) Stock Options and Warrants........................................ A-14
Section 4.5. Dissenters' Rights..................................................... A-14
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1. Representations and Warranties of Grace................................ A-14
(a) Capital Stock...................................................... A-14
(b) Corporate Organization and Qualification........................... A-15
(c) Corporate Authority................................................ A-15
(d) Governmental Filings; No Violations................................ A-16
(e) SEC Documents; Financial Statements; No Undisclosed Liabilities.... A-16
(f) Absence of Certain Events and Changes.............................. A-17
(g) Compliance with Laws............................................... A-17
(h) Title to Assets.................................................... A-18
(i) Litigation........................................................ A-18
(j) Taxes............................................................. A-18
(k) Employee Benefits.................................................. A-18
(l) Environmental Matters............................................. A-20
(m) Rights Plan......................................................... A-20
(n) Takeover Statutes.................................................. A-20
(o) Brokers and Finders................................................ A-20
(p) Tax Matters........................................................ A-20
(q) Information in Disclosure Documents and Registration Statements.... A-20
(r) Trademarks, Patents and Copyrights................................. A-20
(s) Assets............................................................. A-21
(t) Disclosure......................................................... A-21
Section 5.2. Representations and Warranties of Fresenius USA........................ A-21
(a) Capital Stock...................................................... A-21
(b) Corporate Organization and Qualification........................... A-22
(c) Corporate Authority................................................ A-22
(d) Governmental Filings; No Violations................................ A-22
(e) SEC Documents; Financial Statements; No Undisclosed Liabilities.... A-23
(f) Absence of Certain Events and Changes.............................. A-24
(g) Compliance with Laws............................................... A-24
(h) Title to Assets.................................................... A-24
(i) Litigation........................................................ A-24
(j) Taxes............................................................. A-24
(k) Employee Benefits.................................................. A-25
(l) Environmental Matters............................................. A-26
(m) Takeover Statutes................................................... A-26
(n) Brokers and Finders................................................ A-26
</TABLE>
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(o) Information in Disclosure Documents and Registration Statements.... A-26
(p) Trademarks, Patents and Copyrights................................. A-27
(q) Disclosure......................................................... A-27
Section 5.3. Representations and Warranties of Fresenius AG......................... A-27
(a) Corporation Organization and Qualification......................... A-27
(b) Corporate Authority................................................ A-27
(c) Governmental Filings; No Violations................................ A-28
(d) Takeover Statutes.................................................. A-28
(e) Brokers and Finders................................................ A-28
(f) Contribution....................................................... A-28
(g) Tax Matters........................................................ A-28
(h) Information in Disclosure Documents and Registration Statements.... A-28
(i) Disclosure........................................................ A-29
(j) Assets............................................................ A-29
Section 5.4. Representations and Warranties for the FWD Business.................... A-29
(a) Corporate Organization and Qualification........................... A-29
(b) Corporate Authority................................................ A-29
(c) Capitalization..................................................... A-29
(d) Financial Statements; No Undisclosed Liabilities................... A-30
(e) Absence of Certain Events and Changes.............................. A-30
(f) Compliance with Laws............................................... A-30
(g) Title to Assets.................................................... A-30
(h) Litigation......................................................... A-31
(i) Taxes............................................................. A-31
(j) Environmental Matters............................................. A-31
(k) Governmental Filings; No Violations................................ A-31
(l) Contracts and Commitments......................................... A-32
(m) Employee Benefit Plans.............................................. A-32
(n) Lease.............................................................. A-33
(o) Trademarks, Patents and Copyrights................................. A-33
Section 5.5. Certain Definitions Relating to the FWD Business....................... A-33
(a) FWD Business....................................................... A-33
(b) FWD Business Assets................................................ A-33
(c) FWD Business Subsidiaries.......................................... A-34
(d) Fresenius AG Restructuring......................................... A-34
ARTICLE VI
COVENANTS
Section 6.1. Interim Operations..................................................... A-34
Section 6.2. Certain Transactions................................................... A-35
Section 6.3. Acquisition Proposals.................................................. A-36
Section 6.4. Information Supplied................................................... A-36
Section 6.5. Shareholder Approvals.................................................. A-36
Section 6.6. Filings; Other Actions................................................. A-37
Section 6.7. Audited Financial Statements........................................... A-38
</TABLE>
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Section 6.8. Access................................................................ A-39
Section 6.9. Notification of Certain Matters....................................... A-39
Section 6.10. Publicity............................................................. A-39
Section 6.11. [Intentionally Omitted]............................................... A-40
Section 6.12. Employee Benefits..................................................... A-40
Section 6.13. Expenses and Liquidated Damages....................................... A-40
Section 6.14. Grace Rights Agreement................................................ A-41
Section 6.15. Antitakeover Statutes................................................. A-41
Section 6.16. Securities Act Compliance............................................. A-41
Section 6.17. Stock Exchange Listing................................................ A-41
Section 6.18. Transaction Agreements................................................ A-41
Section 6.19. Tax Matters........................................................... A-41
ARTICLE VII
CONDITIONS
Section 7.1. Conditions to Each Party's Obligation.................................. A-41
(a) Shareholder Approval............................................... A-41
(b) Governmental and Regulatory Consents............................... A-41
(c) Third-Party Consents............................................... A-42
(d) Litigation......................................................... A-42
(e) Grace Tax Opinion.................................................. A-42
(f) Registration Statements............................................ A-42
(g) Financing.......................................................... A-42
(h) The Distribution................................................... A-42
(i) Stock Exchange Listing............................................ A-42
(j) Fresenius AG Debt................................................. A-42
(k) Grace Debt......................................................... A-42
Section 7.2. Conditions to Obligation of Grace...................................... A-42
(a) Representations and Warranties..................................... A-42
(b) Performance of Obligations......................................... A-43
(c) Pooling Agreement.................................................. A-43
(d) Fresenius AG Tax Opinion........................................... A-43
Section 7.3. Conditions to Obligation
Concerning Fresenius USA............................................................. A-43
(a) Representations and Warranties..................................... A-43
(b) Performance of Obligations......................................... A-43
(c) Pooling Agreement Opinion.......................................... A-43
Section 7.4. Conditions to Obligation of Fresenius AG............................... A-43
(a) Representations and Warranties..................................... A-43
(b) Performance of Obligations......................................... A-43
</TABLE>
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ARTICLE VIII
TERMINATION
Section 8.1. Termination by Mutual Consent.......................................... A-44
Section 8.2. Termination by any Party Hereto........................................ A-44
Section 8.3. Termination by Grace................................................... A-44
Section 8.4. Termination by Fresenius AG............................................ A-44
Section 8.5. Effect of Termination and Abandonment.................................. A-44
ARTICLE IX
MISCELLANEOUS AND GENERAL
Section 9.1. Survival.............................................................. A-44
Section 9.2. Modification or Amendment............................................. A-44
Section 9.3. Waiver of Conditions.................................................. A-45
Section 9.4. Counterparts.......................................................... A-45
Section 9.5. Governing Law......................................................... A-45
Section 9.6. Notices............................................................... A-45
Section 9.7. Entire Agreement, etc................................................. A-45
Section 9.8. Definitions of "Subsidiary" and "Significant Subsidiary".............. A-46
Section 9.9. Captions.............................................................. A-46
Section 9.10. Specific Performance.................................................. A-46
Section 9.11. Severability.......................................................... A-46
Section 9.12. No Third-Party Beneficiaries.......................................... A-46
Section 9.13. Fresenius AG Covenant................................................. A-46
Section 9.14. Further Assurances.................................................... A-47
</TABLE>
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ANNEX A
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Exhibit A Distribution Agreement
Exhibit B [Intentionally omitted]
Exhibit C [Intentionally omitted]
Exhibit D [Intentionally omitted]
Exhibit E Contribution Agreement
Exhibit F [Intentionally omitted]
Exhibit G [Intentionally omitted]
Exhibit H [Intentionally omitted]
Exhibit I [Intentionally omitted]
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION, dated as of February 4, 1996, as
amended, (this "Agreement" or the "Reorganization Agreement"), by and between W.
R. GRACE & CO., a New York corporation ("Grace"), and FRESENIUS AG, an
Aktiengesellschaft organized under the laws of the Federal Republic of Germany
("Fresenius AG").
RECITALS
A. Defined Terms. Certain capitalized terms used herein shall have the
meanings set forth in Annex A hereto.
B. Newco. Prior to the Effective Time, Fresenius AG intends (a) to
convert a wholly owned GmbH subsidiary into an Aktiengesellschaft organized
under the laws of the Federal Republic of Germany ("Newco"), having charter
documents (the "Newco Charter Documents") and other organizational documents
consistent with the terms set forth in Exhibit D hereto and subject to the
approval of each party hereto, and (b) to enter into a Pooling Agreement
consistent with the terms set forth in Exhibit D hereto and subject to the
approval of each party hereto (the "Newco Pooling Agreement").
C. The Contribution. Prior to the Effective Time, Fresenius AG intends to
contribute its worldwide dialysis business (including its shares of capital
stock of Fresenius USA) to Newco (the "Contribution") pursuant to the
Contribution Agreement attached hereto as Exhibit E (the " Contribution
Agreement"), and shall retain and lease to Newco its real property and buildings
in the Federal Republic of Germany to the extent used in connection with the FWD
Business pursuant to a lease (or leases) (the "Lease") consistent with the terms
set forth in Exhibit B to the Contribution Agreement, and subject to the
approval of each party hereto, and shall retain and license to Newco its name
and certain related marks pursuant to a license consistent with the terms set
forth in Exhibit C to the Contribution Agreement, and subject to the approval of
each party hereto.
D. The Distribution. Simultaneously herewith, W. R. Grace & Co.-Conn., a
Connecticut corporation ("Grace-Conn."), are entering into the Distribution
Agreement attached hereto as Exhibit A (the "Distribution Agreement") and, prior
to the Effective Time, intend to consummate the transactions contemplated
thereby. Prior to the Effective Time, Grace intends to transfer to (or retain
in) Grace-Conn. all non-healthcare assets and liabilities, its interests in the
Amicon bioseparations business and GN Holdings, Inc. and certain other assets,
as contemplated by the Distribution Agreement, and to effect a distribution to
its common shareholders of all of its equity interest in Grace-Conn. (the
"Distribution").
E. The Recapitalization. Immediately prior to the Effective Time, but
following the Distribution, Grace shall be recapitalized (the
"Recapitalization") so that each holder of a Grace Common Share shall thereafter
hold one Grace Common Share and one one-hundredth of a NY Preferred Share.
F. The Mergers. At the Effective Time, the parties intend to effect a
merger of a wholly owned New York corporate subsidiary of Newco ("Grace Merger
Sub") with and into Grace, with Grace being the surviving corporation (the
"Grace Merger"), and that the Certificate of Incorporation of Grace shall be
amended (the "Grace Amendment") to change the name of Grace to a name mutually
acceptable to the parties hereto. Also at the Effective Time, the parties intend
to effect a merger of a wholly owned Massachusetts corporate subsidiary of Newco
("Fresenius USA Merger Sub") with and into Fresenius USA, Inc., a Massachusetts
corporation ("Fresenius USA" and, together with Fresenius AG, the "Fresenius
Parties"), with Fresenius USA being the surviving corporation (the "Fresenius
USA Merger" and, together with the Grace Merger, the "Mergers"), and Fresenius
AG has committed to vote its shares of Fresenius USA in favor of the Fresenius
USA Merger, as provided herein.
G. Financing. It is the intention of the parties hereto that, prior to
the Distribution: (i) Grace and Grace-Conn. shall use reasonable efforts to
cause NMC to arrange new credit facilities so that the transactions contemplated
by the Transaction Agreements may be consummated; (ii) Fresenius AG shall use
reasonable efforts to arrange new credit facilities for the FWD Business so that
the transactions contemplated by the Transaction Agreements may be consummated;
and (iii) the parties shall cooperate with one another with respect to the
foregoing.
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H. Intention of the Parties. It is the intention of the parties to this
Agreement that for United States federal income tax purposes (a) the
Contribution shall qualify as a tax-free exchange under the Code, (b) the
Distribution shall qualify as a tax-free distribution under the Code, (c) the
Recapitalization shall be tax-free to Grace under the Code and (d) each of the
Mergers shall qualify as a "reorganization" within the meaning of Section 368(a)
of the Code.
I. Approvals. The Board of Directors of each party hereto has determined
that this Agreement is in the best interests of such party and its shareholders
and has duly approved this Agreement and authorized its execution and delivery.
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NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE REORGANIZATION; CLOSING; EFFECTIVE TIME
SECTION 1.1. The Distribution, Newco and the Contribution. (a) Subject to
the terms and conditions of the Distribution Agreement, prior to the Effective
Time, the parties thereto shall effect the various transactions contemplated
thereby including, immediately prior to the Effective Time, the Distribution.
(b) Prior to the Effective Time, Fresenius AG shall cause Newco to
adopt the Newco Charter Documents (which shall be satisfactory to the other
parties hereto), shall cause Newco to adopt other organizational documents
as may be necessary or advisable (which shall be satisfactory to the other
parties hereto) and shall enter into, and shall cause Newco to enter into,
the Newco Pooling Agreement (which shall be satisfactory to the other
parties hereto).
(c) Subject to the terms and conditions of the Contribution Agreement,
prior to the Effective Time, Fresenius AG shall effect the various
transactions contemplated by the Contribution Agreement including the
Contribution.
SECTION 1.2. The Recapitalization and the Mergers. (a) Subject to the
terms and conditions of this Agreement, immediately prior to the Effective Time,
but following the Distribution, Grace shall consummate the Recapitalization.
(b) At the Effective Time, Grace and Grace Merger Sub shall consummate the
Grace Merger in which Grace Merger Sub shall be merged with and into Grace and
the separate corporate existence of Grace Merger Sub shall thereupon cease.
Grace shall be the surviving corporation of the Grace Merger (the "Grace
Surviving Corporation") and shall continue to be governed by the laws of the
State of New York.
(c) Subject to the terms and conditions of this Agreement, at the Effective
Time, Fresenius USA and Fresenius USA Merger Sub shall consummate the Fresenius
USA Merger in which Fresenius USA Merger Sub shall be merged with and into
Fresenius USA and the separate corporate existence of Fresenius USA Merger Sub
shall thereupon cease. Fresenius USA shall be the surviving corporation of the
Fresenius USA Merger (the "Fresenius USA Surviving Corporation") and shall
continue to be governed by the laws of the Commonwealth of Massachusetts.
SECTION 1.3. Effective Time. Fresenius USA and Fresenius USA Merger Sub
shall cause a certificate of merger to be submitted to the Department of State
of the Commonwealth of Massachusetts as provided in the MBCL (the "Massachusetts
Certificate"). The Fresenius USA Merger shall become effective at such time as
the Massachusetts Certificate has been filed by the Department of State of the
Commonwealth of Massachusetts in accordance with the provisions of the MBCL or
at such other time as may be specified in the Massachusetts Certificate in
accordance with applicable law. The date and time when the Fresenius USA Merger
shall become effective is referred to herein as the "Effective Time." Grace and
Grace Merger Sub shall cause articles of merger to be submitted to the
Department of State of the State of New York as provided in the NYBCL (the "New
York Certificate "). The New York Certificate shall provide that the Grace
Merger shall become effective at the Effective Time in accordance with
applicable law.
SECTION 1.4. Closing. The closing of the Reorganization (the "Closing")
shall take place at the offices of Wachtell, Lipton, Rosen & Katz, New York, New
York, at 10:00 A.M. on the first business day on which all the conditions set
forth in Article VII can be fulfilled or are waived, or at such other place
and/or time as the parties hereto may agree. The date upon which the Closing
shall occur is herein called the "Closing Date."
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ARTICLE II
CERTIFICATE OF INCORPORATION AND BY-LAWS
SECTION 2.1. Grace Certificate of Incorporation. The certificate of
incorporation of Grace, as in effect at the Effective Time and taking into
account the Grace Amendment, shall be the certificate of incorporation of the
Grace Surviving Corporation (the "Grace Certificate of Incorporation"), until
duly amended in accordance with the terms thereof and the NYBCL.
SECTION 2.2. Grace By-laws. The By-laws of Grace, as in effect at the
Effective Time, shall continue as the By-laws of the Grace Surviving Corporation
until duly amended in accordance with the terms thereof, the Grace Certificate
of Incorporation and the NYBCL.
SECTION 2.3. Fresenius USA Articles of Organization. The articles of
organization of Fresenius USA, as in effect at the Effective Time, shall be the
articles of organization of the Fresenius USA Surviving Corporation (the
"Fresenius USA Articles of Organization"), until duly amended in accordance with
the terms thereof and the MBCL.
SECTION 2.4. Fresenius USA By-laws. The By-laws of Fresenius USA, as in
effect at the Effective Time, shall continue as the By-laws of the Fresenius USA
Surviving Corporation, until duly amended in accordance with the terms thereof,
the Fresenius USA Articles of Organization and the MBCL.
ARTICLE III
DIRECTORS AND OFFICERS
SECTION 3.1. Grace Directors. Immediately after the Effective Time, the
directors of Grace Merger Sub shall be the directors of the Grace Surviving
Corporation.
SECTION 3.2. Grace Officers. Immediately after the Effective Time, the
officers of Grace Merger Sub shall be the officers of the Grace Surviving
Corporation.
SECTION 3.3. Fresenius USA Directors. Immediately after the Effective
Time, the directors of Fresenius USA Merger Sub shall be the directors of the
Fresenius USA Surviving Corporation.
SECTION 3.4. Fresenius USA Officers. Immediately after the Effective Time,
the officers of Fresenius USA Merger Sub shall be the officers of the Fresenius
USA Surviving Corporation.
ARTICLE IV
MERGER CONSIDERATION; CONTRIBUTION CONSIDERATION;
CONVERSION OR CANCELLATION OF SHARES IN THE MERGERS
SECTION 4.1. Grace Merger Consideration; Conversion or Cancellation of
Grace Capital Stock. At the Effective Time, by virtue of the Grace Merger and
without any action on the part of the holder of any capital stock of Grace:
(a) Subject to Section 4.4(c), each Grace Common Share issued and
outstanding immediately prior to the Effective Time (other than any Grace
Common Share owned by Fresenius AG or its subsidiaries or Fresenius USA or
its subsidiaries or any Grace subsidiary or held in Grace's treasury or any
Grace Common Dissenting Share) shall be converted at the Effective Time
into the right to receive the Grace Consideration Per Share.
(b) Each Grace Preferred Share and each NY Preferred Share issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and shall be unchanged by the Grace Merger.
(c) All Grace Common Shares shall cease to be outstanding, shall be
cancelled and retired and shall cease to exist, and each holder of an Old
Grace Common Certificate (other than holders of Old
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Grace Common Certificates representing Grace Common Dissenting Shares)
shall there after cease to have any rights with respect to such Old Grace
Common Certificates, except the right to receive, without interest, upon
exchange of such Old Grace Common Certificates in accordance with Section
4.4, the Newco Ordinary Share Certificates and payments to which such
holder is entitled pursuant to this Article IV.
(d) Each Grace Common Share issued and outstanding immediately prior to the
Effective Time and owned by Fresenius AG or its subsidiaries or Fresenius USA or
its subsidiaries or any Grace subsidiary or held in Grace's treasury shall cease
to be outstanding, shall be cancelled and retired without payment of any
consideration therefor and shall cease to exist.
(e) Each share of Grace Merger Sub common stock issued and outstanding
immediately prior to the Effective Time shall be converted into and become one
share of common stock of the Grace Surviving Corporation.
SECTION 4.2. Fresenius USA Merger Consideration; Conversion or Cancellation
of Fresenius USA Capital Stock. At the Effective Time, by virtue of the
Fresenius USA Merger and without any action on the part of the holder of any
capital stock of Fresenius USA:
(a) Subject to Section 4.4(c), each Fresenius USA Common Share issued
and outstanding immediately prior to the Effective Time (other than any
Fresenius USA Common Share owned by Fresenius AG or its subsidiaries or
Grace or its subsidiaries or any Fresenius USA subsidiary or held in
Fresenius USA's treasury or any Fresenius USA Common Dissenting Share)
shall be converted at the Effective Time into the right to receive the
Fresenius USA Consideration Per Share.
(b) All Fresenius USA Common Shares and Fresenius USA Preferred Shares
shall cease to be outstanding, shall be cancelled and retired and shall
cease to exist, and each holder of an Old Fresenius USA Common Certificate
(other than holders of Old Fresenius USA Common Certificates representing
Fresenius USA Common Dissenting Shares) shall thereafter cease to have any
rights with respect to such Old Fresenius USA Common Certificates, except
the right to receive, without interest, upon exchange of such Old Fresenius
USA Common Certificates in accordance with Section 4.4, the Newco Ordinary
Share Certificates and payments to which such holder is entitled pursuant
to this Article IV.
(c) Each Fresenius USA Common Share issued and outstanding immediately
prior to the Effective Time and owned by Grace or its subsidiaries or
Fresenius AG or its subsidiaries or Newco or any Fresenius USA subsidiary
or held in Fresenius USA's treasury, and each Fresenius USA Preferred
Share, shall cease to be outstanding, shall be cancelled and retired
without payment of any consideration therefor (except, as provided in
Section 4.3) and shall cease to exist.
(d) Each share of Fresenius USA Merger Sub capital stock issued and
outstanding immediately prior to the Effective Time shall be converted into
and become one share of common stock of the Fresenius USA Surviving
Corporation.
(e) Prior to the vote of holders of Fresenius USA Common Shares to be
held with respect to the Fresenius USA Merger, Fresenius AG shall advise
Grace in writing as to the aggregate consideration to be given to Fresenius
USA shareholders (other than Fresenius AG and its subsidiaries) in the
Fresenius USA Merger (the "Aggregate Fresenius USA Common Share
Consideration"); provided that (i) to the extent that the Aggregate
Fresenius USA Common Share Consideration includes any Newco Ordinary
Shares, such shares shall be allocated to the holders of Fresenius USA
Common Share Equivalent (other than Fresenius AG and its subsidiaries) in
lieu of Newco Ordinary Shares which would otherwise have been allocated to
Fresenius AG under Section 4.3; (ii) holders of Grace Common Share
Equivalents shall be allocated in the Reorganization, in the aggregate,
44.8% of Newco's equity securities outstanding immediately following the
Reorganization on a fully diluted basis; (iii) Fresenius AG shall be
allocated in the Reorganization, in the aggregate, no less than 51% of
Newco's equity securities outstanding immediately following the Re
organization on a fully diluted basis; (iv) such transaction shall not
adversely affect the tax-free nature of the Distribution, the Contribution
or the Grace Merger; and (v) no additional costs or expenses (including
applicable taxes) shall be borne by Grace, Fresenius USA or
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Newco as a result thereof, other than costs and expenses for which
Fresenius AG has agreed to reimburse Grace, Fresenius USA or Newco, as
applicable, at the Closing.
SECTION 4.3. Fresenius AG Consideration. At the Effective Time, in
consideration of the Contribution and the contribution to Newco of the Fresenius
USA Common Shares and the Fresenius USA Preferred Shares owned by Fresenius AG
and its subsidiaries (as provided in the Contribution Agreement), and in
consideration of the Fresenius USA Merger, Fresenius AG shall be allocated 55.2%
of the Newco Ordinary Shares that will be outstanding immediately following
consummation of the Reorganization on a fully diluted basis.
SECTION 4.4. Exchange of Old Certificates for New
Certificates. (a) Appointment of Exchange Agent. From and after the Effective
Time until the end of the six-month period following the Effective Time, the
Surviving Corporations shall make available or cause to be made available to an
exchange agent appointed prior to the Effective Time by Newco with the approval
of each of Grace and Fresenius AG (the "Exchange Agent") Newco Ordinary Share
Certificates and cash in amounts sufficient to allow the Exchange Agent to make
all deliveries of Newco Ordinary Share Certificates and payments that may be
required in exchange for Old Certificates pursuant to this Article IV.
(b) Exchange Procedures. Promptly after the Effective Time, the
Surviving Corporations shall cause the Exchange Agent to mail or deliver to
each person (other than any party hereto or its subsidiaries and any holder
of Dissenting Shares) who was, at the Effective Time, a holder of record of
Grace Common Shares or, if applicable, Fresenius USA Common Shares a form
(the terms of which shall be mutually agreed upon by the parties hereto
prior to the Effective Time) of letter of transmittal containing
instructions for use in effecting the surrender of the Old Certificates in
exchange for ADRs or Newco Ordinary Share Certificates and payments
pursuant to this Article IV. Upon surrender to the Exchange Agent of an Old
Certificate for cancellation together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, the
holder of such Old Certificate shall be entitled to receive in exchange
therefor ADRs or a Newco Ordinary Share Certificate representing the Newco
Ordinary Shares, and a check in the amount to which such holder is entitled
pursuant to this Article IV, and the Old Certificate so surrendered shall
forthwith be cancelled. No interest shall be paid or shall accrue on the
amount payable upon surrender of Old Certificates. If any ADR or Newco
Ordinary Share Certificate is to be issued in a name other than that in
which the Old Certificate surrendered in exchange therefor is registered,
it shall be a condition of such exchange that the person requesting such
exchange shall pay any transfer or other taxes required by reason of the
issuance of such ADR or Newco Ordinary Share Certificate in a name other
than that of the registered holder of the Old Certificate surrendered, or
shall establish to the satisfaction of the applicable Surviving Corporation
that any such taxes have been paid or are not applicable. Six months after
the Effective Time, each Surviving Corporation shall be entitled to cause
the Exchange Agent to deliver to it any applicable ADRs or Newco Ordinary
Share Certificates and cash (including any interest thereon) made available
to the Exchange Agent that are unclaimed by the former shareholders of its
constituent corporations. Any such former shareholders who have not
theretofore exchanged their Old Certificates for ADRs or Newco Ordinary
Share Certificates and cash pursuant to this Article IV shall thereafter be
entitled to look exclusively to the applicable Surviving Corporation and
only as general creditors thereof for the Newco Ordinary Shares and cash to
which they become entitled upon exchange of their Old Certificates pursuant
to this Article IV. Each Surviving Corporation shall pay all applicable
charges and expenses, including its applicable share of those of the
Exchange Agent, in connection with the exchange of ADRs or Newco Ordinary
Share Certificates and cash for Old Certificates as contemplated hereby.
(c) Fractional Shares. No fractional ADRs or Newco Ordinary Shares
shall be issued in the Reorganization. In lieu of any such fractional
shares, each person who would otherwise have been entitled to a fraction of
an ADR or Newco Ordinary Share upon surrender of an Old Certificate for
exchange pursuant to this Article IV shall be paid an amount in cash
(without interest) equal to such holder's proportionate interest in the net
proceeds from the sale or sales in the open market by the Exchange Agent,
on behalf of all such holders, of the aggregate fractional ADRs or Newco
Ordinary Shares issued pursuant to this Article IV. As soon as practicable
following the Effective Time, the Exchange Agent
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shall determine the excess of (i) the number of full ADRs or Newco Ordinary
Shares delivered to the Exchange Agent over (ii) the aggregate number of
full ADRs or Newco Ordinary Shares to be distributed in respect of Grace
Common Shares or Fresenius USA Common Shares (such excess being herein
called the "Excess Shares"), and the Exchange Agent, as agent for the
former holders of such shares, shall sell the Excess Shares at the
prevailing prices on the open market. The sale of the Excess Shares by the
Exchange Agent shall be executed on a public exchange through one or more
firms and shall be executed in round lots to the extent practicable; and,
at the discretion of the Exchange Agent, the Excess Shares may be exchanged
for ADRs pursuant to the ADR Facility and such ADRs shall be sold on the
Exchange as aforesaid in lieu of the Excess Shares. Newco shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with such sale of Excess Shares. Until the net proceeds of such
sale or sales have been distributed, the Exchange Agent shall hold such
proceeds in trust for such former stockholders (the "Fractional Securities
Fund"). As soon as practicable after the determination of the amount of
cash to be paid in lieu of any fractional interests, the Exchange Agent
shall make available in accordance with this Agreement such amounts to such
former stockholders.
(d) Distributions with Respect to Unexchanged Shares. Notwithstanding
any other provisions of this Agreement, no dividends shall be paid to any
person holding an Old Certificate until such Old Certificate is surrendered
for exchange as provided herein. Subject to the effect of applicable laws,
following surrender of any such Old Certificate by any holder thereof other
than an Old Certificate representing Dissenting Shares, there shall be paid
to the holder of the Newco Ordinary Share Certificate issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount
of dividends or other distributions with a record date after the Effective
Time theretofore payable with respect to the Newco Ordinary Shares
represented thereby and not paid, less the amount of any withholding taxes
which may be required thereon, and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to the time of such surrender and a payment date
subsequent to the time of such surrender payable with respect to the Newco
Ordinary Shares represented thereby, less the amount of any withholding
taxes which may be required thereon.
(e) No Transfers. At or after the Effective Time, there shall be no
transfers on the stock transfer books of either Surviving Corporation of
Grace Common Shares, Fresenius USA Common Shares or Fresenius USA Preferred
Shares which were outstanding immediately prior to the Effective Time.
(f) No Liability. If any Old Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Old Certificate to be lost, stolen or destroyed and, if
required by the applicable Surviving Corporation, the posting by such
person of a bond in such reasonable amount as the applicable Surviving
Corporation may direct as indemnity against any claim that may be made
against it with respect to such Old Certificate, the applicable Surviving
Corporation shall, in exchange for such lost, stolen or destroyed Old
Certificates, issue or cause to be issued the Newco Ordinary Shares and pay
or cause to be paid the amounts deliverable in respect thereof pursuant to
this Article IV. None of any party hereto, the Exchange Agent, Newco or any
Surviving Corporation shall be liable to any holder of Grace Common Shares
or Fresenius USA Common Shares for any cash from the payment fund delivered
to a public official pursuant to any applicable abandoned property, escheat
or similar law.
(g) Withholding Rights. The Surviving Corporations shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any holder of Grace Common Shares or Fresenius USA Common
Shares such amounts as may be required to be deducted and withheld with
respect to the making of such payment under the Code, or under any
provision of state, local or foreign tax law. To the extent that amounts
are so withheld and paid over to the appropriate taxing authority, such
withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the Grace Common Shares or Fresenius USA
Common Shares in respect of which such deduction and withholding was made.
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(h) Transfer Taxes. Except as provided above, Fresenius USA and Grace
shall pay or cause to be paid any transfer or gains tax (including, without
limitation, any real property gains or transfer tax), other than any income
tax, imposed in connection with or as a result of the Contribution or
Fresenius USA Merger, on the one hand, or the Distribution or Grace Merger,
on the other hand, respectively.
(i) Stock Options and Warrants. At the Effective Time, each option,
warrant or other security convertible into, exchangeable for or exercisable
for the purchase of Grace Common Shares, after taking into account
adjustments pursuant to the Distribution Agreement (each, a "Grace
Option"), and each option, warrant or other security convertible into,
exchangeable for or exercisable for the purchase of Fresenius USA Common
Shares (each, a "Fresenius USA Option") which is outstanding and
unconverted, unexchanged or unexercised, as the case may be, shall cease to
represent a right to acquire Grace Common Shares or Fresenius USA Common
Shares, as the case may be, and shall be converted automatically into an
option, warrant or other security, as the case may be, to purchase Newco
Ordinary Shares in an amount and at an exercise price determined as
provided below:
(A) The number of Newco Ordinary Shares to be subject to the new
option, warrant or other security shall be equal to the product of the
number of shares subject to the original option, warrant or other
security and the Grace Exchange Ratio (in the case of a Grace Option) or
the Fresenius USA Exchange Ratio (in the case of a Fresenius USA
Option), rounded down to the nearest whole number of shares; and
(B) The exercise price per share of Newco Ordinary Shares under the
new option, warrant or other security shall be equal to the exercise
price per share of Grace Common Shares or Fresenius USA Common Shares
under the original Grace Option or Fresenius USA Option, as the case may
be, divided by the Grace Exchange Ratio (in the case of a Grace Option)
or the Fresenius USA Exchange Ratio (in the case of a Fresenius USA
Option), rounded up to the nearest whole cent.
The duration and other terms of the new option, warrant or other security
shall be the same as the remaining duration and other terms of the original
Grace Option or Fresenius USA Option, as the case may be, except that all
references to Grace or Fresenius USA shall be deemed to be references to Newco.
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be, and is intended
to be, effected in a manner which is consistent with Section 424(a) of the Code.
SECTION 4.5. Dissenters' Rights. If any holder of Grace Common Shares or
Fresenius USA Common Shares shall file written objection or provide notice to
Grace or Fresenius USA, respectively, in order to seek appraisal with respect to
such shares, pursuant to applicable statutory procedures, Grace or Fresenius
USA, as applicable, shall give the other notice thereof. If any such holder of
Grace Common Shares or Fresenius USA Common Shares shall fail to perfect or
shall have effectively withdrawn such objection or notice or lost the right to
appraisal with respect to such shares, such shares shall thereupon be treated as
though such shares had been converted pursuant to Section 4.1 or Section 4.2, as
applicable.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.1. Representations and Warranties of Grace. Grace hereby
represents and warrants to Fresenius AG that, except as set forth in a letter
(the "Grace Disclosure Letter") delivered to Fresenius AG simultaneously with
the execution and delivery of this Agreement (provided that, as used herein, all
references to Grace (and/or its Affiliates) shall be deemed to refer to Grace
and its Affiliates which conduct the NMC Business, consistent with Section 9.8
hereof, except as otherwise specifically provided):
(a) Capital Stock. The authorized capital stock of Grace consists of
300,000,000 Grace Common Shares, par value $1.00 per share, of which
97,375,339 were outstanding as of December 31, 1995, and 5,130,000 Grace
Preferred Shares, par value $1.00 per share (consisting of 40,000
authorized Grace 6% Preferred Shares, 50,000 authorized Class A Preferred
Shares, 40,000 authorized Class B Preferred
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Shares and 5,000,000 authorized Class C Preferred Shares), of which 36,460
were outstanding as Grace 6% Preferred Shares, 16,356 were outstanding as
Grace Class A Preferred Shares, 21,577 were outstanding as Grace Class B
Preferred Shares and none were outstanding as Grace Class C Preferred
Shares, in each case as of December 31, 1995. As of December 31, 1995,
53,153 Grace Common Shares were held by Grace and its subsidiaries (other
than any shares held in a fiduciary capacity and beneficially owned by a
third party). As of December 31, 1995, there were outstanding under the
Grace 1994 Stock Incentive Plan, the Grace 1989 Stock Incentive Plan, the
Grace 1986 Stock Incentive Plan, the Grace 1981 Stock Incentive Plan and
the Grace 1994 Stock Retainer Plan for Non-Employee Directors
(collectively, the "Grace Stock Plans") options to acquire an aggregate of
5,694,196 Grace Common Shares (subject to adjustment on the terms set forth
in the Grace Stock Plans). As of the date of this Agreement, there are no
Grace Common Shares reserved for issuance, other than 105,083,951 Grace
Common Shares reserved for issuance in connection with the Grace Rights and
7,655,459 Grace Common Shares reserved for issuance pursuant to the Grace
Stock Plans. All outstanding Grace Common Shares and Grace Preferred Shares
have been duly authorized and validly issued and are fully paid and
nonassessable. Except for the Grace Common Shares and Grace Preferred
Shares, Grace has outstanding no bonds, debentures, notes or other
obligations the holders of which have the right to vote (or are convertible
or exchangeable into or exercisable for securities having the right to
vote) with the shareholders of Grace on any matter. Each of the outstanding
shares of capital stock of each of Grace's subsidiaries has been duly
authorized and validly issued and is fully paid and nonassessable and,
except for an immaterial number of shares held by officers and directors of
Grace and its subsidiaries as nominees and for the benefit of Grace or any
of its subsidiaries, is owned, either directly or indirectly, by Grace free
and clear of all liens, pledges, security interests, claims, proxies,
preemptive or subscriptive rights or other encumbrances or restrictions of
any kind. Except as set forth above and except for Grace Common Shares
issued after December 31, 1995 pursuant to the terms of options, securities
or plans referred to above and except for certain preemptive rights of
certain Grace Preferred Shares as set forth in the Grace Certificate of
Incorporation, there are no shares of capital stock of Grace authorized,
issued or outstanding and there are no preemptive rights or any outstanding
subscriptions, options, puts, calls, warrants, rights, convertible or
exchangeable securities or other agreements or commitments of Grace or any
of its significant subsidiaries of any character relating to the issued or
unissued capital stock or other securities of Grace or any of its
subsidiaries (including, without limitation, the issuance, sale, purchase,
redemption, conversion, exchange, redemption, voting or transfer thereof).
Exhibit 21 to its Annual Report on Form 10-K for the year ended December
31, 1994, as filed with the SEC, is an accurate and correct statement of
all of the information required to be set forth therein by the regulations
of the SEC and is an accurate and correct list of all Grace subsidiaries as
of the date hereof having a book value as of December 31, 1995 or net
income for the fiscal year ended December 31, 1995 in excess of
$25,000,000. Except as set forth in such Exhibit, as of the date hereof,
Grace does not, directly or indirectly, own any capital stock or other
ownership interest in any corporation, partnership, joint venture or other
entity having a book value as of December 31, 1995 or net income for the
fiscal year ended December 31, 1995 in excess of $25,000,000.
(b) Corporate Organization and Qualification. Each of Grace and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its or such subsidiary's jurisdiction of
organization and is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the
business conducted, by it or such subsidiary require such qualification,
except for any such failure so to qualify or be in good standing which,
when taken together with all other such failures, is not reasonably likely
to have a Material Adverse Effect with respect to Grace. Each of Grace and
its subsidiaries has the requisite corporate power and authority to carry
on its businesses as they are now being conducted. Grace has made available
to the other parties hereto a complete and correct copy of its Certificate
of Incorporation and By-laws (or similar organizational documents), each as
amended to date and currently in full force and effect.
(c) Corporate Authority. Subject only to the receipt of the requisite
approval of its shareholders, Grace has the requisite corporate power and
authority and has taken all corporate action necessary in order to execute,
deliver and perform each Transaction Agreement to which it is a party and
to
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consummate the transactions contemplated hereby and thereby including,
without limitation, the approval of the Board of Directors of Grace and the
resolution of the Board of Directors of Grace to recommend the transactions
contemplated hereby and thereby for approval by Grace shareholders, subject
to their fiduciary duties. Each Transaction Agreement to which Grace is a
party is, or when executed and delivered shall be, a valid and binding
agreement of Grace enforceable in accordance with its terms.
(d) Governmental Filings; No Violations. (i) Other than the filings
provided for in the Transaction Agreements, and other than as may be
required under the HSR Act and similar statutes in other countries, the
Exchange Act, the Securities Act, and state securities laws, no notices,
reports or other filings are required to be made by Grace or any subsidiary
with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by it or any subsidiary from, any
governmental or regulatory authority, agency, court, commission or other
entity, domestic or foreign ("Governmental Entity"), in connection with the
execution, delivery or performance of each Transaction Agreement to which
it or any subsidiary is a party by it or any subsidiary and the
consummation by it of the transactions contemplated hereby and thereby, the
failure to make or obtain any or all of which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect with
respect to Grace or enable any person to enjoin or prevent or materially
delay consummation of the transactions contemplated hereby and thereby.
(ii) The execution, delivery and performance by Grace or any
subsidiary of each Transaction Agreement to which it is a party does not or
will not, and the consummation by it of any of the transactions
contemplated hereby and thereby will not, constitute or result in (A) a
breach or violation of, or a default under, its Certificate of
Incorporation or By-laws, or the comparable governing instruments of any of
its subsidiaries, or (B) assuming receipt of any consents and the
occurrence of any events disclosed in the Grace Disclosure Letter as
contemplated in the last sentence of this paragraph, a breach or violation
of, or a default under, or the acceleration of or the creation of a lien,
pledge, security interest or other encumbrance on assets of it, Newco or
the Surviving Corporations or any of their respective subsidiaries (with or
without the giving of notice, the lapse of time or both) pursuant to, any
provision of any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation or commitment ("Contracts") of it or any of
its subsidiaries or any law, rule, ordinance or regulation or judgment,
decree, order, award or governmental or non-governmental permit or license
to which it or any of its subsidiaries is subject, or any change in the
rights or obligations of any party under, or give rise to any rights of
termination under, any of the Contracts, except, in the case of clause (B)
above, for such breaches, violations, defaults, accelerations or changes
that are disclosed in the Grace Disclosure Letter or, individually and in
the aggregate, are not reasonably likely to have a Material Adverse Effect
with respect to Grace. The Grace Disclosure Letter sets forth a list of all
consents required under any Contracts to be obtained by it or any
subsidiary or events required to occur prior to consummation of the
Reorganization (other than consents the failure to obtain of which,
individually and in the aggregate, is not reasonably likely to have a
Material Adverse Effect with respect to Grace).
(e) SEC Documents; Financial Statements; No Undisclosed
Liabilities. (i) Grace has delivered to the other parties hereto each SEC
Document prepared and filed with the SEC by it or its subsidiaries since
December 31, 1994, including, without limitation, (A) its Annual Report on
Form 10-K for the year ended December 31, 1994, and (B) its Quarterly
Reports on Form 10-Q for the periods ended March 31, June 30 and September
30, 1995. As of its filing date, each such SEC Document filed, and each SEC
Document that will be filed by it or its subsidiaries prior to the
Effective Time, as amended or supplemented, if applicable, pursuant to the
Exchange Act (A) complied or will comply in all material respects with the
applicable requirements of the Exchange Act and (B) did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading.
Each of Grace's consolidated balance sheets included in or incorporated by
reference into its SEC Documents (including the related notes and
schedules) fairly presents in all material respects the consolidated
financial position of it and its subsidiaries as of its date and each of
the consolidated
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statements of income, cash flows and shareholders' equity included in or
incorporated by reference into its SEC Documents (including any related
notes and schedules) fairly presents in all material respects the
consolidated results of operations, retained earnings and cash flows, as
the case may be, of it and its subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end
audit adjustments), in each case in accordance with US GAAP.
(ii) Each SEC Document which is a final registration statement filed,
and each final registration statement that will be filed by it or any
subsidiary prior to the Effective Time, as amended or supplemented, if
applicable, pursuant to the Securities Act, as of the date such statement
or amendment became or will become effective (A) complied or will comply in
all material respects with the applicable requirements of the Securities
Act and (B) did not or will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of any
prospectus, in light of the circumstances under which they were made).
(iii) Included in the Grace Disclosure Letter are a special purpose
consolidated balance sheet as of, and special purpose consolidated
statements of income, cash flows and shareholders' equity for Grace for the
year ended, December 31, 1995, for Grace, in each case exclusive of the
Grace-Conn. Business and the assets, liabilities, income, cash flows and
shareholders' equity thereof (such financial statements, the "Grace
Disclosure Letter Financial Statements" and the balance sheet as of
December 31, 1995 included therein, the "Grace Disclosure Letter Balance
Sheet"). The Grace Disclosure Letter Balance Sheet (including any related
notes and schedules) fairly presents in all material respects, and the
special purpose consolidated balance sheet to be included in the Grace
Audited Financial Statements (including any related notes and schedules)
shall fairly present in all material respects, the consolidated financial
position of Grace and its included subsidiaries as of its date; and each of
the special purpose consolidated statements of income, cash flows and
shareholders' equity included in the Grace Disclosure Letter Financial
Statements (including any related notes and schedules) fairly presents in
all material respects, and each such statement to be included in the Grace
Audited Financial Statements (including any related notes and schedules)
shall fairly present in all material respects, the consolidated results of
operations, retained earnings and cash flows, as the case may be, of Grace
and its included subsidiaries for the periods set forth therein, in each
case in accordance with US GAAP and in each case exclusive of the
Grace-Conn. Business and the assets, liabilities, income, cash flows and
shareholders' equity thereof.
(iv) Except as disclosed in the Grace Disclosure Letter Balance Sheet
or the notes thereto or in its SEC Documents filed with the SEC prior to
the date hereof, neither Grace nor its subsidiaries has any liabilities,
whether or not accrued, contingent or otherwise, that, individually or in
the aggregate, are reasonably likely to have a Material Adverse Effect with
respect to Grace.
(f) Absence of Certain Events and Changes. Except as disclosed in its
SEC Documents filed with the SEC prior to the date hereof, since September
30, 1995, Grace and its subsidiaries have conducted their respective
businesses only in the ordinary and usual course of such businesses and
there has not been any change or development or combination of changes or
developments (including any worsening of any condition currently existing)
which, individually and in the aggregate, is reasonably likely to result in
a Material Adverse Effect with respect to Grace.
(g) Compliance with Laws. Except as disclosed in its SEC Documents
filed with the SEC prior to the date hereof, Grace and its subsidiaries
have complied, in the conduct of their respective businesses, with all
applicable federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable thereto, except
where the failure to comply is not reasonably likely, individually and in
the aggregate, to have a Material Adverse Effect with respect to Grace. To
the knowledge of its executive officers, each of Grace and its subsidiaries
has, and, immediately after the Grace Merger, will have, all permits,
licenses, certificates of authority, orders, and approvals of, and has made
all filings, applications, and registrations with, federal, state, local,
and foreign governmental or regulatory bodies that are required in order to
permit it or such subsidiary to carry on its business as it is presently
conducted, except for such permits, licenses, certificates, orders,
filings, applications and
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registrations, the failure to have or make which, individually and in the
aggregate, are not reasonably likely to have a Material Adverse Effect with
respect to Grace.
(h) Title to Assets. Grace and its subsidiaries have and, immediately
after the Grace Merger, the NMC Group will have, good and, with respect to
real property, marketable title to its properties and assets (other than
property as to which it is lessee), except for those defects in title which
are not, individually and in the aggregate, reasonably likely to have a
Material Adverse Effect with respect to Grace. Grace and its subsidiaries
have, and immediately after the Grace Merger, the NMC Group will either own
or have adequate rights to use (on the same basis as currently owned or
used by Grace or such subsidiaries), all assets predominantly used or
useful in the NMC Business as currently conducted and all assets reflected
on the Grace Disclosure Letter Balance Sheet, except for assets disposed of
in accordance with this Agreement and except for those failures to own or
have which are not, individually and in the aggregate, reasonably likely to
have a Material Adverse Effect with respect to Grace.
(i) Litigation. Except as disclosed in Grace's SEC Documents filed
with the SEC prior to the date hereof, there are no civil, criminal or
administrative actions, suits, claims, hearings or proceedings pending or,
to the knowledge of its executive officers, threatened, or investigations
pending, against it or any of its subsidiaries that, individually or in the
aggregate, are reasonably likely to have a Material Adverse Effect with
respect to Grace. There are no judgments or outstanding orders, writs,
injunctions, decrees, stipulations or awards (whether rendered or issued by
a court or Governmental Entity, or by arbitration) against Grace or any of
its subsidiaries or their respective properties or businesses, which are
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect with respect to Grace.
(j) Taxes. Except as disclosed in its SEC Documents filed with the
SEC prior to the date hereof, all material federal, state, local and
foreign tax returns required to be filed by or on behalf of Grace or any of
its subsidiaries have been timely filed or requests for extensions have
been timely filed and any such extension shall have been granted and not
have expired, and all such filed returns are complete and accurate in all
material respects. Except as disclosed in its SEC Documents filed with the
SEC prior to the date hereof, all material taxes required to be shown on
returns filed by Grace, as of the date of such SEC Document, have been paid
in full or have been recorded as a liability on its consolidated balance
sheet (in accordance with US GAAP). Except as disclosed in its SEC
Documents filed with the SEC prior to the date hereof, there is no
outstanding audit examination, deficiency, or refund litigation with
respect to any taxes of Grace that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect with respect to Grace.
Except as disclosed in its SEC Documents filed with the SEC prior to the
date hereof, all material taxes, interest, additions, and penalties due
with respect to completed and settled examinations or concluded litigation
relating to Grace have been paid in full or have been recorded as a
liability on its balance sheet (in accordance with US GAAP). Except as
disclosed in its SEC Documents filed with the SEC prior to the date hereof,
neither Grace nor any of its subsidiaries is a party to a tax sharing or
similar agreement or any agreement pursuant to which it or any of its
subsidiaries has indemnified another party with respect to taxes (other
than the tax sharing agreement attached to the Distribution Agreement),
except for any such agreement under which the liabilities of Grace and its
subsidiaries would not be reasonably likely to have a Material Adverse
Effect with respect to Grace. Except as set forth in SEC Documents filed
prior to the date hereof, neither Grace nor its subsidiaries have waived
any applicable statute of limitations with respect to federal income taxes
or any material state income taxes.
(k) Employee Benefits. (i) Grace's SEC Documents filed prior to the
date hereof disclose all material information required under the applicable
rules and regulations of the SEC with respect to Grace's bonus, deferred
compensation, pension, retirement, profit sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock and
stock option plans, all material employment or severance Contracts, all
other material employee benefit plans and all applicable "change of
control" or similar provisions in any material plan, Contract or
arrangement which covers employees or former employees of Grace or its
subsidiaries ("Grace Compensation Plans"). True and complete copies of the
Grace Compensation Plans and all other benefit plans, Contracts or
arrangements (regardless of whether
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they are funded or unfunded or foreign or domestic) covering employees or
former employees of Grace and its subsidiaries (the "Grace Employees"),
including, but not limited to, "employee benefit plans" within the meaning
of Section 3(3) of ERISA, and all amendments thereto, have been made
available to each other party hereto.
(ii) All Grace Compensation Plans that are "employee benefit plans",
other than "multiemployer plans" within the meaning of Sections 3(37) or
4001(a)(3) of ERISA, covering Grace Employees (the "Grace Plans"), to the
extent subject to ERISA, are in substantial compliance with ERISA, except
where the failure to be so would not reasonably be expected to have a
Material Adverse Effect with respect to Grace. There is no pending or, to
the knowledge of executive officers, threatened litigation relating to any
Grace Plan which is reasonably likely to have a Material Adverse Effect
with respect to Grace.
(iii) No material liability that has not previously been fully
satisfied under Subtitle C or D of Title IV of ERISA, under Section 412 of
the Code or under Section 302 of ERISA has been or is expected to be
incurred by Grace or any of its subsidiaries with respect to any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any of them, or the single-employer
plan of any entity which is considered one employer with it under Section
4001 of ERISA or Section 414 of the Code (a "Grace ERISA Affiliate"). Grace
and its subsidiaries and the Grace ERISA Affiliates have not incurred and
do not expect to incur any material withdrawal liability with respect to a
multiemployer plan under Subtitle E of Title IV of ERISA. No notice of a
"reportable event," within the meaning of Section 4043 of ERISA, for which
the 30-day reporting requirement has not been waived, has been required to
be filed for any of the Grace Plans or by any of the Grace ERISA Affiliates
within the 12-month period ending on the date hereof.
(iv) As of January 1, 1995, the "full-funding limitation" (as defined
in Section 412(c)(9) of the Code) has been satisfied with respect to each
Grace Pension Plan which is a single-employer plan (within the meaning of
Section 4001(a)(15) of ERISA), and there has been no change in the
financial condition of any such Grace Pension Plan since that date that is
reasonably likely to have a Material Adverse Effect with respect to Grace.
The withdrawal liability of Grace and its subsidiaries under each Grace
Plan which is a multiemployer plan to which Grace, its subsidiaries or its
ERISA Affiliates has contributed during the preceding 12 months, determined
as if a "complete withdrawal," within the meaning of Section 4203 of ERISA,
had occurred as of the date hereof, is not reasonably likely to have a
Material Adverse Effect with respect to Grace.
(v) Except as disclosed in its SEC Documents filed prior to the date
hereof, neither Grace nor its subsidiaries have any material obligations
for retiree health and life benefits under any Grace Plan. Except as
disclosed in its SEC Documents filed prior to the date hereof, there are no
restrictions on the right of Grace to amend or terminate any Grace Plan
that provides retiree health or life benefits to Grace Employees without
Grace incurring any material liability thereunder as a result of such
amendment or termination.
(vi) All Grace Compensation Plans covering foreign Employees comply
with applicable local law except when the failure to so comply,
individually and in the aggregate, would not have a Material Adverse Effect
with respect to Grace. Grace and its subsidiaries have no unfunded
liabilities with respect to any Grace Pension Plan which cover foreign
Employees in an amount which is reasonably likely to have a Material
Adverse Effect with respect to Grace.
(vii) Except as disclosed in its SEC Documents filed prior to the date
hereof or as provided in this Agreement, the transactions contemplated by
this Agreement will not result in the vesting or acceleration of any
material amounts under any Grace Compensation Plan, any material increase
in benefits under any Grace Compensation Plan or payment of any severance
or similar compensation under any Grace Compensation Plan, and the amounts,
if any, payable under the Grace Compensation Plans and not deductible by it
by reason of Section 280G of the Code will not exceed the maximum amount
previously disclosed to the other parties hereto. Except as disclosed in
its SEC Documents filed prior to the date
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hereof, Grace and its subsidiaries have not entered into any
change-of-control agreement under which Grace will be obligated to make
change-of-control payments following the Closing.
(l) Environmental Matters. Except as disclosed in its SEC Documents
filed prior to the date hereof and except for such matters that,
individually and in the aggregate, are not reasonably likely to have a
Material Adverse Effect with respect to Grace, to the knowledge of its
executive officers, (i) Grace and its subsidiaries are in compliance with
all applicable Environmental Laws; and (ii) neither Grace nor any of its
subsidiaries has any outstanding notices, demand letters or requests for
information from any Government Entity or any third party that assert that
Grace or any of its subsidiaries may be in violation of, or liable under,
any Environmental Law and none of Grace, its subsidiaries or its properties
are subject to any court order, administrative order or decree arising
under any Environmental Law.
(m) Rights Plan. After giving effect to any amendments that will be
made prior to the Effective Time, execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby
will not cause or permit shareholders to exercise rights under the Grace
Rights Agreement or the Grace Rights issued pursuant thereto and the Grace
Rights will not become unredeemable or exercisable as a result of the
execution, delivery or performance of this Agreement or the consummation of
the transactions contemplated hereby.
(e) Takeover Statutes. Execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby will not
cause to be applicable to Grace any "fair price," "moratorium," "control
share acquisition" or other similar antitakeover statute or regulation
enacted under state or federal laws in the United States or any foreign
jurisdiction (each a "Takeover Statute") (after giving effect to any
actions that will be taken prior to the Effective Time).
(o) Brokers and Finders. Neither it nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated herein except pursuant to
arrangements disclosed in writing to the other parties hereto prior to the
date hereof.
(p) Tax Matters. At the Effective Time, the representations set forth
in the numbered paragraphs of the form of Tax Matters Certificate of Grace
attached hereto as Exhibit G (the "Grace Tax Matters Certificate") will be
true and correct in all respects, and such representations are hereby
incorporated herein by reference with the same effect as if set forth
herein in their entirety.
(q) Information in Disclosure Documents and Registration
Statements. None of the information supplied or to be supplied by Grace
for inclusion or incorporation by reference in any Registration Statement
will, at the time such Registration Statement becomes effective under the
Securities Act and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and the Grace
Proxy Statement will not, at the date mailed to Grace shareholders and at
the time of the Grace Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Grace Proxy
Statement will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder,
except that no representation is made by Grace with respect to statements
made therein based on information supplied by Fresenius AG or Fresenius USA
or their respective subsidiaries.
(r) Trademarks, Patents and Copyrights. Grace and its subsidiaries own
or possess adequate licenses or other rights to use, all patents,
trademarks, trade names, service marks, copyrights, licenses and product
licenses or registrations (including applications for any of the
foregoing), as are used or useful predominantly in connection with the NMC
Business (the "NMC Business Intellectual Property") the lack of which would
reasonably be expected to have a Material Adverse Effect with respect to
Grace; and none of Grace or any of its subsidiaries has any knowledge of
any conflict with the proprietary intellectual property rights of any of
Grace or its subsidiary therein or any knowledge of any conflict by
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Grace or its subsidiary with the rights of others therein which would have
a Material Adverse Effect with respect to Grace. Immediately after the
Grace Merger, Newco or its subsidiaries will own or possess adequate
licenses or other rights to use (on substantially the same basis as
currently owned or possessed by Grace and its subsidiaries) all of the NMC
Business Intellectual Property. There are no Contracts, agreements and
licenses pursuant to which Grace or any of its subsidiaries which will not
be subsidiaries of Newco after the Grace Merger will retain rights or
interests of any kind in or affecting the NMC Business Intellectual
Property.
(s) Assets. Except as contemplated herein, at the Effective Time, the
NMC Group will contain the worldwide health care business of Grace and all
assets and services predominantly used in the conduct of Grace's worldwide
health care business as presently conducted.
(t) Disclosure. Neither the representations and warranties of Grace
contained in this Agreement nor in any written instrument, list, exhibit or
certificate furnished or to be furnished by Grace to Fresenius AG pursuant
hereto or in connection herewith contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements not misleading.
SECTION 5.2. Representations and Warranties of Fresenius USA. Subject to
Section 9.13, Fresenius AG hereby represents and warrants to Grace that, except
as set forth in a letter (the "Fresenius USA Disclosure Letter") delivered to
Grace simultaneously with the execution and delivery of this Agreement:
(a) Capital Stock. The authorized capital stock of Fresenius USA
consists of 40,000,000 Fresenius USA Common Shares, par value $.01 per
share, of which 21,464,874 were outstanding as of December 31, 1995, and
600,000 Fresenius USA Preferred Shares, par value $1.00 per share, of which
200,000 were outstanding as Fresenius USA Series F Preferred Shares as of
such date. Fresenius USA Series F Preferred Shares are convertible into an
aggregate of 3,129,883 Fresenius USA Common Shares. No Fresenius USA Common
Shares were held by Fresenius USA and its subsidiaries (other than any
shares held in a fiduciary capacity and beneficially owned by a third
party) as of December 31, 1995. As of December 31, 1995, there were
outstanding under the Fresenius USA 1976 Stock Option Plan, the Fresenius
USA 1985 Special Stock Option Plan, the Fresenius USA 1987 Stock Option
Plan, the Fresenius USA 1989 Special Stock Option Plan and the Fresenius
USA Directors' Stock Option Plan (collectively, the "Fresenius USA Stock
Plans") options to acquire an aggregate of 2,146,395 Fresenius USA Common
Shares (subject to adjustment on the terms set forth in the Fresenius USA
Stock Plans). As of the date of this Agreement, there are no Fresenius USA
Common Shares reserved for issuance, other than 155,550 Fresenius USA
Common Shares reserved for issuance upon exercise of stock options,
4,512,500 Fresenius USA Common Shares reserved for issuance pursuant to
outstanding warrants and 1,990,845 Fresenius USA Common Shares reserved for
issuance pursuant to the Fresenius USA Stock Plans. All outstanding
Fresenius USA Common Shares and Fresenius USA Preferred Shares have been
duly authorized and validly issued and are fully paid and nonassessable.
Except for the Fresenius USA Common Shares and the Fresenius USA Preferred
Shares, Fresenius USA has outstanding no bonds, debentures, notes or other
obligations the holders of which have the right to vote (or are convertible
or exchangeable into or exercisable for securities having the right to
vote) with the shareholders of Fresenius USA on any matter. Each of the
outstanding shares of capital stock of each of Fresenius USA's subsidiaries
has been duly authorized and validly issued and is fully paid and
nonassessable and, except for an immaterial number of shares held by
officers and directors of Fresenius USA and its subsidiaries as nominees
and for the benefit of Fresenius USA or any of its subsidiaries, is owned,
either directly or indirectly, by Fresenius USA free and clear of all
liens, pledges, security interests, claims, proxies, preemptive or
subscriptive rights or other encumbrances or restrictions of any kind.
Except as set forth above and except for Fresenius USA Common Shares issued
after December 31, 1995 pursuant to the terms of options, securities or
plans referred to above, there are no shares of capital stock of Fresenius
USA authorized, issued or outstanding and there are no preemptive rights or
any outstanding subscriptions, options, puts, calls, warrants, rights,
convertible or exchangeable securities or other agreements or commitments
of Fresenius USA or any of its subsidiaries of any character relating to
the issued or unissued capital stock or other securities of Fresenius USA
or any of its subsidiaries (including, without
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limitation, the issuance, sale, purchase, redemption, conversion, exchange,
redemption, voting or transfer thereof). Exhibit 21 to Fresenius USA's
Annual Report on Form 10-K for the year ended December 31, 1994, as filed
with the SEC, contains an accurate and correct statement of all of the
information required to be set forth therein by the regulations of the SEC
and is an accurate and correct list of all Fresenius USA subsidiaries as of
the date hereof, other than subsidiaries not engaged in an active business.
Except as set forth in such exhibit, as of the date hereof, Fresenius USA
does not, directly or indirectly, own any capital stock or other ownership
interest in any corporation, partnership, joint venture or other entity,
other than subsidiaries not engaged in an active business.
(b) Corporate Organization and Qualification. Each of Fresenius USA
and its subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of its or such subsidiary's jurisdiction of
organization and is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the
business conducted, by it or such subsidiary require such qualification,
except for any such failure so to qualify or be in good standing which,
when taken together with all other such failures, is not reasonably likely
to have a Material Adverse Effect with respect to Fresenius USA. Each of
Fresenius USA and its subsidiaries has the requisite corporate power and
authority to carry on its businesses as they are now being conducted.
Fresenius USA has made available to the other parties hereto a complete and
correct copy of its Certificate of Incorporation and By-laws, each as
amended to date and currently in full force and effect.
(c) Corporate Authority. Except as contemplated by Section 9.13
hereof, Fresenius USA has the requisite corporate power and authority and
has taken all corporate action necessary in order to execute, deliver and
perform each Transaction Agreement to which it is a party and to consummate
the transactions contemplated hereby and thereby. Each Transaction
Agreement to which Fresenius USA is a party is, or when executed and
delivered shall be, a valid and binding agreement of Fresenius USA
enforceable in accordance with its terms.
(d) Governmental Filings; No Violations. (i) Other than the filings
provided for in the Transaction Agreements, and other than as may be
required under the HSR Act and similar statutes in other countries, the
Exchange Act, the Securities Act, and state securities laws, no notices,
reports or other filings are required to be made by Fresenius USA or any
subsidiary with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by it or any subsidiary from, any
Governmental Entity in connection with the execution, delivery or
performance of each Transaction Agreement to which it or any subsidiary is
a party by it or any subsidiary and the consummation by it or any
subsidiary of the transactions contemplated hereby and thereby, the failure
to make or obtain any or all of which, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect with respect to
Fresenius USA or enable any person to enjoin or prevent or materially delay
consummation of the transactions contemplated hereby and thereby.
(ii) The execution, delivery and performance by Fresenius USA or any
subsidiary of each Transaction Agreement to which it is a party does not or
will not, and the consummation by it of any of the transactions
contemplated hereby and thereby will not, constitute or result in (A) a
breach or violation of, or a default under, its Certificate of
Incorporation or By-laws, or the comparable governing instruments of any of
its subsidiaries, or (B) assuming receipt of any consents and the
occurrence of any events disclosed in the Fresenius USA Disclosure Letter
as contemplated in the last sentence of this paragraph, a breach or
violation of, or a default under, or the acceleration of or the creation of
a lien, pledge, security interest or other encumbrance on assets of it,
Newco or the Surviving Corporations or any of their respective subsidiaries
(with or without the giving of notice, the lapse of time or both) pursuant
to, any provision of any Contracts of it or any of its subsidiaries or any
law, rule, ordinance or regulation or judgment, decree, order, award or
governmental or non-governmental permit or license to which it or any of
its subsidiaries is subject, or any change in the rights or obligations of
any party under, or give rise to any rights of termination under, any of
the Contracts, except, in the case of clause (B) above, for such breaches,
violations, defaults, accelerations or changes that are disclosed in the
Fresenius USA Disclosure Letter or, individually and in the aggregate, are
not reasonably likely to have a Material Adverse Effect with respect to
Fresenius USA. The Fresenius USA Disclosure Letter sets forth a list of
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all consents required under any Contracts to be obtained by it or events
required to occur prior to consummation of the Reorganization (other than
consents the failure to obtain of which, individually and in the aggregate,
is not reasonably likely to have a Material Adverse Effect with respect to
Fresenius USA).
(e) SEC Documents; Financial Statements; No Undisclosed
Liabilities. (i) Fresenius USA has delivered to the other parties hereto
each SEC Document prepared and filed with the SEC by it or its subsidiaries
since December 31, 1994, including, without limitation, (A) its Annual
Report on Form 10-K for the year ended December 31, 1994, and (B) its
Quarterly Reports on Form 10-Q for the periods ended March 31, June 30 and
September 30, 1995.
As of its filing date, each such SEC Document filed, and each SEC
Document that will be filed by Fresenius USA or its subsidiaries prior to
the Effective Time, as amended or supplemented, if applicable, pursuant to
the Exchange Act (A) complied or will comply in all material respects with
the applicable requirements of the Exchange Act and (B) did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading.
Each of Fresenius USA's consolidated balance sheets included in or
incorporated by reference into its SEC Documents fairly presents in all
material respects the consolidated financial position of it and its
subsidiaries as of its date and each of the consolidated statements of
income, cash flows and shareholders' equity included in or incorporated by
reference into its SEC Documents (including any related notes and
schedules) fairly presents in all material respects the consolidated
results of operations, retained earnings and cash flows, as the case may
be, of Fresenius USA and its subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal year-end audit
adjustments), in each case in accordance with US GAAP.
(ii) Each SEC Document which is a final registration statement filed,
and each final registration statement that will be filed by it or any
subsidiary prior to the Effective Time, as amended or supplemented, if
applicable, pursuant to the Securities Act, as of the date such statement
or amendment became or will become effective (A) complied or will comply in
all material respects with the applicable requirements of the Securities
Act and (B) did not or will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of any
prospectus, in light of the circumstances under which they were made).
(iii) Included in the Fresenius USA Disclosure Letter are a
consolidated balance sheet as of, and consolidated statements of income,
cash flows and shareholders' equity for the year ended, December 31, 1995
for Fresenius USA (such financial statements, the "Fresenius USA Disclosure
Letter Financial Statements"), and the balance sheet as of December 31,
1995 included therein, (the "Fresenius USA Disclosure Letter Balance
Sheet"). The Fresenius USA Disclosure Letter Balance Sheet (including any
related notes and schedules) fairly presents in all material respects, and
the consolidated balance sheet to be included in the Fresenius USA Audited
Financial Statements (including any related notes and schedules) shall
fairly present in all material respects, the consolidated financial
position of Fresenius USA and its subsidiaries as of its date; and each of
the consolidated statements of income, cash flows and shareholders' equity
included in the Fresenius USA Disclosure Letter Financial Statements
(including any related notes and schedules) fairly presents in all material
respects, and each such statement to be included in the Fresenius USA
Audited Financial Statements (including any related notes and schedules)
shall fairly present in all material respects, the consolidated results of
operations, retained earnings and cash flows, as the case may be, of
Fresenius USA, and its subsidiaries for the periods set forth therein, in
each case in accordance with US GAAP.
(iv) Except as disclosed in the Fresenius USA Disclosure Letter
Balance Sheet or the notes thereto or in its SEC Documents filed with the
SEC prior to the date hereof, neither Fresenius USA nor its subsidiaries
has any liabilities, whether or not accrued, contingent or otherwise, that,
individually or in the aggregate, are reasonably likely to have a Material
Adverse Effect with respect to Fresenius USA.
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(f) Absence of Certain Events and Changes. Except as disclosed in its
SEC Documents filed with the SEC prior to the date hereof, since September
30, 1995, Fresenius USA and its subsidiaries have conducted their
respective businesses only in the ordinary and usual course of such
businesses and there has not been any change or development or combination
of changes or developments (including any worsening of any condition
currently existing) which, individually and in the aggregate, is reasonably
likely to result in a Material Adverse Effect.
(g) Compliance with Laws. Except as disclosed in its SEC Documents
filed with the SEC prior to the date hereof, Fresenius USA and its
subsidiaries have complied, in the conduct of their respective businesses,
with all applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees applicable
thereto, except where the failure to comply is not reasonably likely,
individually and in the aggregate, to have a Material Adverse Effect with
respect to Fresenius USA. To the knowledge of its executive officers, each
of Fresenius USA and its subsidiaries has, and, immediately after the
Fresenius USA Merger, will have, all permits, licenses, certificates of
authority, orders, and approvals of, and has made all filings,
applications, and registrations with, federal, state, local, and foreign
governmental or regulatory bodies that are required in order to permit it
or such subsidiary to carry on its business as it is presently conducted,
except for such permits, licenses, certificates, orders, filings,
applications and registrations, the failure to have or make which,
individually and in the aggregate, are not reasonably likely to have a
Material Adverse Effect with respect to Fresenius USA.
(h) Title to Assets. Fresenius USA or its subsidiaries have and,
immediately after the Fresenius USA Merger, will have, good and, with
respect to real property, marketable title to its properties and assets
(other than property as to which it is lessee), except for those defects in
title which are not, individually and in the aggregate, reasonably likely
to have a Material Adverse Effect with respect to Fresenius USA. Fresenius
USA and its subsidiaries have, and immediately after the Fresenius USA
Merger, will either own or have adequate rights to use (on the same basis
as currently owned or used by Fresenius USA or such subsidiaries), all
assets used or useful in Fresenius USA's business as currently conducted
and all assets reflected on the Fresenius USA Disclosure Letter Balance
Sheet, except for assets disposed of in accordance with this Agreement and
except for those failures to own or have which are not, individually and in
the aggregate, reasonably likely to have a Material Adverse Effect with
respect to Fresenius USA.
(i) Litigation. Except as disclosed in Fresenius USA's SEC Documents
filed with the SEC prior to the date hereof, there are no civil, criminal
or administrative actions, suits, claims, hearings or proceedings pending
or, to the knowledge of its executive officers, threatened, or
investigations pending, against Fresenius USA or any of its subsidiaries
that, individually or in the aggregate, are reasonably likely to have a
Material Adverse Effect with respect to Fresenius USA. There are no
judgments or outstanding orders, writs, injunctions, decrees, stipulations
or awards (whether rendered or issued by a court or Governmental Entity, or
by arbitration) against Fresenius USA or any of its subsidiaries or their
respective properties or businesses, which are reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect with
respect to Fresenius USA.
(j) Taxes. Except as disclosed in Fresenius USA's SEC Documents filed
with the SEC prior to the date hereof, all material federal, state, local
and foreign tax returns required to be filed by or on behalf of Fresenius
USA or any of its subsidiaries have been timely filed or requests for
extensions have been timely filed and any such extension shall have been
granted and not have expired, and all such filed returns are complete and
accurate in all material respects. Except as disclosed in its SEC Documents
filed with the SEC prior to the date hereof, all material taxes required to
be shown on returns filed by Fresenius USA, as of the date of such SEC
Document, have been paid in full or have been recorded as a liability on
its consolidated balance sheet (in accordance with US GAAP). Except as
disclosed in its SEC Documents filed with the SEC prior to the date hereof,
there is no outstanding audit examination, deficiency, or refund litigation
with respect to any taxes of Fresenius USA that, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect with
respect to Fresenius USA. Except as disclosed in its SEC Documents filed
with the SEC prior to the date hereof, all material taxes, interest,
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additions, and penalties due with respect to completed and settled
examinations or concluded litigation relating to Fresenius USA have been
paid in full or have been recorded as a liability on its balance sheet (in
accordance with US GAAP). Except as disclosed in its SEC Documents filed
with the SEC prior to the date hereof, neither Fresenius USA nor any of its
subsidiaries is a party to a tax sharing or similar agreement or any
agreement pursuant to which it or any of its subsidiaries has indemnified
another party with respect to taxes (other than the tax sharing agreement
attached to the Contribution Agreement), except for any such agreement
under which the liabilities of Fresenius USA and its subsidiaries would not
be reasonably likely to have a Material Adverse Effect with respect to
Fresenius USA. Except as set forth in SEC Documents filed prior to the date
hereof, neither Fresenius USA nor its subsidiaries have waived any
applicable statute of limitations with respect to federal income taxes or
any material state income taxes.
(k) Employee Benefits. (i) Fresenius USA's SEC Documents filed prior
to the date hereof disclose all material information required under the
applicable rules and regulations of the SEC with respect to Fresenius USA's
bonus, deferred compensation, pension, retirement, profit sharing, thrift,
savings, employee stock ownership, stock bonus, stock purchase, restricted
stock and stock option plans, all material employment or severance
Contracts, all other material employee benefit plans and all applicable
"change of control" or similar provisions in any material plan, Contract or
arrangement which covers employees or former employees of Fresenius USA or
its subsidiaries ("Fresenius USA Compensation Plans"). True and complete
copies of the Fresenius USA Compensation Plans and all other benefit plans,
Contracts or arrangements (regardless of whether they are funded or
unfunded or foreign or domestic) covering employees or former employees of
Fresenius USA and its subsidiaries (the "Fresenius USA Employees"),
including, but not limited to, "employee benefit plans" within the meaning
of Section 3(3) of ERISA, and all amendments thereto, have been made
available to each other party hereto.
(ii) All Fresenius USA Compensation Plans that are "employee benefit
plans", other than "multiemployer plans" within the meaning of Sections
3(37) or 4001(a)(3) of ERISA, covering Fresenius USA Employees (the
"Fresenius USA Plans"), to the extent subject to ERISA, are in substantial
compliance with ERISA, except where the failure to be so would not
reasonably be expected to have a Material Adverse Effect with respect to
Fresenius USA. There is no pending or, to the knowledge of executive
officers, threatened litigation relating to any Fresenius USA Plan which is
reasonably likely to have a Material Adverse Effect with respect to
Fresenius USA.
(iii) No material liability that has not previously been fully
satisfied under Subtitle C or D of Title IV of ERISA, under Section 412 of
the Code or Section 302 of ERISA has been or is expected to be incurred by
Fresenius USA or any of its subsidiaries with respect to any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any of them, or the single-employer
plan of any entity which is considered one employer with it under Section
4001 of ERISA or Section 414 of the Code (a "Fresenius USA ERISA
Affiliate"). Fresenius USA and its subsidiaries and the Fresenius USA ERISA
Affiliates have not incurred and do not expect to incur any material
withdrawal liability with respect to a multiemployer plan under Subtitle E
of Title IV of ERISA. No notice of a "reportable event," within the meaning
of Section 4043 of ERISA, for which the 30-day reporting requirement has
not been waived, has been required to be filed for any of the Fresenius USA
Plans or by any of the Fresenius USA ERISA affiliates within the 12-month
period ending on the date hereof.
(iv) As of January 1, 1995, the "full-funding limitation" (as defined
in Section 412(c)(9) of the Code) has been satisfied with respect to each
Fresenius USA Pension Plan which is a single-employer plan (within the
meaning of Section 4001(a)(15) of ERISA), and there has been no change in
the financial condition of any such Fresenius USA Pension Plan since that
date that is reasonably likely to have a Material Adverse Effect with
respect to Fresenius USA. The withdrawal liability of Fresenius USA and its
subsidiaries under each Fresenius USA Plan which is a multiemployer plan to
which Fresenius USA, its subsidiaries or its ERISA Affiliates has
contributed during the preceding 12 months, determined as if a "complete
withdrawal," within the meaning of Section 4203 of ERISA, had occurred
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as of the date hereof, is not reasonably likely to have a Material Adverse
Effect with respect to Fresenius USA.
(v) Except as disclosed in its SEC Documents filed prior to the date
hereof, neither Fresenius USA nor its subsidiaries have any obligations for
retiree health and life benefits under any Fresenius USA Plan. Except as
disclosed in its SEC Documents filed prior to the date hereof, there are no
restrictions on the right of Fresenius USA to amend or terminate any
Fresenius USA Plan that provides retiree health or life benefits to
Fresenius USA Employees without Fresenius USA incurring any material
liability thereunder as a result of such amendment or termination.
(vi) All Fresenius USA Compensation Plans covering foreign Employees
comply with applicable local law except when the failure to so comply,
individually and in the aggregate, would not have a Material Adverse Effect
with respect to Fresenius USA. Fresenius USA's and its subsidiaries have no
unfunded liabilities with respect to any Fresenius USA Pension Plan which
cover foreign Employees in an amount which is reasonably likely to have a
Material Adverse Effect with respect to Fresenius USA.
(vii) Except as disclosed in its SEC Documents filed prior to the date
hereof or as provided in this Agreement, the transactions contemplated by
this Agreement will not result in the vesting or acceleration of any
material amounts under any Fresenius USA Compensation Plan, any material
increase in benefits under any Fresenius USA Compensation Plan or payment
of any severance or similar compensation under any Fresenius USA
Compensation Plan, and the amounts, if any, payable under the Fresenius USA
Compensation Plans and not deductible by it by reason of Section 280G of
the Code will not exceed the maximum amount previously disclosed to the
other parties hereto. Except as disclosed in its SEC Documents filed prior
to the date hereof, Fresenius USA and its subsidiaries have not entered
into any change-of-control agreement under which Fresenius USA will be
obligated to make change-of-control payments following the Closing.
(l) Environmental Matters. Except as disclosed in its SEC Documents
filed prior to the date hereof and except for such matters that,
individually and in the aggregate, are not reasonably likely to have a
Material Adverse Effect with respect to Fresenius USA, to the knowledge of
its executive officers, (A) Fresenius USA and its subsidiaries are in
compliance with all applicable Environmental Laws; and (B) neither
Fresenius USA nor any of its subsidiaries has any outstanding notices,
demand letters or requests for information from any Government Entity or
any third party that assert that Fresenius USA or any of its subsidiaries
may be in violation of, or liable under, any Environmental Law and none of
Fresenius USA, its subsidiaries or its properties are subject to any court
order, administrative order or decree arising under any Environmental Law.
(m) Takeover Statutes. Execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby will not
cause to be applicable to Fresenius USA any Takeover Statute (after giving
effect to any actions that will be taken prior to the Effective Time).
(n) Brokers and Finders. Neither it nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated herein except pursuant to
arrangements disclosed in writing to the other parties hereto prior to the
date hereof.
(o) Information in Disclosure Documents and Registration
Statements. None of the information supplied or to be supplied by
Fresenius USA for inclusion or incorporation by reference in any
Registration Statement will, at the time such Registration Statement
becomes effective under the Securities Act and at the Effective Time,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; and the Fresenius USA Proxy Statement will not, at
the date mailed to Fresenius USA shareholders and at the time of the
meeting of Fresenius USA shareholders to be held in connection with the
Fresenius USA Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they are made, not
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misleading. The Fresenius USA Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder, except that no representation is made by Fresenius
USA with respect to statements made therein based on information supplied
by Grace or its subsidiaries.
(p) Trademarks, Patents and Copyrights. Fresenius USA and its
subsidiaries own or possess adequate licenses or other rights to use, all
patents, trademarks, trade names, service marks, copyrights, licenses and
product licenses or registrations (including applications for any of the
foregoing), as are used or useful in connection with its business (the
"Fresenius USA Intellectual Property") the lack of which would reasonably
be expected to have a Material Adverse Effect with respect to Fresenius
USA; and none of Fresenius USA or any of its subsidiaries has any knowledge
of any conflict with the proprietary intellectual property rights of any of
Fresenius USA or its subsidiary therein or any knowledge of any conflict by
Fresenius USA or its subsidiary with the rights of others therein which
would have a Material Adverse Effect with respect to Fresenius USA.
Immediately after the Fresenius USA Merger, Newco and its subsidiaries will
own or possess adequate licenses or other rights to use (on substantially
the same basis as currently owned or possessed by Fresenius USA and its
subsidiaries) all of the Fresenius USA Intellectual Property. Except as
disclosed in its SEC Documents filed with the SEC prior to the date hereof,
there are no Contracts, agreements and licenses pursuant to which Fresenius
USA or any subsidiaries of Fresenius USA which will not be subsidiaries of
Newco after the Fresenius USA Merger will retain rights or interests of any
kind in or affecting the Fresenius USA Intellectual Property.
(q) Disclosure. Neither the representations and warranties of
Fresenius USA or Fresenius AG contained in this Agreement nor in any
written instrument, list, exhibit or certificate furnished or to be
furnished by Fresenius USA or Fresenius AG to Grace pursuant hereto or in
connection herewith contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in
order to make the statements not misleading.
SECTION 5.3. Representations and Warranties of Fresenius AG. Fresenius AG
hereby represents and warrants to Grace that, except as set forth in a letter
(the "Fresenius AG Disclosure Letter") delivered to Grace simultaneously with
the execution and delivery of this Agreement:
(a) Corporate Organization and Qualification. Fresenius AG is an
Aktiengesellschaft duly organized, validly existing and in good standing
under the laws of the Federal Republic of Germany and is in good standing
as a foreign corporation in each jurisdiction where the properties owned,
leased or operated, or the business conducted, by it require such
qualification, except for any such failure so to qualify or be in good
standing which, when taken together with all other such failures, is not
reasonably likely to have a Material Adverse Effect with respect to the FWD
Business. Fresenius AG has the requisite corporate power and authority to
carry on its businesses as they are now being conducted. Fresenius AG has
made available to the other parties hereto a complete and correct copy of
its Certificate of Incorporation and By-laws (or similar organizational
documents), each as amended to date and currently in full force and effect.
(b) Corporate Authority. Subject only to the receipt of the requisite
approval of its shareholders (and, with respect to Fresenius USA, as
contemplated by Section 9.13 hereof), Fresenius AG and its subsidiaries
have the requisite corporate power and authority and have taken all
corporate action necessary in order to execute, deliver and perform each
Transaction Agreement to which any of them are a party and to consummate
the transactions contemplated hereby and thereby including, without
limitation, the approval of the Fresenius AG Supervisory Board and the
affirmative vote of all shareholder representatives thereon. Each
Transaction Agreement to which Fresenius AG or its subsidiary is a party
is, or when executed and delivered shall be, a valid and binding agreement
of Fresenius AG or such subsidiary enforceable in accordance with its
terms. Fresenius AG is the legal and beneficial owner of 18,673,324
Fresenius USA Common Shares (13,793,441 of which are owned beneficially and
of record by Fresenius AG or its subsidiaries, 3,129,883 of which are
issuable upon conversion of Fresenius USA Series F Preferred Shares and
1,750,000 of which are issuable upon the exercise of currently exercisable
warrants) and 200,000 Fresenius USA Series F Preferred Shares.
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(c) Governmental Filings; No Violations. (i) Other than the filings
provided for in the Transaction Agreements, and other than as may be
required under the HSR Act and similar statutes in other countries, the
Exchange Act, the Securities Act, and state securities laws, except as set
forth in the Fresenius AG Disclosure Letter, no notices, reports or other
filings are required to be made by Fresenius AG or any subsidiary with, nor
are any consents, registrations, approvals, permits or authorizations
required to be obtained by it or any subsidiary from, any Governmental
Entity in connection with the execution, delivery or performance of each
Transaction Agreement to which it is a party by it or any subsidiary and
the consummation by it or any subsidiary of the transactions contemplated
hereby and thereby, the failure to make or obtain any or all of which,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect with respect to the FWD Business or enable any person to
enjoin or prevent or materially delay consummation of the transactions
contemplated hereby and thereby.
(ii) The execution, delivery and performance by Fresenius AG or any
subsidiary of each Transaction Agreement to which it is a party does not or
will not, and the consummation by it of any of the transactions
contemplated thereby will not, constitute or result in (A) a breach or
violation of, or a default under, its Certificate of Incorporation or
By-laws, or the comparable governing instruments of any of its
subsidiaries, or (B) assuming receipt of any consents and the occurrence of
any events disclosed in the Fresenius AG Disclosure Letter as contemplated
in the last sentence of this paragraph (ii), a breach or violation of, or a
default under, or the acceleration of or the creation of a lien, pledge,
security interest or other encumbrance on assets of it, Newco or the
Surviving Corporations or any of their respective subsidiaries (with or
without the giving of notice, the lapse of time or both) pursuant to, any
provision of any Contract of it or any of its subsidiaries or any law,
rule, ordinance or regulation or judgment, decree, order, award or
governmental or non-governmental permit or license to which it or any of
its subsidiaries is subject, or any change in the rights or obligations of
any party under, or give rise to any rights of termination under, any of
the Contracts, except, in the case of clause (B) above, for such breaches,
violations, defaults, accelerations or changes that are disclosed in the
Fresenius AG Disclosure Letter or, individually and in the aggregate, are
not reasonably likely to have a Material Adverse Effect with respect to the
FWD Business. The Fresenius AG Disclosure Letter sets forth a list of all
consents required under any Contracts to be obtained by it or any
subsidiary or events required to occur prior to consummation of the
Reorganization (other than consents the failure to obtain of which,
individually and in the aggregate, is not reasonably likely to have a
Material Adverse Effect with respect to the FWD Business).
(d) Takeover Statutes. Execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby will not
cause to be applicable to Fresenius AG any Takeover Statute (after giving
effect to any actions that will be taken prior to the Effective Time).
(e) Brokers and Finders. Neither it nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated herein except pursuant to
arrangements disclosed in writing to the other parties hereto prior to the
date hereof.
(f) Contribution. Except for the shares of capital stock of Fresenius
USA, the FWD Business Assets, which are to be contributed pursuant to the
Contribution, represent the worldwide dialysis business of Fresenius AG and
all assets and services predominantly used in the conduct of Fresenius AG's
worldwide dialysis business as presently conducted.
(g) Tax Matters. At the Effective time, the representations set forth
in the numbered paragraphs of the form of Tax Matters Certificate of
Fresenius AG attached hereto as Exhibit G (the "Fresenius AG Tax Matters
Certificate") will be true and correct in all respects, and such
representations are hereby incorporated herein by reference with the same
effect as if set forth herein in their entirety.
(h) Information in Disclosure Documents and Registration
Statements. None of the information supplied or to be supplied by
Fresenius AG for inclusion or incorporation by reference in any
Registration Statement will, at the time such Registration Statement
becomes effective under the Securities Act and at the Effective Time,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances
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under which they were made, not misleading; and the Fresenius USA Proxy
Statement will not, at the date mailed to Fresenius USA shareholders and at
the time of the Fresenius USA Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Fresenius
USA Proxy Statement will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by Fresenius AG with
respect to statements made therein based on information supplies by Grace
or its subsidiaries.
(i) Disclosure. Neither the representations and warranties of
Fresenius USA or Fresenius AG contained in this Agreement nor in any
written instrument, list, exhibit or certificate furnished or to be
furnished by Fresenius USA or Fresenius AG to Grace pursuant hereto or in
connection herewith contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in
order to make the statements not misleading.
(j) Assets. Except as contemplated herein, at the Effective Time, the
FWD Business Group will contain the worldwide dialysis business of
Fresenius AG and all assets and services predominantly used in the conduct
of Fresenius AG's worldwide dialysis business as presently conducted.
Section 5.4. Representations and Warranties for the FWD
Business. Fresenius AG hereby represents and warrants to Grace that, except as
set forth in a letter (the "FWD Business Disclosure Letter") delivered to Grace
simultaneously with the execution and delivery of this Agreement:
(a) Corporate Organization and Qualification. A true and complete
list of all FWD Business Subsidiaries, together with the jurisdiction of
organization of each such FWD Business Subsidiary, is set forth in the FWD
Business Disclosure Letter. Each FWD Business Subsidiary is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization and is in good standing (if recognized in such jurisdiction,
or, if not, duly qualified) as a foreign corporation in each jurisdiction
where the properties owned, leased or operated, or the business conducted,
by such FWD Business Subsidiary require such qualification, except for any
such failure so to qualify or be in good standing which, when taken
together with all other such failures, is not reasonably likely to have a
Material Adverse Effect with respect to the FWD Business. Each FWD Business
Subsidiary has the requisite corporate power and authority to carry on its
business as now being conducted. Fresenius AG has made available to the
other parties hereto a complete and correct copy of the Certificate of
Incorporation and By-laws (or similar organizational documents) of each FWD
Business Subsidiary, each as amended to date and currently in full force
and effect.
(b) Corporate Authority. Each FWD Business Subsidiary has the
requisite corporate power and authority and has taken all corporate action
necessary in order to consummate the transactions contemplated hereby and
by the other Transaction Agreements.
(c) Capitalization. The authorized capital stock, and the number of
shares of such capital stock issued and outstanding, of each FWD Business
Subsidiary is set forth in the FWD Business Disclosure Letter, and all such
issued and outstanding shares of capital stock are owned of record and
beneficially by Fresenius AG or another FWD Business Subsidiary, free and
clear of all liens, pledges, security interests, claims, proxies,
preemptive or subscriptive rights or other encumbrances or restrictions of
any kind. There are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or
unissued capital stock of any FWD Business Subsidiary or obligating any FWD
Business Subsidiary to issue or sell any shares of capital stock of, or
other equity interests in, any FWD Business Subsidiary. There are no
outstanding contractual obligations of any FWD Business Subsidiary to
repurchase, redeem or otherwise acquire any capital stock of any FWD
Business Subsidiary or to provide funds to make any investment (in the form
of a loan, capital contribution or otherwise) in any FWD Business
Subsidiary or any other entity. Each of the outstanding shares of capital
stock of each FWD Business Subsidiary is duly authorized, validly issued,
fully paid and nonassessable.
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(d) Financial Statements; No Undisclosed Liabilities. (i) Included in
the FWD Business Disclosure Letter are a consolidated balance sheet as of
December 31, 1995, and consolidated statements of income, cash flows and
shareholders' equity for the years ended December 31, 1995 for the FWD
Business (such financial statements, the "FWD Business Disclosure Letter
Financial Statements," and the balance sheet as of December 31, 1995
included therein, the "FWD Business Disclosure Letter Balance Sheet"). The
FWD Business Disclosure Letter Balance Sheet (including any related notes
and schedules) fairly presents in all material respects, and the
consolidated balance sheet to be included in the FWD Business Audited
Financial Statements (including any related notes and schedules) shall
fairly present in all material respects, the consolidated financial
position of the FWD Business as of its date; and each of the consolidated
statements of income, cash flows and shareholders' equity included in the
FWD Business Disclosure Letter Financial Statements (including any related
notes and schedules) fairly presents in all material respects, and each
such statement to be included in the FWD Business Audited Financial
Statements (including any related notes and schedules) shall fairly present
in all material respects, the consolidated results of operations, retained
earnings and cash flows, as the case may be, of the FWD Business for the
periods set forth therein, in each case in accordance with US GAAP.
(ii) Except as disclosed on the FWD Business Disclosure Letter Balance
Sheet or the notes thereto, neither the FWD Business nor any FWD Business
Subsidiary has any liabilities, whether or not accrued, contingent or
otherwise, that, individually or in the aggregate are reasonably likely to
have a Material Adverse Effect with respect to the FWD Business.
(e) Absence of Certain Events and Changes. Except as disclosed in the
FWD Business Disclosure Letter, since September 30, 1995, Fresenius AG,
with respect to the FWD Business, and the FWD Business Subsidiaries, have
conducted their respective businesses only in the ordinary and usual course
of such businesses and there has not been any change or development or
combination of changes or developments (including any worsening of any
condition currently existing) which, individually and in the aggregate, is
reasonably likely to result in a Material Adverse Effect with respect to
the FWD Business.
(f) Compliance with Laws. Fresenius AG has complied, in the conduct
of the FWD Business, and each FWD Business Subsidiary has complied, in the
conduct of its respective business, with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable thereto, except where the failure
to comply is not reasonably likely, individually and in the aggregate, to
have a Material Adverse Effect with respect to the FWD Business. To the
knowledge of the executive officers of Fresenius AG, Fresenius AG has, with
respect to the FWD Business, each FWD Business Subsidiary has, and,
immediately after the Contribution, an FWD Business Subsidiary will have,
all permits, licenses, certificates of authority, orders, and approvals of,
and has made all filings, applications, and registrations with, federal,
state, local, and foreign governmental or regulatory bodies that are
required in order to permit such party to carry on its business as it is
presently conducted, except for such permits, licenses, certificates,
orders, filings, applications and registrations, the failure to have or
make which, individually and in the aggregate, are not reasonably likely to
have a Material Adverse Effect with respect to the FWD Business.
(g) Title to Assets. Fresenius AG and the FWD Business Subsidiaries
have and, immediately after the Contribution, the FWD Business Subsidiaries
will have, good and, with respect to real property, marketable title to its
properties and assets (other than property as to which it is lessee),
except for those defects in title which are not, individually and in the
aggregate, reasonably likely to have a Material Adverse Effect with respect
to the FWD Business. Fresenius AG and the FWD Business Subsidiaries have,
and immediately after the Contribution, the FWD Business Subsidiaries will
either own or have adequate rights to use (on the same basis as currently
owned or used by the FWD Business), all assets predominantly used or useful
in the FWD Business as currently conducted and all assets reflected on the
FWD Business Balance Sheet, except for those properties subject to the
Lease and assets disposed of in accordance with this Agreement and except
for those failures to own or have which are not, individually and in the
aggregate, reasonably likely to have a Material Adverse Effect with respect
to the FWD Business.
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(h) Litigation. There are no civil, criminal or administrative
actions, suits, claims, hearings or proceedings pending or, to the
knowledge of its executive officers, threatened, or investigations pending,
against Fresenius AG or its subsidiaries (other than Fresenius USA) with
respect to the FWD Business, or any FWD Business Subsidiary that,
individually or in the aggregate, are reasonably likely to have a Material
Adverse Effect with respect to the FWD Business. There are no judgments or
outstanding orders, writs, injunctions, decrees, stipulations or awards
(whether rendered or issued by a court or Governmental Entity, or by
arbitration) against Fresenius AG or its subsidiaries (other than Fresenius
USA) with respect to the FWD Business, or any FWD Business Subsidiary, or
any of their respective properties or businesses, which are reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
with respect to the FWD Business.
(i) Taxes. All material federal, state, local and foreign tax returns
required to be filed with respect to the FWD Business or any FWD Business
Subsidiary have been timely filed or requests for extensions have been
timely filed and any such extension shall have been granted and not have
expired, and all such filed returns are complete and accurate in all
material respects. All material taxes required to be shown on returns filed
with respect to the FWD Business or any FWD Business Subsidiary, have been
paid in full or have been recorded as a liability on the FWD Business
Disclosure Letter Balance Sheet. There is no outstanding audit examination,
deficiency, or refund litigation with respect to any taxes with respect to
the FWD Business or any FWD Business Subsidiary that, individually or in
the aggregate, is reasonably likely to have a Material Adverse Effect with
respect to the FWD Business. All material taxes, interest, additions, and
penalties due with respect to completed and settled examinations or
concluded litigation relating to the FWD Business or any FWD Business
Subsidiary have been paid in full or have been recorded as a liability on
the FWD Business Balance Sheet (in accordance with US GAAP). Neither
Fresenius AG nor any FWD Business Subsidiary is a party to a tax sharing or
similar agreement or any agreement with respect to the FWD Business or any
FWD Business Subsidiary, except for any such agreement under which the
liabilities of FWD Business and its subsidiaries would not be reasonably
likely to have a Material Adverse Effect with respect to FWD Business.
Neither Fresenius AG (with respect to the FWD Business) nor the FWD
Business Subsidiaries have waived any applicable statute of limitations
with respect to German tax or any material German state income taxes.
(j) Environmental Matters. Except for such matters that, individually
and in the aggregate, are not reasonably likely to have a Material Adverse
Effect with respect to the FWD Business, to the knowledge of its executive
officers (i) Fresenius AG, with respect to the FWD Business, and the FWD
Business Subsidiaries are in compliance with all applicable Environmental
Laws; and (ii) neither Fresenius AG with respect to the FWD Business, nor
any of the FWD Business Subsidiaries has any outstanding notices, demand
letters or requests for information from any Government Entity or any third
party that assert that Fresenius AG, with respect to the FWD Business, or
any of the FWD Business Subsidiaries may be in violation of, or liable
under, any Environmental Law and none of Fresenius AG with respect to the
FWD Business, the FWD Business Subsidiaries or its properties are subject
to any court order, administrative order or decree arising under any
Environmental Law.
(k) Governmental Filings; No Violations. (i) Other than the filings
provided for in the Transaction Agreements, and other than as may be
required under the HSR Act and similar statutes in other countries, the
Exchange Act, the Securities Act, and state securities laws, no notices,
reports or other filings are required to be made by any FWD Business
Subsidiaries with, nor are any consents, registrations, approvals, permits
or authorizations required to be obtained by it from, any Governmental
Entity, in connection with the execution, delivery or performance of each
Transaction Agreement to which Fresenius AG is a party by it and the
consummation by it of the transactions contemplated hereby and thereby, the
failure to make or obtain any or all of which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect with
respect to the FWD Business or enable any person to enjoin or prevent or
materially delay consummation of the transactions contemplated hereby and
thereby.
(ii) The execution, delivery and performance by each FWD Business
Subsidiary of each Transaction Agreement to which Fresenius AG is a party
does not or will not, and the consummation by it of any
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of the transactions contemplated hereby and thereby will not, constitute or
result in (A) a breach or violation of, or a default under, its Certificate
of Incorporation or By-laws (or similar organizational document), or the
comparable governing instruments of any of its subsidiaries, or (B)
assuming receipt of any consents and the occurrence of any events disclosed
in the FWD Business Disclosure Letter as contemplated in the last sentence
of this paragraph, a breach or violation of, or a default under, or the
acceleration of or the creation of a lien, pledge, security interest or
other encumbrance on assets of it, Newco or the Surviving Corporations or
any of their respective subsidiaries (with or without the giving of notice,
the lapse of time or both) pursuant to, any provision of any Contract of it
or any of its subsidiaries or any law, rule, ordinance or regulation or
judgment, decree, order, award or governmental or non-governmental permit
or license to which it or any of its subsidiaries is subject, or any change
in the rights or obligations of any party under, or give rise to any rights
of termination under, any of the Contracts, except, in the case of clause
(B) above, for such breaches, violations, defaults, accelerations or
changes that are disclosed in the FWD Business Disclosure Letter or,
individually and in the aggregate, are not reasonably likely to have a
Material Adverse Effect with respect to the FWD Business. The FWD Business
Disclosure Letter sets forth a list of all consents required under any
Contracts to be obtained by any FWD Business Subsidiary or events required
to occur prior to consummation of the Reorganization (other than consents
the failure to obtain of which, individually and in the aggregate, is not
reasonably likely to have a Material Adverse Effect with respect to the FWD
Business).
(l) Contracts and Commitments. Except as set forth in the FWD
Business Disclosure Letter, none of Fresenius AG or any of its
subsidiaries, with respect to the FWD Business, nor any FWD Business
Subsidiary is a party to any Contract that would be required to be filed as
an exhibit to a registration statement for the FWD Business and Fresenius
USA, taken as a whole, under the Exchange Act.
(m) Employee Benefit Plans. (i) The FWD Business Disclosure Letter
lists each material employee benefit plan, program, policy, practice and
arrangement and all material bonus, stock option, stock purchase,
restricted stock, incentive, deferred compensation, retiree medical or life
insurance, supplemental retirement, severance or other benefit plans,
programs or arrangements, and all material employment, termination,
severance or other contracts or agreements, whether legally enforceable or
not, to which Fresenius AG, its subsidiaries or any of the FWD Business
Subsidiaries is a party, with respect to which Fresenius AG, its
subsidiaries or any of the FWD Business Subsidiaries has or could incur any
obligation or which are maintained, contributed to or sponsored by
Fresenius AG, its subsidiaries or any of the FWD Business Subsidiaries for
the benefit of any current or former employee, officer or director of
Fresenius AG, its subsidiaries or any of the FWD Business Subsidiaries,
(collectively, the "Fresenius AG Plans"). With respect to each Fresenius AG
Plan, Fresenius AG has caused to be made available to the other parties
hereto a true, correct and complete copy of: (A) each writing constituting
a part of such Fresenius AG Plan, including without limitation all plan
documents, benefit schedules, participant agreements, trust agreements, and
insurance contracts and other funding vehicles; (B) the current summary
plan description, if any; (C) the most recent annual financial report and
actuarial valuations, if any; and (D) the most recent determination letter
from the relevant governmental authority, if any. All financial statements
and actuarial reports for each Fresenius AG Plan have been prepared in
accordance with applicable accounting principles and actuarial principles,
applied on a uniform and consistent basis.
(ii) In all material respects, each Fresenius AG Plan complies with,
and has been managed in accordance with, all applicable laws, regulations
and requirements. Each Fresenius AG Plan required to be registered has been
registered and has been maintained in good standing with applicable legal
and regulatory authorities. Where Fresenius AG Plans are funded or insured,
all contributions and other amounts due to or in respect of them or any
state pension arrangements by Fresenius AG, its subsidiaries or any of the
FWD Business Subsidiaries have been fully paid at the Effective Time. The
fair market value of the assets of each such funded Fresenius AG Plan, or
the liability of each insurer for any Fresenius AG Plan funded through
insurance or the book reserve established for any such Fresenius AG Plan on
the FWD Business Balance Sheet, together with any accrued contributions, is
sufficient to procure or provide for the accrued benefit obligations, as of
the Closing Date, with respect to all current
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and former participants in such Fresenius AG Plan according to the
actuarial assumptions utilized in the actuary's report described in Section
5.4(m)(i) above, and no transaction contemplated by this Agreement shall
cause such assets, book reserves or insurance obligations to be less than
such benefit obligations, and nothing has happened since the date of that
information which would have a Material Adverse Effect on the funding
position of the Fresenius AG Plans. Where Fresenius AG Plans are unfunded
or underfunded, appropriate reserves are established therefore on the FWD
Business Balance Sheet. Fresenius AG, its subsidiaries and the FWD Business
Subsidiaries have not by any act or omission, direct or indirect,
materially increased their liabilities or obligations to the Fresenius AG
Plans since the date of the last actuary's report described in Section
5.4(m)(i) above.
(iii) There is no dispute about the entitlements or benefits payable
under the Fresenius AG Plans, no claim by or against the managers or
administrators of the Fresenius AG Plans, Fresenius AG, its subsidiaries or
any of the FWD Business Subsidiaries has been made or threatened, and there
are no circumstances which might give rise to any such claim except where
any such event could not have, individually and in the aggregate, a
Material Adverse Effect with respect to the FWD Business. Except as set
forth in the FWD Business Disclosure Letter Balance Sheet, there exists no
liability (contingent or otherwise), and no event has occurred, with
respect to any Fresenius AG Plan which could reasonably be expected to have
a Material Adverse Effect with respect to the FWD Business.
(n) Lease. The Lease, pursuant to which Newco (or its subsidiary)
shall lease certain real property in Germany from Fresenius AG, as provided
therein, when executed and delivered, shall be a valid and binding
agreement of Fresenius AG, enforceable in accordance with the terms
thereof; and the total rental to be paid pursuant to such Lease of the
equivalent of $12,000,000 per year beginning January 1, 1997 (subject to
adjustment, as provided therein) is a fair market rental for such property.
(o) Trademarks, Patents and Copyrights. Fresenius AG or a FWD
Business Subsidiary owns or possesses adequate licenses or other rights to
use, all patents, trademarks, trade names, service marks, copyrights,
licenses and product licenses or registrations (including applications for
any of the foregoing), technology, know-how, tangible or intangible
proprietary intellectual property rights, information or material (whether
conceived, reduced to practice or under development), formulae, inventions
and new and investigational applications (including all options or other
rights to acquire any of the foregoing) as are necessary, used or useful in
connection with the FWD Business (the "FWD Business Intellectual
Property"), the lack of which would reasonably be expected to have a
Material Adverse Effect with respect to the FWD Business; and none of
Fresenius AG or any of its subsidiaries has any knowledge of any conflict
with the proprietary intellectual property rights of any of Fresenius AG or
any FWD Business Subsidiary therein or any knowledge of any conflict by
Fresenius AG or any FWD Business Subsidiary with the rights of others
therein which would have a Material Adverse Effect with respect to the FWD
Business. Immediately after the Contribution, Newco or its Subsidiary will
own or possess adequate licenses or other rights to use (on substantially
the same basis as currently owned or possessed by the FWD Business) all of
the FWD Business Intellectual Property. There are no Contracts, agreements
and licenses pursuant to which Fresenius AG or any subsidiaries of
Fresenius AG which are not FWD Business Subsidiaries will retain rights or
interests of any kind in or affecting the FWD Business Intellectual
Property.
SECTION 5.5. Certain Definitions Relating to the FWD Business. (a) "FWD
Business" means the dialysis and renal medical products business conducted
worldwide by Fresenius AG (including, without limitation, the FWD Business
Subsidiaries), other than the dialysis business of Fresenius USA.
(b) "FWD Business Assets" means all the property and assets (including
intangible assets, goodwill and leaseholds) of the FWD Business which are
reflected on the FWD Business Balance Sheet or otherwise predominately relating
to or predominately used or useful in the business and operations of the FWD
Business (other than the property subject to the Lease), plus (i) all property
and assets which have been or will be acquired in the ordinary course of
business since the date of the FWD Business Balance Sheet, less (ii) any
property and assets which have been or will be disposed of or consumed in the
ordinary course of business since the date of the FWD Business Balance Sheet
consistent with the terms hereof.
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(c) "FWD Business Subsidiaries" means all subsidiaries of Fresenius AG and
all other entities in which Fresenius AG holds any direct or indirect equity
interest, other than Fresenius USA and its subsidiaries, which conduct any of
the FWD Business (it being agreed and understood that (i) as of the date hereof,
the FWD Business is conducted, and the FWD Business Assets are held, by
Fresenius AG and certain of its subsidiaries (all such entities, the "Current
Subsidiaries"), (ii) as of the Contribution, by virtue of the Fresenius AG
Restructuring, the FWD Business will be conducted, and the FWD Business Assets
will be held, by certain Fresenius AG subsidiaries which may include the Current
Subsidiaries as well as other subsidiaries (all such entities, the "Closing
Subsidiaries", and (iii) all references herein to FWD Business Subsidiaries
shall be deemed to refer to the Current Subsidiaries as of the date hereof and
to the Closing Subsidiaries as of the Contribution).
(d) "Fresenius AG Restructuring" means the actions taken and proposed to be
taken by Fresenius AG and its subsidiaries to restructure the FWD Business so
that, at or prior to Contribution, the FWD Business Subsidiaries shall own all
FWD Business Assets.
ARTICLE VI
COVENANTS
SECTION 6.1. Interim Operations. Each of Grace and Fresenius AG (for
itself and on behalf of Fresenius AG) covenants and agrees as to itself and its
subsidiaries that, from and after the date hereof until the Effective Time,
except insofar as the other parties shall otherwise consent or except as
otherwise contemplated by this Agreement, the Contribution Agreement, the
Distribution Agreement or its Disclosure Letter (provided that, as used herein,
all references to Grace (and/or its Affiliates) shall be deemed to refer to
Grace and its Affiliates which conduct the NMC Business, consistent with Section
9.8 hereof, except as otherwise specifically provided):
(a) To the extent reasonably practicable, taking into account any
operational matters that may arise that are primarily attributable to the
pendency of the Reorganization, the business of it and its subsidiaries
will be conducted only in the ordinary and usual course consistent with
past practice and existing business plans previously disclosed to the other
parties and, to the extent consistent therewith, it and its subsidiaries
will use all reasonable efforts to preserve their business organization
intact and maintain their existing relations with customers, suppliers,
employees and business associates.
(b) It will not (i) sell or pledge or agree to sell or pledge any
stock owned by it in any of its subsidiaries or, in the case of Fresenius
AG, any FWD Business Subsidiary; (ii) amend its Certificate of
Incorporation or By-laws (or similar organizational document); (iii) split,
combine or reclassify any outstanding capital stock; or (iv) declare, set
aside or pay any dividend payable in stock or property with respect to any
of its capital stock.
(c) Neither Grace, Fresenius USA, nor any of their respective
subsidiaries or, Fresenius AG, solely with respect to any FWD Business
Subsidiary, will issue, sell, pledge, dispose of or encumber, or authorize
or propose the issuance, sale, pledge, disposition or encumbrance of, any
shares of, or securities convertible or exchangeable for, or options, puts,
warrants, calls, commitments or rights of any kind to acquire, any shares
of its capital stock of any class other than common shares issuable
pursuant to options, warrants and other convertible securities outstanding
on the date hereof and disclosed in its Disclosure Letter, and employee
stock options granted after the date hereof in the ordinary course of
business.
(d) None of Grace, Fresenius USA or Fresenius AG, with respect to the
FWD Business, will (i) transfer, lease, license, guarantee, sell, mortgage,
pledge or dispose of any property or assets encumber any property or assets
other than in the ordinary and usual course of business; (ii) authorize or
make capital expenditures; (iii) make any acquisition of, or investment in,
assets, stock or other securities of any other person or entity other than
its wholly owned subsidiaries or (iv) make any divestiture.
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(e) Except as required by agreements or arrangements disclosed in its
SEC Documents or its Disclosure Letter, neither it nor any of its
subsidiaries or, in the case of Fresenius AG, any FWD Business Subsidiary,
will grant any severance or termination pay to, or enter into, extend or
amend any employment, consulting, severance or other compensation agreement
with, any director, officer or other of its employees, except to other
employees in the ordinary course in a manner consistent with past practice,
which would bind Newco (or its subsidiary) after the Reorganization.
(f) Except as may be required to satisfy contractual obligations
existing as of the date hereof (and disclosed to the other parties hereto)
and the requirements of applicable law, and except in the ordinary course
of business, neither it nor any of its subsidiaries or, in the case of
Fresenius AG, any FWD Business Subsidiary, will establish, adopt, enter
into, make, amend or make any elections under any collective bargaining,
bonus, profit sharing, thrift, compensation, stock option, restricted
stock, pension, retirement, employee stock ownership, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any directors,
officers or employees which would affect Newco (or its subsidiary), except
in a manner consistent with past practice.
(g) It will not implement any change in its accounting principles,
practices or methods, other than as may be required by German GAAP, in the
case of Fresenius AG, or US GAAP, in the case of Grace and Fresenius USA,
other than as may be necessary or advisable in connection with the
Distribution.
(h) Neither it nor any of its subsidiaries will authorize or enter
into an agreement to take any of the actions referred to in paragraphs (a)
through (g) above.
SECTION 6.2. Certain Transactions. (a) Prior to the Distribution: (i)
Grace and Grace-Conn. shall use reasonable efforts to cause NMC to arrange new
credit facilities so that the transactions contemplated by the Transaction
Agreements may be consummated; (ii) Fresenius AG shall use reasonable efforts to
arrange new credit facilities for the FWD Business so that the transactions
contemplated by the Transaction Agreements may be consummated; and (iii) the
parties hereto shall cooperate with respect to the foregoing.
(b) Prior to or concurrent with the Reorganization, the parties hereto
shall use reasonable efforts to satisfy the conditions set forth in Sections
7.1(j) and 7.1(k).
(c) It is understood and agreed by the parties hereto that, at the time of
the Reorganization, none of Grace, Fresenius USA and the FWD Business shall have
cash or marketable securities, it being contemplated that, in connection with
the Reorganization, such cash and marketable securities shall be provided to
Grace-Conn. and Fresenius AG, respectively, and that new working capital
facilities to finance working capital needs shall be obtained.
(d) It is the intention of the parties hereto that (i) Newco shall pay
dividends to the holders of its outstanding ordinary shares in the amounts set
forth in the business plan previously disclosed to the parties hereto beginning
in January 1997, subject to the declaration of such dividends by the Newco
Board, and (ii) Newco (or its subsidiary) shall lease real property and
buildings in Germany from Fresenius AG, for a total rental of the equivalent $12
million per year beginning January 1997 pursuant to the Lease to be consistent
with the terms set forth in Exhibit D to the Contribution Agreement.
(e) It is the intention of the parties hereto that, following the
Reorganization, Newco shall seek to refinance up to $700 million of credit
facilities through the sale of preferred securities which will be primarily
"mezzanine" capital, which could be classified as equity under German generally
accepted accounting principles and whose interest stream would be tax
deductible. The sale (or commitments for sale) of such preferred securities
shall not be a condition to the consummation of the Reorganization.
(f) It is the intention of the parties hereto that, to the extent that it
is not possible to obtain the credit facilities and/or arrange for the sale of
the preferred securities contemplated by paragraphs (a) and (e) above on terms
which will permit the payment of cash pursuant to the lease and dividends
pursuant to paragraph (d) above, prior to the Effective Time, the parties shall
endeavor to restructure the transactions contemplated
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hereby so that, commencing in January 1997, Fresenius AG shall receive cash flow
from Newco in the amount that otherwise would have been received pursuant to
paragraph (d) above.
SECTION 6.3. Acquisition Proposals. Each party hereto agrees that neither
it nor any of its subsidiaries nor any of its respective officers and directors
or the officers and directors of its subsidiaries shall, and it shall each
direct and use its best efforts to cause its employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its subsidiaries) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, it or any of its
subsidiaries (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
relating to an Acquisition Proposal; provided, however, that the Grace Board may
furnish or cause to be furnished information (pursuant to confidentiality
arrangements) and may participate in such discussions and negotiations directly
or through its representatives if (i) the failure to provide such information or
participate in such negotiations and discussions could, in the opinion of its
outside counsel, reasonably be deemed to cause the members of the Grace Board to
breach their fiduciary duties under applicable law or (ii) another corporation,
partnership, person or other entity or group makes a written offer or written
proposal which, based upon the identity of the person or entity making such
offer or proposal and the terms thereof, and the availability of adequate
financing therefor, the Grace Board believes, in the good faith exercise of its
business judgment and based upon advice of its outside legal and financial
advisors, could reasonably be expected to be consummated and represents a
transaction more favorable to its shareholders than the Reorganization (a
"Higher Offer"); provided further, however, that the foregoing restriction shall
not apply to an Acquisition Proposal exclusively involving all or part of the
stock or assets of Grace-Conn. Grace shall notify the other parties hereto as
soon as practicable if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with it.
SECTION 6.4. Information Supplied. Each of parties hereto agrees that none
of the information supplied or to be supplied by it for inclusion or
incorporation by reference in any Registration Statement, Proxy Statement or
Schedule 14A, or any amendment or supplement thereto, will, in the case of a
Registration Statement, at the time such Registration Statement and each
amendment and supplement thereto becomes effective under the Securities Act, or,
in the case of a Proxy Statement or Schedule 14A, at the time such Proxy
Statement or Schedule 14A and each amendment and supplement thereto is filed in
definitive form with the SEC or mailed to shareholders and at the time of the
applicable Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading.
SECTION 6.5. Shareholder Approvals. (a) Each of Grace and Fresenius AG (on
behalf of Fresenius USA) agrees to take, in accordance with applicable law and
its Certificate of Incorporation and By-laws, all action necessary to convene a
meeting of holders of Grace Common Shares and Grace Preferred Shares and
Fresenius USA Common Shares and Fresenius USA Preferred Shares, respectively, as
promptly as practicable after the Newco Registration Statement and the ADR
Registration Statement are declared effective (and, in the case of Grace, the NY
Preferred Registration Statement and the Grace-Conn. Registration Statement are
declared effective), and its Proxy Statement is cleared, by the SEC, to consider
and vote upon the approval of the transactions contemplated by the Transaction
Agreements (including, without limitation, the Grace Amendment). Subject to the
remainder of this Section 6.5, each of the Grace Board and the Fresenius USA
Board shall recommend such adoption and approval and shall take all lawful
action to solicit such approval by shareholders. The Grace Board may fail to
make such a recommendation, or withdraw, modify, or change any such
recommendation, or recommend any other offer or proposal, if the Grace Board,
based on the opinion of its outside counsel, determines that making such
recommendation, or the failure to recommend any other offer or proposal, or the
failure to so withdraw, modify, or change its recommendation, or the failure to
recommend any other offer or proposal, could reasonably be deemed to cause the
members of the Grace Board to breach their fiduciary duties under applicable law
in connection
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with a Higher Offer. In such event, notwithstanding anything contained in this
Agreement to the contrary, any such failure to recommend, withdrawal,
modification, or change of recommendation or recommendation of such other offer
or proposal, or the entering by Grace into an agreement with respect to a Higher
Offer (provided that Grace shall have provided Fresenius AG with at least 72
hours notice of its intention to so enter and the identity of the other party
thereto), shall not constitute a breach of this Agreement by Grace.
(b) Fresenius AG agrees to take, in accordance with applicable law and its
organizational documents, all action necessary to convene a meeting of Fresenius
AG shareholders as promptly as practicable after the date hereof to consider and
vote upon the approval of the transactions contemplated hereby. The Fresenius AG
Management Board shall recommend such adoption and approval and shall take all
lawful action to solicit such approval by Fresenius AG shareholders.
SECTION 6.6. Filings; Other Actions. (a) Subject to the obligations of
consultation contained herein, Grace shall promptly prepare for filing with the
SEC the Grace Proxy Statement, the Grace Schedule 14A and the Grace-Conn.
Registration Statement, Fresenius USA shall promptly prepare for filing with the
SEC the Fresenius USA Proxy Statement and Fresenius USA Schedule 14A, and the
parties hereto shall cooperate to promptly prepare for filing with the SEC the
Newco Registration Statement, the NY Preferred Registration Statement and the
ADR Registration Statement (including all required financial statements). In
connection with the foregoing, Fresenius AG shall prepare audited financial
statements prepared in accordance with US GAAP for the FWD Business and such
financial statement shall be included in the Newco Registration Statement (and
in such other Registration Statements and Proxy Statements as may be
appropriate). Each party hereto shall use its reasonable efforts, after
consultation with the other parties hereto, to respond promptly to any comments
made by the SEC with respect to such filings, to have such filings declared
effective or cleared, as the case may be, and cause such filings to be mailed at
the earliest reasonably practicable time. Each party hereto and its counsel
shall be given a reasonable opportunity to review and comment on each version of
such filings prior to the filing thereof with the SEC. Each party hereto also
shall use its reasonable efforts to obtain all necessary state securities law or
blue sky permits and approvals required to carry out the transactions
contemplated hereby and shall furnish all information as may be reasonably
requested in connection with any such action.
(b) Each party hereto shall cooperate with the other parties hereto,
subject to the terms and conditions set forth herein, use its reasonable efforts
promptly to prepare and file all necessary documentation, to effect all
necessary applications, notices, petitions, filings and other documents, and to
obtain as promptly as reasonably practicable all necessary permits, consents,
orders, approvals and authorizations of, or any exemption by, all third parties
and Governmental Entities necessary or advisable to consummate the transactions
contemplated hereby. Each party hereto shall consult with the other parties
hereto with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Governmental Entities necessary or
advisable to consummate the transactions contemplated hereby and each party
shall keep the other parties hereto apprised of the status of matters relating
to completion of the transactions contemplated hereby.
(c) Each party hereto shall, upon reasonable request and except as
otherwise may be required by applicable law, furnish the other parties hereto
with all information concerning itself, its subsidiaries, directors, officers
and shareholders and other Affiliates and such other matters as may be
reasonably necessary or advisable in connection any statement, filing, notice or
application made by or on behalf of such other party or any of its Affiliates to
any Governmental Entity in connection with any transactions contemplated by this
Agreement.
(d) Each party hereto shall, subject to applicable laws relating to the
disclosure and exchange of information, promptly furnish the other parties
hereto with copies of written communications received by each such party or any
of its subsidiaries, from, or delivered by any of the foregoing to, any
Governmental Entity in respect of the transactions contemplated hereby.
(e) Each party hereto shall cooperate with each other party hereto and
promptly take or cause to be taken all actions and do or cause to be done all
things necessary, proper or advisable to obtain favorable review of the proposed
transaction under the HSR Act and any foreign antitrust or competition laws,
which efforts
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shall include, without limitation, undertaking litigation and/or agreeing to
hold aside or divest, or enter into any conduct restriction with respect to, any
asset or business to be part of Newco after the Effective Time (all such
decisions to be made by the parties in consultation with one another taking into
consideration the effect on Newco); provided, however, that the foregoing shall
not require that any action be taken with respect to (or by) Grace-Conn. or its
business; provided further, however, that Grace shall not be required to commit
to any action that is to be taken prior to the Effective Time.
SECTION 6.7. Audited Financial Statements. (a) Not later than March 31,
1996, Grace shall deliver to the other parties hereto an audited special purpose
consolidated balance sheet as of, and audited special purpose consolidated
statements of income, cash flows and shareholders' equity for the year ended
December 31, 1995, in each case for Grace and exclusive of the Grace-Conn.
Business and the assets, liabilities, income cash flows and shareholders' equity
thereof (such financial statements, the "Grace Audited Financial Statements"),
together with the unqualified opinion of Grace's independent accountants thereon
to the effect that such special purpose consolidated balance sheet fairly
presents in all material respects the consolidated financial position of Grace
and its included subsidiaries as of its date and such special purpose
consolidated statements of income, cash flows and shareholders' equity fairly
present in all material respects the consolidated results of operations,
retained earnings and cash flows, as the case may be, of Grace and its included
subsidiaries for the periods set forth therein, in each case in accordance with
US GAAP and exclusive of the Grace-Conn. Business and the assets, liabilities,
income, cash flows and shareholders' equity thereof.
(b) Not later than March 31, 1996, Fresenius USA shall deliver to the other
parties hereto an audited consolidated balance sheet as of, and audited
consolidated statements of income, cash flows and shareholders' equity for
Fresenius USA for the year ended December 31, 1995 (such financial statements,
the "Fresenius USA Audited Financial Statements"), together with the unqualified
opinion of Fresenius USA's independent accountants thereon to the effect that
such consolidated balance sheet fairly presents in all material respects the
consolidated financial position of Fresenius USA and its subsidiaries as of its
date and such consolidated statements of income, cash flows and shareholders'
equity fairly present in all material respects the consolidated results of
operations, retained earnings and cash flows, as the case may be, of Fresenius
USA and its subsidiaries for the periods set forth therein, in each case in
accordance with US GAAP.
(c) Not later than March 31, 1996, Fresenius AG shall deliver to the other
parties hereto: (i) an audited consolidated balance sheet as of, and audited
consolidated statements of income, cash flows and shareholders' equity for the
FWD Business for the years ended December 31, 1994 and December 31, 1995 showing
consolidating adjustments made in connection with the consolidation of Fresenius
USA with the FWD Business (such financial statements, the "FWD Business Audited
Financial Statements"), together with the unqualified opinion of Fresenius AG's
independent accountants thereon to the effect that such consolidated balance
sheet fairly presents in all material respects the consolidated financial
position of the FWD Business as of its date and such consolidated statements of
income, cash flows and shareholders' equity fairly presents in all material
respects the consolidated results of operations, retained earnings and cash
flows, as the case may be, of the FWD Business for the periods set forth
therein, in each case in accordance with US GAAP, (ii) an audited consolidated
balance sheet as of, and audited consolidated statements of income, cash flows
and shareholders' equity for Fresenius AG for the year ended December 31, 1994
and December 31, 1995 (such financial statements, the "Fresenius AG Audited
Financial Statements"), together with the unqualified opinion of Fresenius AG's
independent accountants thereon to the effect that such consolidated balance
sheet fairly presents in all material respects the consolidated financial
position of Fresenius AG as of its date and such consolidated statements of
income, cash flows and shareholders' equity fairly presents in all material
respects the consolidated results of operations, retained earnings and cash
flows, as the case may be, of Fresenius AG for the periods set forth therein, in
each case in accordance with German GAAP, and (iii) a reconciliation showing,
with such level of detail provided to support each of the adjustments made to
the 1995 Fresenius AG Audited Financial Statements to derive the 1995 FWD
Business Audited Financial Statements.
(d) If (i) there exists any material difference between the Grace Audited
Financial Statements, the Fresenius USA Audited Financial Statements or the FWD
Business Audited Financial Statements, on the one hand, and the Grace Disclosure
Letter Financial Statements, the Fresenius USA Disclosure Letter
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Financial Statements or the FWD Business Disclosure Letter Financial Statements,
respectively, on the other hand, and such material difference adversely affects
a party hereto (other than the party the financial statements of which contain
such material difference, and treating, for purposes of this parenthetical,
Fresenius AG and Fresenius USA as a single party) (such party, the "Affected
Party"), and such Affected Party notifies the other parties hereto of such
difference within 10 days following receipt of the applicable Audited Financial
Statements, or (ii) if Grace believes in good faith that the Fresenius USA
Audited Financial Statements and the FWD Business Audited Financial Statements,
or if Fresenius AG believes in good faith that the Grace Audited Financial
Statements, reflect a material adverse change in the prospects of the business
of Fresenius USA and the FWD Business or Grace, as the case may be, from the
business plans previously disclosed by the parties hereto and not otherwise
disclosed in connection with this Agreement (a party so believing being a
"Change Party"), and such Change Party notifies the other parties hereto of such
change within 10 days following receipt of the applicable Audited Financial
Statements, then the parties hereto shall negotiate in good faith to adjust the
relative economics of the transactions contemplated hereby, in consultation with
financial and accounting advisors, in light of the foregoing. If the parties do
not reach agreement on such an adjustment within 14 days of notice, this
Agreement shall be terminable by an Affected Party or a Change Party.
(e) After delivery of the Audited Financial Statements as contemplated by
this Section 6.7 (if there is no material difference or material adverse change
as contemplated by the immediately preceding paragraph) or after the reaching of
agreement as contemplated by the immediately preceding paragraph (if there is a
material difference or material adverse change as contemplated by the
immediately preceding paragraph), all references herein to the Disclosure Letter
Financial Statements shall be deemed to refer to the Audited Financial
Statements.
(f) Each party hereto shall use all reasonable efforts to cause to be
delivered to the other party is, as appropriate, and its directors a letter of
its independent accountants, dated (i) the date on which each Registration
Statement shall become effective and (ii) a date shortly prior to the Effective
Date, and addressed to such other party and its directors, in form and substance
customary for "comfort" letters delivered by independent accountants in
connection with registration statements.
(g) Time shall be of the essence with respect to the delivery of the
Audited Financial Statements.
SECTION 6.8. Access. Upon reasonable notice, and except as may otherwise
be required by applicable law, each party hereto shall afford each other party's
Representatives access, during normal business hours throughout the period until
the Effective Time to its properties, books, Contracts and records and, during
such period, shall (and shall cause each of its subsidiaries to) furnish
promptly to the other party all information concerning its business, properties
and personnel as may reasonably be requested; provided that no investigation
pursuant to this Section 6.8 shall affect or be deemed to modify any
representation or warranty made by the party furnishing such information;
provided further that with respect to the work papers of independent
accountants, the provision of access shall be subject to the permission of such
independent accountants, and each party hereto shall use reasonable best efforts
to secure such permission for the other. Each party hereto shall not, and shall
cause its respective Representatives not to, use any information obtained
pursuant to this Section for any purpose unrelated to the consummation of the
transactions contemplated by this Agreement. All information obtained pursuant
to this paragraph shall be subject to the provisions of the written
confidentiality arrangements existing among the parties hereto.
SECTION 6.9. Notification of Certain Matters. Each party shall give prompt
notice to the other party of any change that is reasonably likely to result in
any Material Adverse Effect to the knowledge of the executive officers.
SECTION 6.10. Publicity. The initial press release relating hereto shall
be a joint press release and, thereafter, each party hereto shall consult with
each other party hereto prior to issuing any press releases or otherwise making
public statements with respect to the transactions contemplated hereby and prior
to making any filings with any Governmental Entity or stock exchange with
respect thereto; provided that if a party shall be advised by counsel that any
such press release, statement or filing is required by applicable law and it
shall not be practicable to consult with the other parties prior to the time
such press release, statement or filing is
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required, a party may make such press release, statement or filing and shall
promptly notify the other parties thereof.
SECTION 6.11. [Intentionally omitted.]
SECTION 6.12. Employee Benefits. (i) All Grace Employees who are actively
employed by Grace or its subsidiaries on the Effective Time (including any Grace
Employees who are receiving long-term disability as of the Effective Time) shall
be provided with compensation and benefits (including, without limitation,
severance benefits and retiree benefits) substantially the same as those
benefits provided to Grace Employees as of the date hereof. In addition, Grace
Employees shall be given service credit for all periods of employment with Grace
or its Affiliates prior to the Effective Date for purposes of eligibility and
vesting (but not for benefit accrual) under any plan adopted by Newco or any of
their respective subsidiaries or Affiliates with respect to Grace Employees to
provide retirement or welfare benefits. Following the Effective Time, NMC and
Grace, and not Grace-Conn., shall bear any costs and expenses associated with
the termination of employees involved in the NMC Business. It is the intention
of Fresenius AG to consider the adoption by Newco of a broad based equity
incentive program for employees in the United States.
(ii) Upon the request of Fresenius AG, prior to the Effective Time, Grace
shall amend or cause to be amended each Grace Pension Plan which is a
single-employer plan within the meaning of Section 4001(a)(15) of ERISA (and
which covers employees in the NMC Business) to delete any provision that would
become applicable on or after a Change of Control (as defined in such Pension
Plan), requiring (i) that Grace fund the Pension Plan on a termination basis,
and/or (ii) that benefit accruals under the Plan become nonforfeitable as of the
date of a Change of Control.
SECTION 6.13. Expenses and Liquidated Damages. (a) Except as set forth in
paragraph (b) below, whether or not the Reorganization is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense; provided,
however, that the costs and expenses of printing and mailing the Grace Proxy
Statement, Fresenius USA Proxy Statement, the NY Preferred Registration
Statement and the Newco Registration Statement, and all filing and other fees
paid to the SEC or antitrust authorities in connection with the Reorganization,
shall be borne by Newco.
(b) In the event that:
(A) (1) this Agreement shall be terminated pursuant to either Section
8.3(ii) or Section 8.3(iii) or (2) this Agreement shall be terminated
pursuant to Section 8.2(ii) (due to a failure to obtain Grace shareholder
approval) and, at the time of the meeting called for the approval of Grace
shareholders referred to in Section 7.1(a), the Grace Board shall have
failed to recommend to its shareholders the approval of the transactions
contemplated hereby, or shall have withdrawn, modified or changed such
recommendation, or (3) this Agreement shall be terminated pursuant to
Section 8.2(ii) (due to a failure to obtain Grace shareholder approval)
and, at the time of the meeting called for the approval of Grace
shareholders referred to in Section 7.1(a), there shall have been made an
Acquisition Proposal that has become public and, within six months
following such termination, Grace shall enter into a definitive agreement
with respect to the sale of Grace's health care business; and
and (B), at the time of such termination, neither Fresenius Party
shall be in material breach of its covenants or agreements contained in
this Agreement;
then, Grace shall pay to Fresenius AG, as liquidated damages, in exchange for a
complete release of any liabilities of Grace hereunder, the amount of $35
million plus actual out of pocket expenses incurred to third parties in
connection with the transactions contemplated hereby after the date of this
Agreement, payable by wire transfer of immediately available funds within 24
hours to the account specified by Fresenius AG in writing; provided that, if the
approval of the transactions contemplated hereby by the shareholders of
Fresenius AG, as contemplated by Section 6.5, or an irrevocable written
commitment to vote in favor of such transactions from the holder of an amount of
Fresenius AG capital stock sufficient under applicable law to give such
approval, shall have been obtained, the amount of liquidated damages payable
pursuant to this
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Section 6.13 shall be $75 million plus actual out of pocket expenses incurred to
third parties in connection with the transactions contemplated hereby after the
date of this Agreement.
SECTION 6.14. Grace Rights Agreement. The Grace Board shall take all
requisite action in order to render the Grace Rights inapplicable to the Grace
Merger and the other transactions contemplated by this Agreement and the
Distribution Agreement and to extinguish the Grace Rights in connection with the
Reorganization.
SECTION 6.15. Antitakeover Statutes. If any Takeover Statute is or may
become applicable to the transactions contemplated hereby, each of the parties
hereto and the members of its Board of Directors shall grant such approvals and
take such actions as are necessary so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
any Takeover Statute on any of the transactions contemplated by this Agreement.
SECTION 6.16. Securities Act Compliance. As soon as practicable after the
date of the Meetings, each party hereto shall identify to Newco all persons who
were, at the time of the Meetings, possible Affiliates, shall use its reasonable
efforts to obtain a written agreement in the usual and customary form from each
person who is so identified as a possible Affiliate and shall deliver such
written agreements to Newco as soon as practicable after the Meetings.
SECTION 6.17. Stock Exchange Listing. Prior to the Effective Time,
Fresenius AG shall use reasonable efforts to cause the ADR Facility and the
listing of the ADRs on the Exchange to become effective.
SECTION 6.18. Transaction Agreements. (a) Prior to the Effective Time, the
parties shall consummate any transactions to be consummated prior to the
Effective Time pursuant to the Distribution Agreement or the Contribution
Agreement.
(b) The parties shall not waive or amend any terms of the Distribution
Agreement or the Contribution Agreement without the consent of the other
parties hereto, which consent shall not be unreasonably withheld.
(c) The parties hereto acknowledge that the indemnities of Grace-Conn.
and of Fresenius AG contained in the Distribution Agreement and the
Contribution Agreement, respectively, shall inure to the benefit of each
other and to the benefit of Newco.
SECTION 6.19. Tax Matters. Each party agrees to report the Distribution as
a tax-free distribution under the Code and the Grace Merger as a tax-free
reorganization under the Code on all tax returns and other filings, and take no
position inconsistent therewith, except where, in the opinion of nationally
recognized tax counsel to such party, there is not "substantial authority," as
defined in Section 6662 of the Code, to support such a position.
ARTICLE VII
CONDITIONS
SECTION 7.1. Conditions to Each Party's Obligation. The respective
obligation of each party hereto to consummate the Reorganization is subject to
the fulfillment of each of the following conditions:
(a) Shareholder Approval. To the extent required by law or stock
exchange regulations, the transactions contemplated by the Transaction
Agreements shall have been duly approved by the holders of Grace Common
Shares and Grace Preferred Shares in accordance with the NYBCL, other
applicable law and the Certificate of Incorporation and By-laws of Grace,
and by the shareholders of Fresenius AG in accordance with applicable law.
(b) Governmental and Regulatory Consents. The waiting periods
applicable to the consummation of the transactions contemplated by the
Transaction Agreements under the HSR Act shall have expired
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or been terminated; and all filings required to be made prior to the
Closing by any party hereto or any of its respective subsidiaries with, and
all consents, approvals and authorizations required to be obtained prior to
the Closing by any party hereto or any of its respective subsidiaries from,
any Governmental Entity in connection with the execution and delivery of
the Transactions Agreements and the consummation of the transactions
contemplated by the Transaction Agreements shall have been made or
obtained, except where the failure to obtain such consents is not
reasonably likely to have a Material Adverse Effect and could not
reasonably be expected to subject the parties hereto or their Affiliates or
any directors or officers of any of the foregoing to the risk of criminal
liability.
(c) Third-Party Consents. All consents or approvals of all persons
(other than Governmental Entities) required for or in connection with the
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated by the Transaction Agreements shall have
been obtained and shall be in full force and effect, except for those the
failure to obtain of which would not have a Material Adverse Effect with
respect to all parties and Newco.
(d) Litigation. No United States or state court or other Governmental
Entity of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, judgment, decree,
injunction or other order (whether temporary, preliminary or permanent)
which is in effect and prohibits consummation of the transactions
contemplated by the Transaction Agreements.
(e) Grace Tax Opinion. Grace shall have received opinions of
Wachtell, Lipton, Rosen & Katz and of Miller & Chevalier, Chartered, dated
the Effective Date, substantially in the form of Exhibit H hereto. In
rendering such opinions, such firms may receive and rely upon
representations contained in certificates of the Grace, Fresenius AG, Newco
and others, including, without limitation, the Grace Tax Matters
Certificate and the Fresenius AG Tax Matters Certificate.
(f) Registration Statements. The Registration Statements shall have
become effective under the Securities Act or Exchange Act (as applicable),
and no stop order suspending the effectiveness of any Registration
Statement shall have been issued and no proceedings for that purpose shall
have been initiated or threatened by the SEC.
(g) Financing. The parties hereto shall have obtained the financing
necessary to consummate the transactions contemplated by the Transaction
Agreements on terms satisfactory to the parties.
(h) The Distribution. The Distribution shall have been consummated.
(i) Stock Exchange Listing. The ADR Facility and the listing of the
ADRs on the Exchange shall have become effective; provided, however, that
the foregoing shall not apply to obligations of Fresenius USA and Fresenius
AG unless Fresenius AG has satisfied the obligations contained in Section
6.18 hereof.
(j) Fresenius AG Debt. As of the Effective Time, Fresenius USA and
the FWD Business and their respective subsidiaries (taken together, on a
consolidated basis) shall have no Debt other than Debt not in excess of an
aggregate amount of $170 million.
(k) Grace Debt. As of the Effective Time, Grace and its subsidiaries
(on a consolidated basis) shall have no Debt, other than Debt not in excess
of an aggregate amount of (i) $2.263 billion plus (ii) any amounts incurred
to finance capital expenditures or acquisitions permitted to be made
hereunder.
SECTION 7.2. Conditions to Obligation of Grace. The obligation of Grace to
consummate the Reorganization is also subject to the fulfillment or waiver by
Grace prior to the Closing of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of each Fresenius Party set forth in this Agreement shall be
true and correct in all material respects as of the date of this Agreement
and as of the Closing Date as though made on and as of the Closing Date
(except that representations and warranties that by their terms speak as of
the date of this Agreement or some other
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date shall be true and correct as of such date), and Grace shall have
received certificates signed on behalf of each Fresenius Party by an
officer to such effect.
(b) Performance of Obligations. Each Fresenius Party shall have
performed in all material respects all obligations required to be performed
by it under this Agreement or the Contribution Agreement at or prior to the
Closing Date, and Grace shall have received a certificate signed on behalf
of each Fresenius Party by an officer to such effect.
(c) Pooling Agreement. Fresenius AG and Newco shall have entered into
the Newco Pooling Agreement; and Grace shall have received an opinion of
nationally recognized counsel, dated the Closing Date, to the effect that
the Newco Pooling Agreement is a valid and binding agreement, enforceable
against Newco and Fresenius AG in accordance with the terms thereof, under
the laws of the Federal Republic of Germany, respectively. Such opinion
shall be reasonably acceptable to the other parties hereto.
(d) Fresenius AG Tax Opinion. Grace shall have received the opinion
of nationally recognized tax counsel (which may be, for purposes of this
provision, KPMG Deutsche Treuhand-Gesellschaft AG and/or KPMG Peat Marwick
LLP), dated the Closing Date, substantially in the form of Exhibit I
hereto, to the effect that Newco shall have no liability with respect to
the Fresenius AG Restructuring and the Contribution under the relevant
provisions of the Code and applicable law of the Federal Republic of
Germany.
SECTION 7.3. Conditions to Obligation Concerning Fresenius USA. The
obligation of Fresenius AG to cause Fresenius USA to consummate the
Reorganization is also subject to the fulfillment or waiver by Fresenius USA
prior to the Closing Date of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Grace set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date (except that
representations and warranties that by their terms speak as of the date of
this Agreement or some other date shall be true and correct as of such
date) and Fresenius USA shall have received a certificate signed on behalf
of Grace by an officer to such effect.
(b) Performance of Obligations. Grace shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and Fresenius USA shall have
received a certificate signed on behalf of Grace by an officer to such
effect.
(c) Pooling Agreement Opinion. Fresenius AG and Newco shall have
entered into the Newco Pooling Agreement; and Fresenius USA shall have
received an opinion of nationally recognized counsel, dated the Closing
Date, to the effect that the Newco Pooling Agreement is a valid and binding
agreement, enforceable against Newco and Fresenius AG in accordance with
the terms thereof, under the laws of the Federal Republic of Germany,
respectively. Such opinion shall be reasonably acceptable to the other
parties hereto.
SECTION 7.4. Conditions to Obligation of Fresenius AG. The obligation of
Fresenius AG to consummate the Reorganization is also subject to the fulfillment
or waiver by Fresenius AG prior to the Closing of each of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Grace set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date (except that
representations and warranties that by their terms speak as of the date of
this Agreement or some other date shall be true and correct as of such
date) and Fresenius AG shall have received a certificate signed on behalf
of Grace by an officer to such effect.
(b) Performance of Obligations. Grace shall have performed in all
material respects all obligations required to be performed by it under this
Agreement or the Distribution Agreement at or prior to
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the Closing Date, and Fresenius AG shall have received a certificate signed
on behalf of Grace by an officer to such effect.
ARTICLE VIII
TERMINATION
SECTION 8.1. Termination by Mutual Consent. This Agreement may be
terminated, and the Reorganization may be abandoned, at any time prior to the
Effective Time, before or after the approval by the shareholders of Grace,
Fresenius AG and/or Fresenius USA, by the mutual consent of each party hereto,
which consent shall be effected by action of its Board of Directors.
SECTION 8.2. Termination by any Party Hereto. This Agreement may be
terminated, and the Reorganization may be abandoned, by action of the Board of
Directors of any party hereto, if (i) the Reorganization shall not have been
consummated by October 1, 1996 or (ii) at the Grace Meeting or at any
adjournment thereof, the approval of Grace's shareholders, or, at a meeting of
Fresenius AG shareholders or any adjournment thereof, the approval of Fresenius
AG's shareholders, each as referred to in Section 7.1(a), shall not have been
obtained or (iii) pursuant to Section 6.7.
SECTION 8.3. Termination by Grace. This Agreement may be terminated and
the Reorganization may be abandoned at any time prior to the Effective Time,
before or after the adoption and approval by shareholders of Grace referred to
in Section 7.1(a), by action of the Grace Board, if (i) either Fresenius Party
shall have failed to comply in any material respect with any of the covenants or
agreements contained herein to be performed by such Fresenius Party at or prior
to the time of termination, which failure is not cured or capable of being cured
within 30 days after notice thereof, or (ii) the Grace Board shall have failed
to recommend to its shareholders the approval of the transactions contemplated
hereby, or shall have withdrawn, modified or changed such recommendation, in a
manner permitted by Section 6.5, or (iii) Grace shall have entered into an
agreement respect to a Higher Offer in a manner permitted by Section 6.5.
SECTION 8.4. Termination by Fresenius AG. This Agreement may be terminated
and the Reorganization may be abandoned at any time prior to the Effective Time
by action of the Board of Directors of Fresenius AG, if (i) Grace shall have
failed to comply in any material respect with any of the covenants or agreements
contained herein to be performed by it at or prior to the time of termination,
which failure is not cured or capable of being cured within 30 days after notice
thereof, or (ii) the Grace Board shall have failed to recommend to its
shareholders the approval of the transactions contemplated hereby or shall have
withdrawn, modified or changed in a manner materially adverse to such Fresenius
Party its approval or recommendation of this Agreement.
SECTION 8.5. Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Reorganization pursuant
to this Article VIII, other than as set forth in Section 6.13, no party hereto
(or any of its directors or officers) shall have any liability or further
obligation to any other party, except that nothing herein will relieve any party
from liability for any material and willful breach of any covenant contained
herein.
ARTICLE IX
MISCELLANEOUS AND GENERAL
SECTION 9.1. Survival. Only those agreements and covenants of the parties
which by their express terms apply in whole or in part after the Effective Time
shall survive the Effective Time. All other representations, warranties,
agreements and covenants shall be deemed only to be conditions of the
Reorganization and shall not survive the Effective Time.
SECTION 9.2. Modification or Amendment. Subject to the applicable
provisions of the NYBCL and the MBCL, at any time prior to the Effective Time,
the parties hereto may modify or amend this Agreement, by written agreement
executed and delivered by duly authorized officers of the respective parties.
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SECTION 9.3. Waiver of Conditions. The conditions to each party's
obligation to consummate the Reorganization are for the sole benefit of such
party and may be waived by such party in whole or in part to the extent
permitted by applicable law.
SECTION 9.4. Counterparts. For the convenience of the parties hereto, this
Agreement may be executed in any number of separate counterparts signed by one
or more of the parties hereto, each such counterpart being deemed to be an
original instrument, and all such counterparts shall together constitute the
same agreement.
SECTION 9.5. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 9.6. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telegram, telex or other standard form of telecommunications, or by registered
or certified mail, postage prepaid, return receipt requested, addressed as
follows:
(a) If to Grace and Grace-Conn.:
W. R. Grace & Co.
One Town Center Road
Boca Raton, Florida 33486-1010
Attention: Secretary
Fax: (407) 362-1635
with copies to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, N.Y. 10019
Attention: Andrew R. Brownstein, Esq.
Fax: (212) 403-2000
(b) If to Fresenius AG:
Fresenius AG
Borkenberg 14
61440 Oberursel
61343 Bad Homburg
Germany
Attention: Mr. Udo Werle
Fax: 011-49-6171-60-2104
with copies to:
O'Melveny & Myers
Citicorp Center
153 East 53rd Street
New York, NY 10022-4611
Attention: Dr. Ulrich Wagner
Fax: (212) 326-2061
or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section.
SECTION 9.7. Entire Agreement, etc. This Agreement (and the Exhibits and
Disclosure Letters hereto) (a) constitute the entire agreement, and supersede
all other prior agreements, understandings, representations and warranties, both
written and oral, among the parties, with respect to the subject matter
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hereof other than the written confidentiality arrangements existing among the
parties hereto, which shall survive, and (b) shall not be assignable by
operation of law or otherwise.
SECTION 9.8. Definitions of "Subsidiary" and "Significant Subsidiary." (a)
When a reference is made in this Agreement to a subsidiary of a party, the term
"subsidiary" means any corporation or other organization whether incorporated or
unincorporated of which at least a majority of the securities or interests
having by the terms thereof ordinary voting power to elect at least a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its subsidiaries, or by such
party and one or more of its subsidiaries; provided, however, that except in the
context of references herein to financial statements of Grace and its
subsidiaries or as otherwise specified herein, (i) no member of the Grace-Conn.
Group shall be deemed to be a subsidiary of Grace, (ii) each member of the
Grace-Conn. Group (other than Grace-Conn.) shall be deemed to be a subsidiary of
Grace-Conn., (iii) no member of the NMC Group shall be deemed to be a subsidiary
of Grace-Conn. and (iv) each member of the NMC Group (other than Grace) shall be
deemed to be a subsidiary of Grace.
(b) When a reference is made in this Agreement to a significant subsidiary
of a party, the term "significant subsidiary" shall mean a subsidiary of such
party meeting the standards specified in clause (1) or (2) of the definition of
such term in Rule 1-02 of the SEC's Regulation S-X.
SECTION 9.9. Captions. The Article, Section and paragraph captions herein
are for convenience of reference only, do not constitute part of this Agreement
and shall not be deemed to limit or otherwise affect any of the provisions
hereof.
SECTION 9.10. Specific Performance. In the event of any actual or
threatened default in, or breach of, any of the terms, conditions and provisions
of this Agreement, the party or parties who are or are to be thereby aggrieved
shall have the right of specific performance and injunctive relief giving effect
to its or their rights under this Agreement, in addition to any and all other
rights and remedies at law or in equity, and all such rights and remedies shall
be cumulative. The parties agree that the remedies at law for any breach or
threatened breach, including monetary damages, are inadequate compensation for
any loss and that any defense in any action for specific performance that a
remedy at law would be adequate is waived.
SECTION 9.11. Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party.
SECTION 9.12. No Third-Party Beneficiaries. Nothing contained in this
Agreement, expressed or implied, is intended to confer upon any person or entity
other than the parties hereto and Grace-Conn., any benefit, right or remedies,
other than the provisions of Section 6.11 hereof.
SECTION 9.13. Fresenius AG Covenant. (i) As between Fresenius AG and
Grace, prior to the Effective Time, Fresenius AG shall cause the Fresenius USA
Board to adopt, approve and ratify this Agreement and the other Transaction
Agreements and to submit the Fresenius USA Merger to a vote of Fresenius USA
shareholders. As a result of the foregoing, without limiting any obligations of
Fresenius AG with respect to Fresenius USA hereunder, Fresenius USA will
undertake the obligations contained herein as a "party" hereto and make the
representations and warranties contained herein with respect to itself directly
to Grace. Fresenius AG will vote its shares of Fresenius USA in favor of the
Fresenius USA Merger.
(ii) All obligations of Fresenius USA herein shall also be obligations of
Fresenius AG.
(iii) Notwithstanding the foregoing, nothing in this provision shall be
construed to prevent the Special Committee of the Board of Directors of
Fresenius USA or any similar committee evaluating the Fresenius USA Merger from
making a determination with respect to the adequacy of the Aggregate Fresenius
USA
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Common Share Consideration and the entire fairness of the transaction to the
shareholders of Fresenius USA consistent with their fiduciary duties.
SECTION 9.14. Further Assurances. In addition to the actions specifically
provided for elsewhere in this Agreement, but subject to Section 9.1 hereof,
each of the parties hereto shall use reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things reasonably
necessary, proper or advisable under applicable laws, regulations and agreements
to consummate and make effective the transactions contemplated by this
Agreement. Without limiting the foregoing the parties will as promptly as
practicable (and in the case of this Agreement and the Contribution Agreement
within one week after the signing hereof in Germany or Switzerland) apply for
any notarial or similar registrations with respect to the transactions
contemplated hereby in foreign jurisdictions.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto on the date first hereinabove
written.
W. R. GRACE & CO.
By: /s/ Albert J. Costello
------------------------------------
Name:
Title:
FRESENIUS AG
By: /s/ Gerd Krick
------------------------------------
Name:
Title:
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ANNEX A
DEFINED TERMS
Acquisition Proposal: as defined in Section 6.3 hereof.
ADR: an American depositary receipt for Newco Ordinary Shares issued
pursuant to the ADR Facility.
ADR Facility: a facility for exchanging Newco Ordinary Shares for American
depositary receipts suitable for listing on the Exchange in form and substance
satisfactory to Grace and Fresenius AG.
ADR Registration Statement: the registration statement filed in connection
with the ADR Facility.
Affected Party: as defined in Section 6.7(d) hereof.
Affiliate: as defined in Rule 12b-2 under the Exchange Act.
Aggregate Fresenius USA Common Share Consideration: as defined in Section
4.2(e).
Aggregate Grace Common Share Consideration: Newco Ordinary Shares in an
amount that represents 44.8% of the number of Newco Ordinary Shares that will be
outstanding immediately following consummation of the Reorganization on a fully
diluted basis.
Agreement: as defined in the Preamble hereof.
Audited Financial Statements: the Grace Audited Financial Statements, the
Fresenius USA Audited Financial Statements and the FWD Business Audited
Financial Statements.
Change Party: as defined in Section 6.7(d) hereof.
Closing: as defined in Section 1.4 hereof.
Closing Date: as defined in Section 1.4 hereof.
Closing Subsidiaries: as defined in Section 5.5(c) (ii) hereof.
Code: the Internal Revenue Code of 1986, as amended.
Contracts: as defined in Section 5.1(d)(ii).
Contribution: as defined in Recital C hereof.
Contribution Agreement: as defined in Recital C hereof.
Current Subsidiaries: as defined in Section 5.5(c)(ii) hereof.
Debt: (a) all obligations for borrowed money, whether or not represented by
a note, bond or debenture, (b) off balance sheet financing including, without
limitation, off balance sheet receivables financings at NMC, (c) any obligation
created or arising under any conditional sale agreement or other title retention
agreement that is treated as a liability under a balance sheet prepared in
accordance with US GAAP, (d) the portion of the obligations with respect to
capital leases that is properly classified as a liability on a balance sheet in
accordance with US GAAP, (e) a reasonable estimate, to be agreed by Fresenius
and Grace, of the amounts payable in respect of Dissenting Shares of Fresenius
USA or Grace, as the case may be, (f) any obligation owed in respect of the
deferred purchase price of property (excluding any obligations incurred in the
ordinary course of business), and (g) the liquidation preference of, and accrued
dividends on, preferred stock outstanding at the Effective Time (other than NY
Preferred Shares).
Disclosure Letters: the Fresenius AG Disclosure Letter, the Fresenius USA
Disclosure Letter and the Grace Disclosure Letter.
Disclosure Letter Financial Statements: the Grace Disclosure Letter
Financial Statements, the Fresenius USA Disclosure Letter Financial Statements
and the FWD Business Disclosure Letter Financial Statements.
Dissenting Shares: Grace Common Dissenting Shares and Fresenius USA Common
Dissenting Shares.
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Distribution: as defined in Recital D hereof.
Distribution Agreement: as defined in Recital D hereof.
Effective Time: as defined in Section 1.3 hereof.
Employees: the Grace Employees and the Fresenius USA Employees.
Environmental Law: any federal, state, foreign or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, common law, legal doctrine, order, judgment, decree, injunction,
requirement or agreement with any governmental entity, (a) relating to the
protection, preservation or restoration of the environment (including, without
limitation, air, water vapor, surface water, groundwater, drinking water supply,
surface land, subsurface land, plant and animal life or any other natural
resource), or to human health or safety, or (b) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances, in each case
as amended and as now in effect.
ERISA: the Employee Retirement Income Security Act of 1974, as amended, and
the rules and regulations promulgated thereunder.
ERISA Affiliates: the Grace ERISA Affiliates and the Fresenius USA ERISA
Affiliates.
Excess Shares: as defined in Section 4.4(c) (ii) hereof.
Exchange: the New York Stock Exchange, Inc. or the NASDAQ Stock Market.
Exchange Act: the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
Exchange Agent: as defined in Section 4.4(a) hereof.
Fractional Securities Fund: as defined in Section 4.4(c) (ii) hereof.
Fresenius AG: as defined in the Preamble hereof.
Fresenius AG Disclosure Letter: as defined in Section 5.3 hereof.
Fresenius AG Plans: as defined in Section 5.4(m)(i) hereof.
Fresenius AG Restructuring: as defined in Section 5.5(d) hereof.
Fresenius AG Tax Matters Certificate: as defined in Section 5.3(g) hereof.
Fresenius Parties: as defined in Recital F hereof.
Fresenius USA: as defined in Recital F hereof.
Fresenius USA Articles of Organization: as defined in Section 2.3 hereof.
Fresenius USA Audited Financial Statements: as defined in Section 6.7(b)
hereof.
Fresenius USA Board: the Board of Directors of Fresenius USA.
Fresenius USA Common Dissenting Shares: Fresenius USA Common Shares as to
which rights of appraisal have been perfected pursuant to the MBCL.
Fresenius USA Common Share Equivalents: at any time, (i) the aggregate
number of Fresenius USA Common Shares outstanding at such time (other than any
Fresenius USA Common Share owned by Fresenius AG or its subsidiaries or Newco or
Fresenius USA or its subsidiaries or any Fresenius USA subsidiary or held in
Fresenius USA's treasury or any Fresenius USA Common Dissenting Share) plus (ii)
the aggregate number of Fresenius USA Options (other than any Fresenius USA
Option on an outstanding Fresenius USA Common Share).
Fresenius USA Common Shares: shares of common stock, par value $.01 per
share, of Fresenius USA.
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Fresenius USA Compensation Plans: as defined in Section 5.2(k)(i).
Fresenius USA Consideration Per Share: the amount into which each Fresenius
USA Common Share will be converted in the Fresenius USA Merger, to be calculated
as the quotient of the Aggregate Fresenius USA Common Share Consideration
divided by the number of Fresenius USA Common Share Equivalents outstanding
immediately prior to the Fresenius USA Merger.
Fresenius USA Disclosure Letter: as defined in Section 5.2 hereof.
Fresenius USA Disclosure Letter Balance Sheet: as defined in Section
5.2(e)(iii) hereof.
Fresenius USA Disclosure Letter Financial Statements: as defined in Section
5.2(e)(iii) hereof.
Fresenius USA Employees: as defined in Section 5.2(k)(i) hereof.
Fresenius USA ERISA Affiliate: as defined in Section 5.2(k)(iii) hereof.
Fresenius USA Exchange Ratio: the Fresenius USA Consideration Per Share,
expressed as the numerical ratio of Newco Ordinary Shares per Fresenius USA
Common Share.
Fresenius USA Intellectual Property: as defined in Section 5.2(p) hereof.
Fresenius USA Meeting: a duly convened meeting of holders of Fresenius USA
Common Shares and Fresenius USA Preferred Shares called to vote on and approve
the transactions contemplated hereby.
Fresenius USA Merger: as defined in Recital F hereof.
Fresenius USA Merger Sub: as defined in Recital F hereof.
Fresenius USA Option: as defined in Section 4.4(i) hereof.
Fresenius USA Plans: as defined in Section 5.2(k)(ii) hereof.
Fresenius USA Preferred Shares: shares of preferred stock, par value $1.00
per share, of Fresenius USA.
Fresenius USA Proxy Statement: the proxy statement (including all proxy
solicitation materials constituting a part thereof) to be mailed to the holders
of Fresenius USA Common Shares and Fresenius USA Preferred Shares in connection
with the Fresenius USA Meeting.
Fresenius USA Schedule 14A: the Schedule 14A filed by Fresenius USA with
the SEC including the Fresenius USA Proxy Statement.
Fresenius USA Series F Preferred Shares: Fresenius USA Preferred Shares
designated as Series F Series Convertible Preferred Stock.
Fresenius USA Stock Plans: as defined in Section 5.2(a) hereof.
Fresenius USA Surviving Corporation: as defined in Section 1.2(c) hereof.
FWD Business: as defined in Section 5.5(a) hereof.
FWD Business Assets: as defined in Section 5.5(b) hereof.
FWD Business Audited Financial Statements: as defined in Section 6.7(c)
hereof.
FWD Business Disclosure Letter: as defined in Section 5.4 hereof.
FWD Business Disclosure Letter Balance Sheet: as disclosed in Section
5.4(d)(i) hereof.
FWD Business Disclosure Letter Financial Statements: as defined in Section
5.4(d)(i) hereof.
FWD Business Intellectual Property: as defined in Section 5.4(o) hereof.
FWD Business Subsidiary: as defined in Section 5.5(c) hereof.
German GAAP: German generally accepted accounting principles consistently
applied.
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Governmental Entity: as defined in Section 5.1(d)(i) hereof.
Grace: as defined in the Preamble hereof.
Grace Amendment: as defined in Recital F hereof.
Grace Audited Financial Statements: as defined in Section 6.7(a) hereof.
Grace Board: the Board of Directors of Grace.
Grace Certificate of Incorporation: as defined in Section 2.1 hereof.
Grace Class A Preferred Shares: Grace Preferred Shares designated as Class
A.
Grace Class B Preferred Shares: Grace Preferred Shares designated as Class
B.
Grace Class C Preferred Shares: Grace Preferred Shares designated as Class
C.
Grace Common Dissenting Shares: Grace Common Shares as to which rights of
appraisal have been perfected pursuant to the NYBCL.
Grace Common Share Equivalents: at any time, (i) the aggregate number of
Grace Common Shares outstanding at such time (other than any Grace Common Share
owned by Fresenius AG or its subsidiaries or Fresenius USA or its subsidiaries
or any Grace subsidiary or held in Grace's treasury or any Grace Common
Dissenting Share) plus (ii) the aggregate number of Grace Options (other than
any Grace Option on an outstanding Grace Common Share).
Grace Common Shares: shares of common stock, par value $1.00 per share, of
Grace (including the associated Grace Rights).
Grace Compensation Plans: as defined in Section 5.1(k)(i) hereof.
Grace-Conn.: as defined in Recital D hereof.
Grace-Conn. Business: as defined in the Distribution Agreement.
Grace-Conn. Group: as defined in the Distribution Agreement.
Grace-Conn. Registration Statement: the registration statement filed by
Grace-Conn. with the SEC in connection with the Distribution.
Grace Consideration Per Share: Newco Ordinary Shares in the amount into
which each Grace Common Share (and associated Grace Right) will be converted in
the Grace Merger, to be calculated as the quotient of the Aggregate Grace Common
Share Consideration divided by the number of Grace Common Share Equivalents
outstanding immediately prior to the Grace Merger after giving effect to the
Distribution.
Grace Disclosure Letter: as defined in Section 5.1 hereof.
Grace Disclosure Letter Balance Sheet: as defined in Section 5.1(e)(iii)
hereof.
Grace Disclosure Letter Financial Statements: as defined in Section
5.1(e)(iii) hereof.
Grace Employees: as defined in Section 5.1(k)(i) hereof.
Grace ERISA Affiliate: as defined in Section 5.1(k)(iii) hereof.
Grace Exchange Ratio: the Grace Consideration Per Share, expressed as the
numerical ratio of Newco Ordinary Shares per Grace Common Share.
Grace Meeting: a duly convened meeting of holders of Grace Common Shares
and Grace Preferred Shares called to vote on and approve the transactions
contemplated hereby.
Grace Merger: as defined in Recital F hereof.
Grace Merger Sub: as defined in Recital F hereof.
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Grace Option: as defined in Section 4.4(i) hereof.
Grace Preferred Shares: shares of preferred stock, par value $1.00 per
share, of Grace (other than NY Preferred Shares).
Grace Proxy Statement: the proxy statement (including all proxy
solicitation materials constituting a part thereof) to be mailed to the holders
of Grace Common Shares and Grace Preferred Shares in connection with the Grace
Meeting.
Grace Rights: the common stock purchase rights of Grace issued pursuant to
the Rights Agreement.
Grace Rights Agreement: the Amended and Restated Rights Agreement, dated as
of June 7, 1990, between Grace and Manufacturers Hanover Trust Company, as
supplemented and amended.
Grace Schedule 14A: the Schedule 14A filed by Grace with the SEC including
the Grace Proxy Statement.
Grace 6% Preferred Shares: Grace Preferred Shares designated as 6%.
Grace Stock Plans: as defined in Section 5.1(a) hereof.
Grace Surviving Corporation: as defined in Section 1.2(b) hereof.
Grace Tax Matters Certificate: as defined in Section 5.1(p) hereof.
Hazardous Substance: any substance presently listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, under any Environmental Law, whether by type or by quantity,
including any substance containing any such substance as a component.
Higher Offer: as defined in Section 6.3 hereof.
HSR Act: the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
IRS: the United States Internal Revenue Service.
Lease: as defined in Recital D hereof.
knowledge of executive officers: shall mean, in the case of Grace, the
knowledge of each officer of Grace subject to Section 16 of the Exchange Act
pursuant to Rule 16a-2 under the Exchange Act.
Massachusetts Certificate: as defined in Section 1.3 hereof.
material: with respect to any party, material to such party and its
subsidiaries, taken as a whole; provided, however, that when determining
materiality with respect to Grace, only that property, business, financial
condition, results of operations or prospects which are included in or
exclusively related to the NMC Business shall be included.
Material Adverse Effect: with respect to any party, an effect which would
be materially adverse to the properties, business, financial condition, results
of operations or prospects of such party and its subsidiaries taken as a whole;
provided, however, that when determining Material Adverse Effect with respect to
Grace, only that property, business, financial condition, results of operations
or prospects which are included in or exclusively relate to the NMC Business
shall be included.
MBCL: the Massachusetts Business Corporation Law.
Meetings: the Grace Meeting and the Fresenius USA Meeting.
Mergers: as defined in Recital F hereof.
NMC: National Medical Care, Inc., a Delaware corporation and an indirect
wholly owned subsidiary of Grace.
NMC Business: as defined in the Distribution Agreement.
NMC Business Intellectual Property: as defined in Section 5.1(r) hereof.
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NMC Group: as defined in the Distribution Agreement.
Newco Board: the Supervisory Board of Newco.
Newco Charter Documents: as defined in Recital B hereof.
Newco Ordinary Share Certificate: certificates for Newco Ordinary Shares.
Newco Ordinary Shares: ordinary shares in the capital of Newco.
Newco Pooling Agreement: as defined in Recital B hereof.
Newco Registration Statement: the registration statement filed with the SEC
in connection with the issuance of Newco Ordinary Shares in the Mergers.
New York Certificate: as defined in Section 1.3 hereof.
NYBCL: the New York Business Corporation Law.
NY Preferred Registration Statement: the registration statement filed with
the SEC in connection with the issuance of NY Preferred Shares in the
Recapitalization.
NY Preferred Shares: shares of a new series of preferred stock of Grace to
be issued in the Recapitalization having the terms set forth in Exhibit C
hereto.
Old Certificates: Old Grace Certificates and Old Fresenius USA
Certificates.
Old Fresenius USA Certificate: a certificate for Fresenius USA Common
Shares or Fresenius USA Preferred Shares.
Old Grace Certificate: a certificate for Grace Common Shares.
Other Agreements: (i) as defined in the Contribution Agreement plus (ii) as
defined in the Distribution Agreement.
Proxy Statements: the Fresenius USA Proxy Statement and the Grace Proxy
Statement.
Recapitalization: as defined in Recital E hereof.
Registration Statements: the Newco Registration Statement, the Grace-Conn.
Registration Statement, the NY Preferred Registration Statement and the ADR
Registration Statement.
Reorganization: the Contribution, the Recapitalization, the Distribution
and the Mergers.
Reorganization Agreement: as defined in the Preamble hereof.
Representatives: with respect to any party, such party's officers,
employees, counsel, accountants and other authorized representatives.
Schedules 14A: the Grace Schedule 14A and the Fresenius USA Schedule 14A.
SEC: the Securities and Exchange Commission.
SEC Documents: with respect to any party, all filings made by such party or
its Subsidiaries with the SEC since December 31, 1994, including notes,
schedules, amendments and exhibits thereto.
Securities Act: the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
significant subsidiary: as defined in Section 9.9(b) hereof.
subsidiary: as defined in Section 9.9(a) hereof.
Surviving Corporations: the Grace Surviving Corporation and the Fresenius
USA Surviving Corporation.
Takeover Statute: as defined in Section 5.1(n) hereof.
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Transaction Agreements: the Reorganization Agreement, the Newco Pooling
Agreement, the Distribution Agreement, the Contribution Agreement and the Other
Agreements.
US GAAP: United States generally accepted accounting principles
consistently applied.
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EXHIBIT A TO APPENDIX A
DISTRIBUTION AGREEMENT
BY AND AMONG
W. R. GRACE & CO.,
W. R. GRACE & CO.-CONN.,
AND
FRESENIUS AG
DATED AS OF FEBRUARY 4, 1996
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
I. Definitions................................................................... AA-4
1.01 General.............................................................. AA-4
1.02 References to Time................................................... AA-7
II. Certain Transactions Prior to the Distribution Date........................... AA-7
2.01 Certificate of Incorporation; By-laws; Rights Plan................... AA-7
2.02 Issuance of Stock.................................................... AA-7
2.03 Other Agreements..................................................... AA-8
2.04 Capital Structure.................................................... AA-8
2.05 Registration and Listing............................................. AA-8
2.06 Grace-Conn. Board.................................................... AA-8
2.07 Mergers and Transfers................................................ AA-8
2.08 Intercompany Accounts and Distribution Payments...................... AA-8
III. The Distribution.............................................................. AA-9
3.01 Record Date and Distribution Date.................................... AA-9
3.02 The Agent............................................................ AA-9
3.03 Delivery of Share Certificates to the Agent.......................... AA-9
3.04 The Distribution..................................................... AA-9
IV. Survival and Indemnification.................................................. AA-9
4.01 Survival of Agreements............................................... AA-9
4.02 Indemnification...................................................... AA-9
4.03 Procedures for Indemnification for Third-Party Claims................ AA-10
4.04 Remedies Cumulative.................................................. AA-11
4.05 Compromise of Investigations......................................... AA-11
V. Certain Additional Covenants.................................................. AA-11
5.01 Notices to Third Parties............................................. AA-11
5.02 Licenses and Permits................................................. AA-11
5.03 Intercompany Agreements.............................................. AA-11
5.04 Guarantee Obligations................................................ AA-12
5.05 Further Assurances................................................... AA-12
5.06 Representations and Warranties of Grace-Conn......................... AA-12
VI. Access to Information......................................................... AA-13
6.01 Provision of Corporate Records....................................... AA-13
6.02 Access to Information................................................ AA-13
6.03 Production of Witnesses.............................................. AA-14
6.04 Retention of Records................................................. AA-14
6.05 Confidentiality...................................................... AA-14
6.06 Cooperation with Respect to Government Reports and Filings........... AA-15
VII. No Representations or Warranties.............................................. AA-15
7.01 No Representations or Warranties..................................... AA-15
VIII. Miscellaneous................................................................. AA-16
8.01 Conditions to Obligations............................................ AA-16
8.02 Use of Grace Name and Mark........................................... AA-16
8.03 Complete Agreement................................................... AA-16
8.04 Expenses............................................................. AA-16
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
8.05 Governing Law........................................................ AA-16
8.06 Notices.............................................................. AA-16
8.07 Amendment and Modification........................................... AA-17
8.08 Successors and Assigns; No Third-Party Beneficiaries................. AA-17
8.09 Counterparts......................................................... AA-18
8.10 Interpretation....................................................... AA-18
8.11 Severability......................................................... AA-18
8.12 References; Construction............................................. AA-18
8.13 Termination.......................................................... AA-18
SIGNATURES............................................................................ AA-19
</TABLE>
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DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (this "Agreement"), dated February 4, 1996, by
and between W. R. Grace & Co., a New York corporation ("Grace"), and W. R. Grace
& Co.-Conn., a Connecticut corporation and a wholly owned subsidiary of Grace
("Grace-Conn."), and Fresenius AG, an Aktiengesellschaft organized under the
laws of the Federal Republic of Germany ("Fresenius AG").
RECITALS
A. The Reorganization Agreement. Simultaneously herewith, Grace and
Fresenius AG are entering into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") and, prior to the Effective Time, intend to
consummate the transactions contemplated hereby.
B. The Contribution. Prior to the Effective Time, Fresenius AG intends to
contribute its worldwide dialysis business to SP, as provided in the
Contribution Agreement, and to retain and lease to SP certain real property and
buildings in the Federal Republic of Germany pursuant to a lease consistent with
the terms set forth in Exhibit B to the Contribution Agreement and to retain and
license to Newco its name and certain derived marks pursuant to a license
consistent with the terms set forth in Exhibit C to the Contribution Agreement.
C. Newco. In connection with the Contribution, Fresenius AG intends that
SP shall convert to an Aktiengesellschaft, pursuant to German law, and to become
"Newco," consistent with the terms of the Reorganization Agreement.
D. The Distribution. Immediately prior to the Effective Time, Grace
intends to transfer to (or retain in) Grace-Conn. all non-healthcare assets and
liabilities, its interests in the Amicon bioseparations business and GN
Holdings, Inc. and certain other assets, as contemplated by this Agreement, and
to effect a distribution to its common shareholders of all of its equity
interest in Grace-Conn.
E. The Recapitalization. Following the Distribution and immediately prior
to the Effective Time, Grace intends to consummate the Recapitalization in which
each holder of a Grace Common Share shall hold, immediately thereafter, a Grace
Common Share and one one-hundredth of a NY Preferred Share.
F. The Mergers. At the Effective Time, the parties intend to effect a
merger of a wholly owned New York corporate subsidiary of Newco with and into
Grace, with Grace being the surviving corporation. Also at the Effective Time,
the parties intend to effect a merger of a wholly owned Massachusetts corporate
subsidiary of Newco with and into Fresenius USA, with Fresenius USA being the
surviving corporation.
G. Financing. It is the intention of the parties hereto that, prior to the
Distribution: (i) Grace and Grace-Conn. shall use reasonable efforts to cause
NMC to arrange new credit facilities so that the transactions contemplated by
the Transaction Agreements may be consummated; (ii) Fresenius AG shall use
reasonable efforts to arrange new credit facilities for the FWD Business so that
the transactions contemplated by the Transaction Agreements may be consummated;
and (iii) the parties shall cooperate with one another with respect to the
foregoing.
H. Intention of the Parties. It is the intention of the parties to the
Reorganization Agreement that for United States federal income tax purposes (a)
the Distribution shall qualify as a tax-free distribution under the Code, (b)
each of the Mergers shall qualify as a "reorganization" within the meaning of
Section 368(a) of the Code, (c) the Contribution shall qualify as a tax-free
exchange under the Code and (d) the Recapitalization shall be tax-free to Grace
under the Code.
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NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 General. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
Affiliate: with respect to any specified Person, a Person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such specified Person; provided, however, that for
purposes of this Agreement, no member of either Group shall be deemed to be an
Affiliate of any member of the other Group.
Agent: the distribution agent to be appointed by Grace to distribute the
shares of Grace-Conn. Common Stock pursuant to the Distribution.
Agreement: as defined in the preamble hereof.
Asset: any and all assets and properties, tangible or intangible,
including, without limitation, the following: (i) cash, notes and accounts and
notes receivable (whether current or non-current); (ii) certificates of deposit,
banker's acceptances, stock, debentures, evidences of indebtedness, certificates
of interest or participation in profit-sharing agreements, collateral-trust
certificates, preorganization certificates or subscriptions, transferable
shares, investment contracts, voting-trust certificates, fractional undivided
interests in oil, gas or other mineral rights, puts, calls, straddles, options
and other securities of any kind; (iii) intangible property rights, inventions,
discoveries, know-how, U.S. and foreign patents and patent applications, trade
secrets, confidential information, registered and unregistered trademarks,
service marks, service names, trade styles and trade names and associated
goodwill; statutory, common law and registered copyrights; applications for any
of the foregoing, rights to use the foregoing and other rights in, to and under
the foregoing; (iv) rights under leases, contracts, licenses, permits,
distribution arrangements, sales and purchase agreements, other agreements and
business arrangements; (v) real estate and buildings and other improvements
thereon; (vi) leasehold improvements, fixtures, trade fixtures, machinery,
equipment (including transportation and office equipment), tools, dies and
furniture; (vii) office supplies, production supplies, spare parts, other
miscellaneous supplies and other tangible property of any kind; (viii) computer
equipment and software; (ix) raw materials, work-in-process, finished goods,
consigned goods and other inventories; (x) prepayments or prepaid expenses; (xi)
claims, causes of action, choses in action, rights under express or implied
warranties, rights of recovery and rights of setoff of any kind; (xii) the right
to receive mail, payments on accounts receivable and other communications;
(xiii) lists of customers, records pertaining to customers and accounts,
personnel records, lists and records pertaining to customers, suppliers and
agents, and books, ledgers, files and business records of every kind; (xiv)
advertising materials and other printed or written materials; (xv) goodwill as a
going concern and other intangible properties; (xvi) employee contracts,
including any rights thereunder to restrict an employee from competing in
certain respects; and (xvii) licenses and authorizations issued by any
governmental authority.
Business: the Grace-Conn. Business or the NMC Business.
Code: the Internal Revenue Code of 1986, as amended, or any successor
legislation.
Contribution: as defined in the Reorganization Agreement.
Contribution Agreement: as defined in the Reorganization Agreement.
Debt: as defined in the Reorganization Agreement.
Distribution: the distribution of Grace-Conn. Common Stock to holders of
shares of Grace Common Stock to be effected pursuant to Article III on the basis
of one share of Grace-Conn. Common Stock for each share of Grace Common Stock
held of record as of the Record Date.
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Distribution Date: the date as of which the Distribution shall be effected,
to be determined by the Board of Directors of Grace consistent with the
Reorganization Agreement.
Effective Time: as defined in the Reorganization Agreement.
Environmental Law: as defined in the Reorganization Agreement.
Exchange Act: the Securities Exchange Act of 1934, as amended, together
with the rules and regulations promulgated thereunder.
Foreign Exchange Rate: with respect to any currency other than United
States dollars as of any date, the rate on such date at which such currency may
be exchanged for United States dollars as quoted in The Wall Street Journal.
Fresenius: each of Fresenius AG and Fresenius USA.
Fresenius AG: as defined in the preamble to this Agreement.
Fresenius USA: as defined in the Reorganization Agreement.
FWD Business: as defined in the Reorganization Agreement.
Grace: as defined in the preamble to this Agreement.
Grace Common Stock: the common stock, par value $1.00 per share, of Grace.
Grace-Conn.: as defined in the preamble to this Agreement.
Grace-Conn. Assets: all of the Assets owned by Grace or its Subsidiaries
immediately prior to the Distribution Date, other than any NMC Assets.
Grace-Conn. Business: all of the businesses and operations conducted by
Grace and its Subsidiaries at any time, whether prior to, on or after the
Distribution Date, other than the NMC Business.
Grace-Conn. Common Stock: the common stock of Grace-Conn., together with
the Grace-Conn. Rights.
Grace-Conn. Group: Grace-Conn. and the Grace-Conn. Subsidiaries.
Grace-Conn. Indemnitees: Grace-Conn., each Affiliate of Grace-Conn. and
each of their respective Representatives and each of the heirs, executors,
successors and assigns of any of the foregoing.
Grace-Conn. Rights: stock purchase rights of Grace-Conn.
Grace-Conn. Subsidiaries: all direct and indirect Subsidiaries of Grace,
other than NMC and any NMC Subsidiary, and all Transferred Companies.
Grace Tax Sharing Agreement: a tax sharing agreement between Grace and
Grace-Conn. substantially in the form attached hereto as Exhibit B, with such
changes as may be mutually satisfactory to Grace, Grace-Conn. and Fresenius.
Group: the NMC Group or the Grace-Conn. Group.
Indemnifiable Losses: all losses, Liabilities, damages, claims, demands,
judgments or settlements of any nature or kind, known or unknown, fixed,
accrued, absolute or contingent, liquidated or unliquidated, including all
reasonable costs and expenses (legal, accounting or otherwise as such costs are
incurred) relating thereto, suffered (and not actually reimbursed by insurance
proceeds) by an Indemnitee, including any reasonable costs or expenses of
enforcing any indemnity hereunder.
Indemnifying Party: a Person who or which is obligated under this Agreement
to provide indemnification.
Indemnitee: a Person who or which may seek indemnification under this
Agreement.
Indemnity Payment: an amount that an Indemnifying Party is required to pay
to or in respect of an Indemnitee pursuant to Article IV.
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Information: all records, books, contracts, instruments, computer data and
other data and information.
Information Statement: the information statement to be included in the
Registration Statement and sent to Grace shareholders in connection with the
Distribution.
Liabilities: all debts, liabilities and obligations, whether absolute or
contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, and whether or not the same would
properly be reflected on a balance sheet.
Litigation Matters: actual, threatened or future litigations,
investigations, claims or other legal matters that have been or may be asserted
against, or otherwise adversely affect, NMC and/or Grace-Conn. (or members of
either Group).
Material Adverse Effect: as defined in the Reorganization Agreement.
NMC: National Medical Care, Inc., a Delaware corporation and an indirect
wholly owned subsidiary of Grace.
NMC Assets: (i) all of the Assets owned by Grace or its Subsidiaries
immediately prior to the Distribution Date and predominantly used or useful in
or predominantly relating to the NMC Business, excluding items to be retained by
or transferred to any member of the Grace-Conn. Group pursuant to the
Reorganization Agreement or any Other Agreement, and (ii) all Assets that have
been or are to be transferred to any member of the NMC Group pursuant to the
Reorganization Agreement or any Other Agreement; provided that all cash and
marketable securities held by any member of the NMC Group prior to the
Distribution shall be Grace-Conn. Assets.
NMC Business: all of the worldwide health care businesses and operations
conducted by Grace and its Subsidiaries at any time, whether prior to, on or
after the Distribution Date, other than the Transferred Operations.
NMC Group: Grace, NMC and the NMC Subsidiaries.
NMC Indemnitees: Newco, Grace, NMC, each Affiliate of NMC and each of their
respective Representatives and each of the heirs, executors, successors and
assigns of any of the foregoing.
NMC Subsidiaries: all direct and indirect Subsidiaries of Grace through
which Grace conducts the NMC business, other than Transferred Companies.
Newco: as defined in the Reorganization Agreement.
NY Preferred Registration Statement: as defined in the Reorganization
Agreement.
NY Preferred Share: as defined in the Reorganization Agreement.
Other Agreements: an employee benefits agreement, restructuring agreements,
an insurance procedures agreement, the Grace Tax Sharing Agreement and the other
agreements entered into or to be entered into in connection with the
Distribution as contemplated by Section 2.03.
Person: an individual, a partnership, a joint venture, a corporation, a
limited liability company, a trust, an unincorporated organization or a
government or any department or agency thereof.
Privileged Information: with respect to either Group, Information regarding
a member of such Group, or any of its operations, Assets or Liabilities (whether
in documents or stored in any other form or known to its employees or agents)
that is or may be protected from disclosure pursuant to the attorney-client
privilege, the work product doctrine or other applicable privileges, that a
member of the other Group may come into possession of or obtain access to
pursuant to this Agreement or otherwise.
Proxy Statement: the Grace proxy statement provided for in the
Reorganization Agreement.
Recapitalization: as defined in the Reorganization Agreement.
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Record Date: the moment immediately prior to the close of business on the
date to be determined by the Board of Directors of Grace consistent with the
Reorganization Agreement as the record date for determining shareholders of
Grace entitled to receive the Distribution.
Registration Statement: a registration statement on Form 10 to effect the
registration of the Grace-Conn. Common Stock pursuant to the Exchange Act.
Reorganization Agreement: as defined in the recitals to this Agreement.
Representative: with respect to any Person, any of such Person's directors,
officers, employees, agents, consultants, advisors, accountants, attorneys and
representatives.
SEC: the Securities and Exchange Commission.
Securities Act: the Securities Act of 1933, as amended, together with the
rules and regulations promulgated thereunder.
SP: as defined in the Contribution Agreement.
Subsidiary: with respect to any specified Person, (i) any corporation or
other legal entity of which such Person or any of its subsidiaries controls or
owns, directly or indirectly, more than 50% of the stock or other equity
interest entitled to vote on the election of members to the board of directors
or similar governing body and (ii) any corporation, partnership or other
business entity, in which such Person has owned or shall own any equity interest
or other investment and which predominantly relates to the business and
operations conducted by such Person's Group.
Tax: as defined in the Grace Tax Sharing Agreement.
Third-Party Claim: any claim, suit, derivative suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency or commission or any arbitration tribunal
asserted by a Person who or which is neither a party hereto nor an Affiliate of
a party hereto.
Transferred Companies: Amicon, Inc., GN Holdings, Inc. and its Subsidiaries
and the other Subsidiaries of Grace which conduct the business of Amicon.
Transferred Operations: the businesses, operations, Assets and Liabilities
of the Transferred Companies.
SECTION 1.02 References To Time. All references in this Agreement to times
of the day shall be to New York City time.
ARTICLE II
CERTAIN TRANSACTIONS PRIOR TO THE DISTRIBUTION DATE
SECTION 2.01 Certificate of Incorporation; By-laws; Rights Plan. Prior to
the Distribution Date, Grace-Conn. may be reorganized (through merger, asset
transfer or other reorganization transaction) such that Grace-Conn. shall be a
Delaware corporation or a subsidiary of a Delaware holding company or its Assets
transferred in their entirety to a Delaware corporation, in which case all
references to Grace-Conn. herein shall include any such successor corporation or
holding company. In addition, prior to the Distribution Date, the parties hereto
shall take all action necessary so that, at the Distribution Date, Grace-Conn.'s
name shall be "W. R. Grace & Co."; the Certificate of Incorporation and By-laws
of Grace-Conn. shall be amended as specified by Grace prior to the Distribution
Date; and Grace-Conn. shall adopt a rights plan in the form as specified by
Grace prior to the Distribution Date.
SECTION 2.02 Issuance of Stock. Prior to the Distribution Date, the
parties hereto shall take all steps necessary so that, prior to the
Distribution, the number of shares of Grace-Conn. Common Stock outstanding and
held by Grace shall equal the number of shares of Grace Common Stock outstanding
on the Record Date.
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SECTION 2.03 Other Agreements. Each of Grace and Grace-Conn. shall enter
into, or cause the appropriate members of the Group of which it is a member to
enter into, the Tax Sharing Agreement and Other Agreements as may be advisable
in connection with the Distribution including, without limitation, agreements
with respect to employee benefits, restructuring, insurance procedures and other
matters, all such Other Agreements to be on terms acceptable to Grace and
Fresenius prior to the Distribution Date.
SECTION 2.04 Capital Structure. (a) It is intended that, prior to the
Distribution, each of Grace and/or the NMC Group, on the one hand, and the
Grace-Conn. Group, on the other hand, shall obtain new credit facilities or
issue new debt instruments or securities on terms satisfactory to Grace, and to
the extent necessary to permit and enable the Distribution and the other
transactions contemplated hereby, including, without limitation, the
transactions contemplated by this Section and Section 2.08 below, to be
consummated consistent with the Reorganization Agreement; and each of the
parties hereto agrees that it shall use reasonable efforts, and shall cooperate
with the other party's efforts, to effect the foregoing.
(b) Prior to or concurrent with the Distribution, Grace and/or NMC shall
take all action including, without limitation, the incurrence of additional debt
to be arranged in connection with the Reorganization and the payment of cash, as
provided in Section 2.08, so that, upon and giving effect to the consummation of
the Distribution, Grace's consolidated Debt shall be of an aggregate amount
consistent with the Reorganization Agreement.
SECTION 2.05 Registration and Listing. Prior to the Distribution Date:
(a) The parties shall take such efforts regarding the Registration
Statement and the Proxy Statement, as is provided in the Reorganization
Agreement. After the Registration Statement becomes effective, Grace shall
cause the Information Statement to be delivered to all holders of record of
Grace Common Stock as of the Record Date.
(b) The parties hereto shall use reasonable efforts to take all such
action as may be necessary or appropriate under state securities and blue
sky laws in connection with the transactions contemplated by this
Agreement.
(c) Grace-Conn. shall prepare, and Grace-Conn. shall file and seek to
make effective, an application for the listing of the Grace-Conn. Common
Stock on the NYSE, subject to official notice of issuance, or for the
inclusion of quotations for the Grace-Conn. Common Stock on the Nasdaq
Stock Market.
(d) The parties hereto shall cooperate in preparing, filing with the
SEC and causing to become effective any registration statements or
amendments thereto which are necessary or appropriate in order to effect
the transactions contemplated hereby or to reflect the establishment of, or
amendments to, any employee benefit plans contemplated hereby or by the
Employee Benefits Agreement requiring registration under the Securities
Act.
SECTION 2.06 Grace-Conn. Board. Prior to the Distribution Date, the
parties hereto shall take all steps necessary so that, effective immediately
after the Distribution, the Board of Directors of Grace-Conn. shall be comprised
of those individuals so named in the Information Statement.
SECTION 2.07 Mergers and Transfers. Prior to or as of the Distribution
Date, Grace and Grace-Conn. shall cause to be consummated the transactions that
are to take place prior to or as of the Distribution Date pursuant to the Other
Agreements and internal reorganization transactions as may be necessary or
advisable, and consistent with the Reorganization Agreement, in connection with
the Distribution (including, without limitation, the transfer to Grace-Conn. of
the Grace-Conn. Preferred Stock currently held by Grace) so that, at the
Effective Time, all NMC Assets and the NMC Business are owned by the NMC Group.
SECTION 2.08 Intercompany Accounts and Distribution Payments. Prior to or
as of the Distribution Date, the parties shall pay or otherwise settle
intercompany accounts between members of the Grace-Conn. Group and members of
the NMC Group, and Grace or its Subsidiary shall make a cash payment to Grace-
Conn., all as more specifically provided in Schedule 2.08.
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ARTICLE III
THE DISTRIBUTION
SECTION 3.01 Record Date and Distribution Date. Subject to the
satisfaction of the conditions set forth in Section 8.01(a), the Board of
Directors of Grace, in its sole discretion and consistent with the
Reorganization Agreement, shall establish the Record Date and the Distribution
Date and any appropriate procedures in connection with the Distribution.
SECTION 3.02 The Agent. Prior to the Distribution Date, Grace shall enter
into an agreement with the Agent providing for, among other things, the payment
of the Distribution to the holders of Grace Common Stock in accordance with this
Article III.
SECTION 3.03 Delivery of Share Certificates to the Agent. Prior to the
Distribution Date, Grace shall deliver to the Agent a share certificate
representing all of the outstanding shares of Grace-Conn. Common Stock to be
distributed in connection with the payment of the Distribution. After the
Distribution Date, upon the request of the Agent, Grace-Conn. shall provide all
certificates for shares of Grace-Conn. Common Stock that the Agent shall require
in order to effect the Distribution.
SECTION 3.04 The Distribution. Subject to the terms and conditions of this
Agreement, Grace shall instruct the Agent to distribute, as of the Distribution
Date, one share of Grace-Conn. Common Stock in respect of each share of Grace
Common Stock held by holders of record of Grace Common Stock on the Record Date.
ARTICLE IV
SURVIVAL AND INDEMNIFICATION
SECTION 4.01 Survival of Agreements. All covenants and agreements of the
parties hereto contained in this Agreement shall survive the Distribution Date.
SECTION 4.02 Indemnification. (a) Except as specifically otherwise
provided in the Other Agreements, Grace-Conn. shall indemnify, defend and hold
harmless the NMC Indemnitees from and against (1) all Indemnifiable Losses of
Grace (including, without limitation, Indemnifiable Losses of the Grace-Conn.
Group), whether such Indemnifiable Losses relate to events, occurrences or
circumstances occurring or existing, or whether such Indemnifiable Losses are
asserted, before or after the Distribution Date, including, without limitation,
Indemnifiable Losses relating to the manufacture or sale of asbestos-containing
materials by any Grace-Conn. Business or relating to any liability of the
Grace-Conn. Business under Environmental Law, other than those Indemnifiable
Losses arising from or relating to the NMC Business; (2) all Indemnifiable
Losses arising out of or based upon any untrue statement or alleged untrue
statement of a material fact, or omission or alleged omission to state a
material fact required to be stated, in the Registration Statement, the NY
Preferred Registration Statement or the Proxy Statement or any preliminary or
final form thereof or any amendment thereto, or necessary to make the statements
therein not misleading, except that such indemnifications shall not apply to any
Indemnifiable Losses that arise out of or are based upon any statement or
omission, or alleged statement or omission, in any of the portions of the
Registration Statement, the NY Preferred Registration Statement or the Proxy
Statement, or any preliminary or final form thereof or any amendment thereto,
that are supplied by Fresenius; (3) all Indemnifiable Losses arising from or
relating to all existing litigation brought by pre-Reorganization shareholders
of Grace acting in such capacity and all litigation to be brought by
pre-Reorganization shareholders of Grace acting in such capacity and relating to
the Reorganization; and (4) all Indemnifiable Losses arising out of or relating
to the new credit facilities, debt instruments and securities of the Grace-Conn.
Group referred to in Section 2.04 above.
(b) Except as specifically otherwise provided in the Other Agreements,
Grace shall indemnify, defend and hold harmless the Grace-Conn. Indemnitees from
and against (1) all Indemnifiable Losses arising from or relating to the NMC
Business, whether such Indemnifiable Losses relate to events, occurrences or
circumstances occurring or existing, or whether such Indemnifiable Losses are
asserted, before or after the Distribution Date, including, without limitation,
all Indemnifiable Losses relating to compliance or non-
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compliance with United States food and drug law, medical and medicare billing
and reimbursement law and other health care matters and all Indemnifiable Losses
arising from or relating to all aspects of any ongoing investigations of the NMC
Business by the Office of the Inspector General of the United States Department
of Health and Human Services (and the various United States Attorneys' Offices),
by the United States Attorney's Office for the District of New Jersey, by the
United States Attorney's Office for the District of Virginia and by the United
States Food and Drug Administration; (2) all Indemnifiable Losses arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact, or omission or alleged omission to state a material fact required to be
stated, in any portion of the Registration Statement, the NY Preferred
Registration Statement or the Proxy Statement supplied by Fresenius, or any
preliminary or final form thereof or any amendment thereto, or necessary to make
the statements therein not misleading; and (3) all Indemnifiable Losses arising
out of or relating to the new credit facilities, debt instruments and securities
of Grace and the NMC Group referred to in Section 2.04 above.
(c) If any Indemnity Payment required to be made hereunder or under any
Other Agreement is denominated in a currency other than United States dollars,
such payment shall be made in United States dollars and the amount thereof shall
be computed using the Foreign Exchange Rate for such currency determined as of
the date that notice of the claim with respect which to such Indemnity Payment
is made is given by or on behalf of the Indemnitee to Grace or Grace-Conn., as
the case may be.
(d) Notwithstanding anything to the contrary set forth herein,
indemnification relating to any arrangements between any member of the NMC Group
and any member of the Grace-Conn. Group (or any unit of the Grace-Conn.
Business) for the provision after the Distribution of goods and services in the
ordinary course shall be governed by the terms of such arrangements and not by
this Section.
SECTION 4.03 Procedures For Indemnification For Third-Party Claims. (a)
Grace-Conn. shall, and shall cause the other Grace-Conn. Indemnitees to, notify
Grace in writing promptly after learning of any Third-Party Claim for which any
Grace-Conn. Indemnitee intends to seek indemnification from Grace under this
Agreement. Grace shall, and shall cause the other NMC Indemnitees to, notify
Grace-Conn. in writing promptly after learning of any Third-Party Claim for
which any NMC Indemnitee intends to seek indemnification from Grace-Conn. under
this Agreement. The failure of any Indemnitee to give such notice shall not
relieve any Indemnifying Party of its obligations under this Article except to
the extent that such Indemnifying Party or its Affiliate is actually prejudiced
by such failure to give notice. Such notice shall describe such Third-Party
Claim in reasonable detail considering the Information provided to the
Indemnitee.
(b) Except as otherwise provided in subsection (c) of this Section, an
Indemnifying Party may, by notice to the Indemnitee and to Grace-Conn., if Grace
is the Indemnifying Party, or to the Indemnitee and Grace, if Grace-Conn. is the
Indemnifying Party, at any time after receipt by such Indemnifying Party of such
Indemnitee's notice of a Third-Party Claim, undertake (itself or through another
member of the Group of which the Indemnifying Party is a member) the defense or
settlement of such Third-Party Claim. If an Indemnifying Party undertakes the
defense of any Third-Party Claim, such Indemnifying Party shall thereby admit
its obligation to indemnify the Indemnitee against such Third-Party Claim, and
such Indemnifying Party shall control the investigation and defense or
settlement thereof, and the Indemnitee may not settle or compromise such
Third-Party Claim, except that such Indemnifying Party shall not require any
Indemnitee, without its prior written consent, to take or refrain from taking
any action in connection with such Third-Party Claim, or make any public
statement, which such Indemnitee reasonably considers to be against its
interests, nor shall the Indemnifying Party, without the prior written consent
of the Indemnitee and of Grace-Conn., if the Indemnitee is a Grace-Conn.
Indemnitee, or the Indemnitee and of Grace, if the Indemnitee is a NMC
Indemnitee, consent to any settlement that does not include as a part thereof an
unconditional release of the Indemnitees from liability with respect to such
Third-Party Claim or that requires the Indemnitee or any of its Representatives
or Affiliates to make any payment that is not fully indemnified under this
Agreement or to submit to any non-monetary remedy; and subject to the
Indemnifying Party's control rights, as specified herein, the Indemnitees may
participate in such investigation and defense, at their own expense. Following
the provision of notices to the Indemnifying Party, until such time as an
Indemnifying Party has undertaken the defense of any Third-Party Claim as
provided herein, such Indemnified Party shall control the investigation and
defense or settlement thereof, without prejudice to its right to seek
indemnification hereunder.
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(c) If an Indemnitee reasonably determines that there may be legal defenses
available to it that are different from or in addition to those available to its
Indemnifying Party which make it inappropriate for the Indemnifying Party to
undertake the defense or settlement thereof, then such Indemnifying Party shall
not be entitled to undertake the defense or settlement of such Third-Party
Claim; and counsel for the Indemnifying Party shall be entitled to conduct the
defense of such Indemnifying Party and counsel for the Indemnified Party shall
be entitled to conduct the defense of such Indemnitee, it being understood that
both such counsel shall cooperate with each other to conduct the defense or
settlement of such action as efficiently as possible.
(d) In no event shall an Indemnifying Party be liable for the fees and
expenses of more than one counsel for all Indemnitees in connection with any one
action, or separate but similar or related actions, in the same jurisdiction
arising out of the same general allegations or circumstances.
(e) Grace-Conn. shall, and shall cause the other Grace-Conn. Indemnitees
to, and Grace shall, and shall cause the other NMC Indemnitees to, make
available to each other, their counsel and other Representatives, all
information and documents reasonably available to them which relate to any
Third-Party Claim, and otherwise cooperate as may reasonably be required in
connection with the investigation, defense and settlement thereof. Any joint
defense agreement entered into by Grace-Conn. or Grace with any third party
relating to any Third-Party Claim shall provide that Grace-Conn. or Grace may,
if requested, provide information obtained through any such agreement to the
Grace-Conn. Indemnitees or the Grace Indemnitees.
SECTION 4.04 Remedies Cumulative. The remedies provided in this Article IV
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any other remedies against any Indemnifying
Party. However, the procedures set forth in Section 4.03 shall be the exclusive
procedures governing any indemnity action brought under this Agreement or
otherwise and relating to a Third-Party Claim, except as otherwise specifically
provided in any of the Other Agreements.
SECTION 4.05 Compromise of Investigations. NMC and the members of the NMC
Group shall not settle or compromise any of the matters referred to in Section
4.02(b)(1) above on terms that do not include as a part thereof an unconditional
release of the members of the Grace-Conn. Group from all liability with respect
thereto.
ARTICLE V
CERTAIN ADDITIONAL COVENANTS
SECTION 5.01 Notices to Third Parties. In addition to the actions
described in Section 5.02, the members of the NMC Group and the members of the
Grace-Conn. Group shall cooperate to make all other filings and give notice to
and obtain consents from all third parties that may reasonably be required to
consummate the transactions contemplated by this Agreement and the Other
Agreements.
SECTION 5.02 Licenses and Permits. Each party hereto shall cause the
appropriate members of its Group to prepare and file with the appropriate
licensing and permitting authorities applications for the transfer or issuance,
as may be necessary or advisable in connection with the Distribution, to its
Group of all material governmental licenses and permits required for the members
of its Group to operate its Business after the Distribution. The members of the
Grace-Conn. Group and the members of the NMC Group shall cooperate and use all
reasonable efforts to secure the transfer or issuance of the licenses and
permits.
SECTION 5.03 Intercompany Agreements. All contracts, licenses, agreements,
commitments or other arrangements, formal or informal, between any member of the
NMC Group, on the one hand, and any member of the Grace-Conn. Group, on the
other, in existence as of the Distribution Date, pursuant to which any member of
either Group provides to any member of the other Group services (including,
without limitation, management, administrative, legal, financial, accounting,
data processing, insurance, or technical support), or the use of any Assets of
any member of the other Group, or the secondment of any employee, or pursuant to
which rights, privileges or benefits are afforded to members of either Group as
Affiliates of the other Group, shall terminate as of the close of business on
the day prior to the Distribution Date, except as specifically provided herein
or in the Other Agreements. From and after the Distribution Date, no member of
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either Group shall have any rights under any such contract, license, agreement,
commitment or arrangement with any member of the other Group, except as
specifically provided herein or in the Other Agreements.
Section 5.04 Guarantee Obligations. (a) Grace and Grace-Conn. shall
cooperate, and shall cause their respective Groups to cooperate, to terminate,
or to cause a member of the NMC Group to be substituted in all respects for any
member of the Grace-Conn. Group in respect of, all obligations of any member of
the Grace-Conn. Group under any loan, financing, lease, contract, or other
obligation in existence as of the Distribution Date pertaining to the NMC
Business for which such member of the Grace-Conn. Group may be liable, as
guarantor, original tenant, primary obligor or otherwise. If such a termination
or substitution is not effected by the Distribution Date, (1) Grace shall
indemnify and hold harmless the Grace-Conn. Indemnitees for any Indemnifiable
Loss arising from or relating thereto, and (2) without the prior written consent
of the Chief Financial Officer, Treasurer or any Assistant Treasurer of
Grace-Conn., from and after the Distribution Date, Grace shall not, and shall
not permit any member of the NMC Group or any of its Affiliates to, renew or
extend the term of, increase its obligations under, or transfer to a third
party, any loan, lease, contract or other obligation for which any member of the
Grace-Conn. Group is or may be liable unless all obligations of the Grace-Conn.
Group with respect thereto are thereupon terminated by documentation reasonably
satisfactory in form and substance to the Chief Financial Officer, Treasurer or
any Assistant Treasurer of Grace-Conn.
(b) Grace and Grace-Conn. shall cooperate, and shall cause their respective
Groups to cooperate, to terminate, or to cause a member of the Grace-Conn. Group
to be substituted in all respects for any member of the NMC Group in respect of,
all obligations of any member of the NMC Group under any loan, financing, lease,
contract or other obligation in existence as of the Distribution Date pertaining
to the Grace-Conn. Business for which such member of the NMC Group may be
liable, as guarantor, original tenant, primary obligor or otherwise. If such a
termination or substitution is not effected by the Distribution Date, (1) Grace-
Conn. shall indemnify and hold harmless the NMC Indemnitees for any
Indemnifiable Loss arising from or relating thereto, and (2) without the prior
written consent of the Chief Financial Officer, Treasurer or any Assistant
Treasurer of NMC, from and after the Distribution Date, Grace-Conn. shall not,
and shall not permit any member of the Grace-Conn. Group to, renew or extend the
term of, increase its obligations under, or transfer to a third party, any loan,
lease, contract or other obligation for which any member of the NMC Group is or
may be liable unless all obligations of the NMC Group with respect thereto are
thereupon terminated by documentation reasonably satisfactory in form and
substance to the Chief Financial Officer, Treasurer or any Assistant Treasurer
of NMC.
SECTION 5.05 Further Assurances. In addition to the actions specifically
provided for elsewhere in this Agreement, each of the parties hereto shall use
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things reasonably necessary, proper or advisable under
applicable laws, regulations and agreements to consummate and make effective the
transactions contemplated by this Agreement including, without limitation, Asset
transfers and debt and cash balances of the other party contemplated thereby.
Without limiting the foregoing, each party hereto shall cooperate with the other
party, and execute and deliver, or use reasonable efforts to cause to be
executed and delivered, all instruments, and to make all filings with, and to
obtain all consents, approvals or authorizations of, any governmental or
regulatory authority or any other Person under any permit, license, agreement,
indenture or other instrument, and take all such other actions as such party may
reasonably be requested to take by any other party hereto from time to time,
consistent with the terms of this Agreement and the Other Agreements, in order
to effectuate the provisions and purposes of this Agreement.
SECTION 5.06 Representations and Warranties of Grace-Conn. Grace-Conn.
hereby represents and warrants to Fresenius AG that:
(a) Corporate Organization and Qualification. Grace-Conn. is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and is in good standing as a
foreign corporation in each jurisdiction where the properties owned, leased
or operated, or the business conducted, by it requires such qualification,
except for any such failure so to qualify or be in good standing which,
when taken together with all other such failures, is not reasonably likely
to have a Material Adverse Effect with respect to Grace-Conn.
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Grace-Conn. has the requisite corporate power and authority to carry
on its business as it is now being conducted.
(b) Corporate Authority. Grace-Conn. has the requisite corporate
power and authority and has taken all corporate action necessary in order
to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. This Agreement is a valid and binding
agreement of Grace-Conn. enforceable in accordance with its terms.
(c) No Violations. The execution, delivery and performance by
Grace-Conn. of this Agreement does not or will not, and the consummation by
it of any of the transactions contemplated hereby will not, constitute or
result in a breach or violation of, or a default under, its Certificate of
Incorporation or By-laws.
ARTICLE VI
ACCESS TO INFORMATION
SECTION 6.01 Provision of Corporate Records. Prior to or as promptly as
practicable after the Distribution Date, Grace shall deliver to Grace-Conn. all
corporate books and records of the Grace-Conn. Group in its possession and
copies of the relevant portions of all corporate books and records of the NMC
Group relating directly and primarily to the Grace-Conn. Assets, the Grace-Conn.
Business, or the Liabilities of the Grace-Conn. Group, including, in each case,
all active agreements, active litigation files and government filings. From and
after the Distribution Date, all such books, records and copies shall be the
property of Grace-Conn. Prior to or as promptly as practicable after the
Distribution Date, Grace-Conn. shall deliver to Grace all corporate books and
records of the NMC Group in its possession and copies of the relevant portions
of all corporate books and records of the Grace-Conn. Group relating directly
and primarily to the NMC Assets, the NMC Business, or the Liabilities of the NMC
Group, including, in each case, all active agreements, active litigation files
and government filings. From and after the Distribution Date, all such books,
records and copies shall be the property of Grace.
SECTION 6.02 Access to Information. From and after the Distribution Date,
each of Grace and Grace-Conn. shall afford to the other and to the other's
Representatives reasonable access and duplicating rights during normal business
hours to all Information within the possession or control of such party's Group
relating to the other party's Group's pre-Distribution business, Assets or
Liabilities or relating to or arising in connection with the relationship
between the Groups on or prior to the Distribution Date, insofar as such access
is reasonably required for a reasonable purpose, subject to the provisions below
regarding Privileged Information. Without limiting the foregoing, Information
may be requested under this Section 6.02 for audit, accounting, claims,
litigation and Tax purposes, as well as for purposes of fulfilling disclosure
and reporting obligations.
In furtherance of the foregoing:
(a) Each party hereto acknowledges that: (i) Each of Grace and
Grace-Conn. (and the members of the NMC Group and the Grace-Conn. Group,
respectively) has or may obtain Privileged Information; (ii) there are a
number of Litigation Matters affecting each or both of Grace and
Grace-Conn.; (iii) both Grace and Grace-Conn. have a common legal interest
in Litigation Matters, in the Privileged Information, and in the
preservation of the confidential status of the Privileged Information, in
each case relating to pre-Distribution business of the NMC Group or the
Grace-Conn. Group or relating to or arising in connection with the
relationship between the Groups on or prior to the Distribution Date; and
(iv) both Grace and Grace-Conn. intend that the transactions contemplated
hereby and by the Reorganization Agreement and the Other Agreements and any
transfer of Privileged Information in connection therewith shall not
operate as a waiver of any potentially applicable privilege.
(b) Each of Grace and Grace-Conn. agrees, on behalf of itself and each
member of the Group of which it is a member, not to disclose or otherwise
waive any privilege attaching to any Privileged Information relating to
pre-Distribution business of the Grace-Conn. Group or the NMC Group,
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respectively, or relating to or arising in connection with the relationship
between the Groups on or prior to the Distribution Date, without providing
prompt written notice to and obtaining the prior written consent of the
other, which consent shall not be unreasonably withheld and shall not be
withheld if the other party certifies that such disclosure is to be made in
response to a likely threat of suspension or debarment or similar action;
provided, however, that Grace and Grace-Conn. may make such disclosure or
waiver with respect to Privileged Information if such Privileged
Information relates solely to the pre-Distribution business of the NMC
Group in the case of Grace or the Grace-Conn. Group in the case of
Grace-Conn. In the event of a disagreement between any member of the NMC
Group and any member of the Grace-Conn. Group concerning the reasonableness
of withholding such consent, no disclosure shall be made prior to a
resolution of such disagreement by a court of competent jurisdiction.
(c) Upon any member of the NMC Group or any member of the Grace-Conn.
Group receiving any subpoena or other compulsory disclosure notice from a
court, other governmental agency or otherwise which requests disclosure of
Privileged Information, in each case relating to pre-Distribution business
of the Grace-Conn. Group or the NMC Group, respectively, or relating to or
arising in connection with the relationship between the Groups on or prior
to the Distribution Date, the recipient of the notice shall promptly
provide to the other Group (following the notice provisions set forth
herein) a copy of such notice, the intended response, and all materials or
information relating to the other Group that might be disclosed. In the
event of a disagreement as to the intended response or disclosure, unless
and until the disagreement is resolved as provided in subsection (b), the
parties shall cooperate to assert all defenses to disclosure claimed by
either party's Group, and shall not disclose any disputed documents or
information until all legal defenses and claims of privilege have been
finally determined.
SECTION 6.03 Production of Witnesses. Subject to Section 6.02, after the
Distribution Date, each of Grace and Grace-Conn. shall, and shall cause each
member of the NMC Group and the Grace-Conn. Group, respectively, to, make
available to Grace or Grace-Conn. or any member of the NMC Group or of the
Grace-Conn. Group, as the case may be, upon written request, such Group's
directors, officers, employees and agents as witnesses to the extent that any
such Person may reasonably be required in connection with any Litigation
Matters, administrative or other proceedings in which the requesting party may
from time to time be involved and relating to the pre-Distribution business of
the NMC Group or the Grace-Conn. Group or relating to or in connection with the
relationship between the Groups on or prior to the Distribution Date.
SECTION 6.04 Retention of Records. Except as otherwise agreed in writing,
or as otherwise provided in the Other Agreements, each of Grace and Grace-Conn.
shall, and shall cause the members of the Group of which it is a member to,
retain all Information in such party's Group's possession or under its control
relating directly and primarily to the pre-Distribution business, Assets or
Liabilities of the other party's Group that is less than ten years old until
such Information is at least ten years old except that if, prior to the
expiration of such period, any member of either party's Group wishes to destroy
or dispose of any such Information that is at least three years old, prior to
destroying or disposing of any of such Information, (1) the party whose Group is
proposing to dispose of or destroy any such Information shall provide no less
than 30 days' prior written notice to the other party, specifying the
Information proposed to be destroyed or disposed of, and (2) if, prior to the
scheduled date for such destruction or disposal, the other party requests in
writing that any of the Information proposed to be destroyed or disposed of be
delivered to such other party, the party whose Group is proposing to dispose of
or destroy such Information promptly shall arrange for the delivery of the
requested Information to a location specified by, and at the expense of, the
requesting party.
SECTION 6.05 Confidentiality. Subject to Section 6.02, which shall govern
Privileged Information, from and after the Distribution Date, each of Grace and
Grace-Conn. shall hold, and shall use reasonable efforts to cause its Affiliates
and Representatives to hold, in strict confidence all Information concerning the
other party's Group obtained by it prior to the Distribution Date or furnished
to it by such other party's Group pursuant to this Agreement or the Other
Agreements and shall not release or disclose such Information to any other
Person, except its Affiliates and Representatives, who shall be bound by the
provisions of this Section 6.05, and each party shall be responsible for a
breach by any of its Affiliates or Representatives; provided, however, that any
member of the NMC Group or the Grace-Conn. Group may disclose such Information
to the extent that (a) disclosure is compelled by judicial or administrative
process or, in the
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opinion of such Person's counsel, by other requirements of law, or (b) such
party can show that such Information was (i) available to such Person on a
nonconfidential basis (other than from a member of the other party's Group)
prior to its disclosure by the other party's Group, (ii) in the public domain
through no fault of such Person or (iii) lawfully acquired by such Person from
another source after the time that it was furnished to such Person by the other
party's Group, and not acquired from such source subject to any confidentiality
obligation on the part of such source, or on the part of the acquiror, known to
the acquiror. Notwithstanding the foregoing, each of Grace and Grace-Conn. shall
be deemed to have satisfied its obligations under this Section 6.05 with respect
to any Information (other than Privileged Information) if it exercises the same
care with regard to such Information as it takes to preserve confidentiality for
its own similar Information.
SECTION 6.06 Cooperation with Respect to Government Reports and
Filings. Grace, on behalf of itself and each member of the NMC Group, agrees to
provide any member of the Grace-Conn. Group, and Grace-Conn., on behalf of
itself and each member of the Grace-Conn. Group, agrees to provide any member of
the NMC Group, with such cooperation and Information as may be reasonably
requested by the other in connection with the preparation or filing of any
government report or other government filing contemplated by this Agreement or
in conducting any other government proceeding relating to pre-Distribution
business of the NMC Group or the Grace-Conn. Group, Assets or Liabilities of
either Group or relating to or in connection with the relationship between the
Groups on or prior to the Distribution Date. Such cooperation and Information
shall include, without limitation, promptly forwarding copies of appropriate
notices and forms or other communications received from or sent to any
government authority which relate to the NMC Group, in the case of the
Grace-Conn. Group, or the Grace-Conn. Group, in the case of the NMC Group. Each
party shall make its employees and facilities available during normal business
hours and on reasonable prior notice to provide explanation of any documents or
Information provided hereunder.
ARTICLE VII
NO REPRESENTATIONS OR WARRANTIES
SECTION 7.01 No Representations or Warranties. Grace-Conn. acknowledges
that, prior to the date of this Agreement, it has had primary responsibility for
the operation and management of the Grace-Conn. Business (other than with
respect to CCHP, as to which NMC has had responsibility for the management of
the investment therein and the exercise of any rights attendant thereto, and the
"Amicon" membrane filtrations system and chromatography equipment business, for
the operation and management of which NMC has had primary responsibility since
1992); and Grace acknowledges that, prior to the date of this Agreement, NMC has
had primary responsibility for the operation and management of the NMC Business.
Grace-Conn. understands and agrees that no member of the NMC Group is, in this
Agreement or in any other agreement or document, representing or warranting to
Grace-Conn. or any member of the Grace-Conn. Group in any way as to the
Grace-Conn. Assets, the Grace-Conn. Business or the Liabilities of the
Grace-Conn. Group or as to any consents or approvals required in connection with
the consummation of the transactions contemplated by this Agreement, it being
agreed and understood that Grace-Conn. and each member of the Grace-Conn. Group
shall take all of the Grace-Conn. Assets "as is, where is." Grace-Conn. and each
member of the Grace-Conn. Group shall bear the economic and legal risk that
conveyances of the Grace-Conn. Assets shall prove to be insufficient, that the
title of any member of the Grace-Conn. Group to any Grace-Conn. Assets, Grace-
Conn. Transferred Companies or Grace-Conn. Transferred Operations shall be other
than good and marketable and free from encumbrances or that results from the
failure of Grace-Conn. or any member of the Grace-Conn. Group to obtain any
consents or approvals relating to the Grace-Conn. Business required in
connection with the consummation of the transactions contemplated by this
Agreement. Grace understands and agrees that no member of the Grace-Conn. Group
is, in this Agreement or in any other agreement or document, representing or
warranting to Grace or any member of the NMC Group in any way as to the NMC
Assets, the NMC Business or the Liabilities of the NMC Group or as to any
consents or approvals required in connection with the consummation of the
transactions contemplated by this Agreement or the Reorganization Agreement, it
being agreed and understood that Grace, NMC and each other member of the NMC
Group shall take all of the NMC Assets "as is, where is." Grace and each member
of the NMC Group shall bear the
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economic and legal risk that conveyances of the NMC Assets shall prove to be
insufficient, that the title of any member of the NMC Group to any NMC Assets or
NMC Transferred Operations shall be other than good and marketable and free from
encumbrances, or that results from the failure of Grace or any member of the NMC
Group to obtain any consents or approvals relating to the NMC Business required
in connection with the consummation of the transactions contemplated by this
Agreement. The foregoing shall be without prejudice to any rights under Section
4.02 or Section 5.05 of this Agreement.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 Conditions to Obligations. (a) The obligations of the parties
hereto to consummate the payment of the Distribution are subject to the
satisfaction of each of the following conditions:
(i) To the extent required by applicable law and stock exchange
regulations, the transactions contemplated hereby shall have been duly
approved by Grace shareholders;
(ii) All conditions to the Reorganization set forth in the
Reorganization Agreement shall have been satisfied or waived
contemporaneously with the Effective Time; and
(iii) The transactions contemplated hereby shall be in compliance with
all applicable federal and state securities laws.
(b) Any determination made by the Board of Directors of Grace on behalf of
either party hereto prior to the Distribution Date concerning the satisfaction
or waiver of any or all of the conditions set forth in this Section shall be
conclusive.
SECTION 8.02 Use of Grace Name and Mark. Grace acknowledges that
Grace-Conn. shall own all rights in the "Grace" name and logo and related
tradenames and marks. Effective at the Distribution Date, Grace shall change its
name to a name that does not use the word "Grace" or any variation thereof and
shall itself, and shall cause each member of the NMC Group to, cease all use of
the "Grace" name as part of any corporate name. Within 90 days after the
Distribution Date, Grace shall, and shall cause each member of the NMC Group to,
cease all other use of the "Grace" name and logo and related tradenames and
marks. Grace shall cause the NMC Group to use such names, logos and marks during
such 90-day period only to the extent that it is not practical to change or
replace any existing signs, letterheads, business cards, invoices or other
business forms, telephone directory listings or promotional material, and shall
cause the NMC Group to maintain the same standards of quality with respect to
such names, logos and marks as previously exercised.
SECTION 8.03 Complete Agreement. This Agreement, the Exhibits and
Schedules hereto and the agreements and other documents referred to herein shall
constitute the entire agreement between the parties hereto with respect to the
subject matter hereof (other than the Reorganization Agreement and the Schedules
and Exhibits thereto) and shall supersede all previous negotiations, commitments
and writings with respect to such subject matter.
SECTION 8.04 Expenses. Grace-Conn. shall bear all costs with respect to
the transactions contemplated hereby and by the Other Agreements, except as
otherwise specifically provided in the Reorganization Agreement or the Other
Agreements.
SECTION 8.05 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York (other than the
laws regarding choice of laws and conflicts of laws that would apply the
substantive laws of any other jurisdiction) as to all matters, including matters
of validity, construction, effect, performance and remedies.
SECTION 8.06 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery
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in person, by cable, telegram, telex or other standard form of
telecommunications, or by registered or certified mail, postage prepaid, return
receipt requested, addressed as follows:
If to Grace or any member of the NMC Group:
W. R. Grace & Co.
c/o National Medical Care, Inc.
1601 Trapelo Road
Reservoir Place
Waltham, MA 02154
Attention: Chief Financial Officer
Fax: (617) 890-6993
with a copy to:
Fresenius AG
Borkenberg 14
61440 Oberursel
61343 Bad Homburg
Germany
Attention: Mr. Udo Werle
Fax: 011-49-6171-60-2104
and
O'Melveny & Myers
Citicorp Center
153 East 53rd Street
New York, NY 10022-4611
Attention: Dr. Ulrich Wagner
Fax: (212) 326-2061
If to Grace-Conn. or any member of the Grace-Conn. Group:
W. R. Grace & Co.-Conn.
One Town Center Road
Boca Raton, Florida 33486-1010
Attention: Secretary
Fax: (407) 362-1635
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Andrew R. Brownstein, Esq.
Fax: (212) 403-2000
or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section.
SECTION 8.07 Amendment and Modification. This Agreement may be amended,
modified or supplemented only by a written agreement signed by all of the
parties hereto.
SECTION 8.08 Successors and Assigns; No Third-Party Beneficiaries. This
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties hereto and their successors and permitted assigns,
but neither this Agreement nor any of the rights, interests and obligations
hereunder shall be assigned by any party hereto without the prior written
consent of the other party. Except for the provisions of Sections 4.02 and 4.03
relating to indemnities, which are also for the benefit of the Indemnitees, this
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Agreement is solely for the benefit of the parties hereto and their Subsidiaries
and Affiliates and is not intended to confer upon any other Persons any rights
or remedies hereunder.
SECTION 8.09 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
SECTION 8.10 Interpretation. (a) The Article and Section headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties hereto and shall not in any way affect the
meaning or interpretation of this Agreement.
(b) The parties hereto intend that the Distribution shall be a distribution
pursuant to the provisions of Section 355 of the Code, so that no gain or loss
shall be recognized for federal income tax purposes as a result of such
transaction, and all provisions of this Agreement shall be so interpreted. The
parties hereto do not intend to submit the Distribution to the Internal Revenue
Service for a private letter ruling with respect to such nonrecognition, and any
ultimate ruling or decision that any gain or loss should be recognized for
federal income Tax purposes shall not permit a rescission or reformation of this
Agreement or transactions contemplated hereby.
SECTION 8.11 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party.
SECTION 8.12 References; Construction. References to any "Article,"
"Exhibit," "Schedule" or "Section," without more, are to Articles, Exhibits,
Schedules and Sections to or of this Agreement. Unless otherwise expressly
stated, clauses beginning with the term "including" set forth examples only and
in no way limit the generality of the matters thus exemplified.
SECTION 8.13 Termination. Notwithstanding any provision hereof, following
termination of the Reorganization Agreement, this Agreement may be terminated
and the Distribution abandoned at any time prior to the Distribution Date by and
in the sole discretion of the Board of Directors of Grace without the approval
of any other party hereto or of Grace's shareholders. In the event of such
termination, no party hereto or to any Other Agreement shall have any Liability
to any Person by reason of this Agreement or any Other Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
W. R. GRACE & CO.
By: /s/ Albert J. Costello
--------------------------------------
Name:
Title:
W. R. GRACE & CO.-CONN.
By: /s/ Albert J. Costello
--------------------------------------
Name:
Title:
FRESENIUS AG
By: /s/ Gerd Krick
--------------------------------------
Name:
Title:
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EXHIBIT E TO APPENDIX A
CONTRIBUTION AGREEMENT
BY AND AMONG
FRESENIUS AG,
STERIL PHARMA GMBH
AND
W. R. GRACE & CO.-CONN.
DATED FEBRUARY 4, 1996
<PAGE> 422
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
I. Definitions................................................................. EE-3
1.01 General............................................................... EE-3
II. Certain Transactions Prior to the Contribution Date......................... EE-6
2.01 Certain Transfers..................................................... EE-6
2.02 Termination of Agreements............................................. EE-6
2.03 Other Agreements...................................................... EE-6
III. [Intentionally Omitted]..................................................... EE-6
IV. Survival and Indemnification................................................ EE-7
4.01 Survival of Agreements................................................ EE-7
4.02 Indemnification....................................................... EE-7
4.03 Procedures for Indemnification for Third-Party Claims................. EE-7
4.04 Remedies Cumulative................................................... EE-8
V. Certain Additional Covenants................................................ EE-8
5.01 Notices to Third Parties.............................................. EE-8
5.02 Licenses and Permits.................................................. EE-8
5.03 Intercompany Agreements............................................... EE-9
5.04 Guarantee Obligations................................................. EE-9
5.05 Further Assurances.................................................... EE-9
VI. Access to Information....................................................... EE-10
6.01 Provision of Corporate Records........................................ EE-10
6.02 Access to Information................................................. EE-10
6.03 Production of Witnesses............................................... EE-11
6.04 Retention of Records.................................................. EE-11
6.05 Confidentiality....................................................... EE-11
6.06 Cooperation with Respect to Government Reports and Filings............ EE-12
VII. No Representations or Warranties............................................ EE-12
7.01 No Representations or Warranties...................................... EE-12
VIII. Miscellaneous............................................................... EE-12
8.01 Use of Fresenius AG Name and Mark..................................... EE-12
8.02 Complete Agreement.................................................... EE-13
8.03 Expenses.............................................................. EE-13
8.04 Jurisdiction and Forum................................................ EE-13
8.05 Notices............................................................... EE-13
8.06 Amendment and Modification............................................ EE-14
8.07 Successors and Assigns; No Third-Party Beneficiaries.................. EE-14
8.08 Counterparts.......................................................... EE-14
8.09 Interpretation........................................................ EE-14
8.10 Severability.......................................................... EE-14
8.11 References; Construction.............................................. EE-15
SIGNATURES............................................................................ EE-15
</TABLE>
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CONTRIBUTION AGREEMENT
This CONTRIBUTION AGREEMENT (this "Agreement"), dated February 4, 1996, by
and between Fresenius AG, an Aktiengesellschaft organized under the laws of the
Federal Republic of Germany ("Fresenius AG"), Steril Pharma GmbH, a wholly owned
Gesellschaft mit beschrankter Haftung of Fresenius AG ("GmbH" or "SP"), and W.
R. Grace & Co.-Conn., a Connecticut corporation ("Grace-Conn.").
W I T N E S S E T H:
A. The Reorganization Agreement. Simultaneously herewith, Grace and
Fresenius AG are entering into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") and, prior to the Effective Time, intend to
consummate the transactions contemplated hereby.
B. The Contribution. Prior to the Effective Time, Fresenius AG intends to
contribute its worldwide dialysis business to SP, as provided herein, and to
retain and lease to Newco certain real property and buildings in the Federal
Republic of Germany pursuant to a lease consistent with the terms set forth in
Exhibit B hereto and to retain and license to Newco its name and certain derived
marks pursuant to a license consistent with the terms set forth in Exhibit C
hereto.
C. Newco. In connection with the Contribution, Fresenius AG intends that
SP shall convert to an Aktiengesellschaft, pursuant to German law, and to become
"Newco," consistent with the terms of the Reorganization Agreement.
D. The Distribution. Immediately prior to the Effective Time, Grace
intends to transfer to (or retain in) Grace-Conn. all non-healthcare assets and
liabilities, its interests in the Amicon bioseparations business and GN
Holdings, Inc. and certain other assets, as contemplated by this Agreement, and
to effect a distribution to its common shareholders of all of its equity
interest in Grace-Conn.
E. The Recapitalization. Following the Distribution and immediately prior
to the Effective Time, Grace intends to consummate the Recapitalization in which
each holder of a Grace Common Share shall hold, immediately thereafter, a Grace
Common Share and one one-hundredth of a NY Preferred Share.
F. The Mergers. At the Effective Time, the parties intend to effect a
merger of a wholly owned New York corporate subsidiary of Newco with and into
Grace, with Grace being the surviving corporation. Also at the Effective Time,
the parties intend to effect a merger of a wholly owned Massachusetts corporate
subsidiary of Newco with and into Fresenius USA, with Fresenius USA being the
surviving corporation.
G. Financing. It is the intention of the parties hereto that, prior to the
Distribution: (i) Grace and Grace-Conn. shall use reasonable efforts to cause
NMC to arrange new credit facilities so that the transactions contemplated by
the Transaction Agreements may be consummated; (ii) Fresenius AG shall use
reasonable efforts to arrange new credit facilities for the FWD Business so that
the transactions contemplated by the Transaction Agreements may be consummated;
and (iii) the parties shall cooperate with one another with respect to the
foregoing.
H. Intention of the Parties. It is the intention of the parties to the
Reorganization Agreement that for United States federal income tax purposes (a)
the Distribution shall qualify as a tax-free distribution under the Code, (b)
each of the Mergers shall qualify as a "reorganization" under the Code, (c) the
Contribution shall qualify as a tax-free exchange under the Code and (d) the
Recapitalization shall be tax-free to Grace under the Code.
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NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 General. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
Affiliate: with respect to any specified Person, a Person that directly,
or indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with, such specified Person; provided, however, that for
purposes of this Agreement, no member of either Group shall be deemed to be an
Affiliate of any member of the other Group.
Agreement: as defined in the preamble to this Agreement.
Asset: any and all assets and properties, tangible or intangible,
including, without limitation, the following: (i) cash, notes and accounts and
notes receivable (whether current or non-current); (ii) certificates of deposit,
banker's acceptances, stock, debentures, evidences of indebtedness, certificates
of interest or participation in profit-sharing agreements, collateral-trust
certificates, preorganization certificates or subscriptions, transferable
shares, investment contracts, voting-trust certificates, fractional undivided
interests in oil, gas or other mineral rights, puts, calls, straddles, options
and other securities of any kind; (iii) intangible property rights, inventions,
discoveries, know-how, patents and patent applications, trade secrets,
confidential information, registered and unregistered trademarks, service marks,
service names, trade styles and trade names and associated goodwill; statutory,
common law and registered copyrights; applications for any of the foregoing,
rights to use the foregoing and other rights in, to and under the foregoing;
(iv) rights under leases, contracts, licenses, permits, distribution
arrangements, sales and purchase agreements, other agreements and business
arrangements; (v) real estate and buildings and other improvements thereon; (vi)
leasehold improvements, fixtures, trade fixtures, machinery, equipment
(including transportation and office equipment), tools, dies and furniture;
(vii) office supplies, production supplies, spare parts, other miscellaneous
supplies and other tangible property of any kind; (viii) computer equipment and
software; (ix) raw materials, work-in-process, finished goods, consigned goods
and other inventories; (x) prepayments or prepaid expenses; (xi) claims, causes
of action, choses in action, rights under express or implied warranties, rights
of recovery and rights of set-off of any kind; (xii) the right to receive mail,
payments on accounts receivable and other communications; (xiii) lists of
customers, records pertaining to customers and accounts, personnel records,
lists and records pertaining to customers, suppliers and agents, and books,
ledgers, files and business records of every kind; (xiv) advertising materials
and other printed or written materials; (xv) goodwill as a going concern and
other intangible properties; (xvi) employee contracts, including any rights
thereunder to restrict an employee from competing in certain respects; and
(xvii) licenses and authorizations issued by any governmental authority.
Business: the Fresenius AG Business or the FWD Business.
Contribution: as defined in the Reorganization Agreement.
Contribution Date: the date on which the Effective Time occurs.
CTC-DE: as defined in Section 8.04(b) of this Agreement.
CTC-NY: as defined in Section 8.04(b) of this Agreement.
Debt: as defined in the Reorganization Agreement.
Effective Time: as defined in the recitals to this Agreement.
Foreign Exchange Rate: with respect to any currency other than United
States dollars as of any date, the rate on such date at which such currency may
be exchanged for United States dollars as quoted in The Wall Street Journal.
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Fresenius AG: as defined in the preamble to this Agreement.
Fresenius AG Assets: all Assets owned by any member of the Fresenius AG
Group immediately prior to the Contribution Date, other than FWD Business Assets
and other than any stock or assets of Fresenius USA.
Fresenius AG Business: all of the business and operations conducted at any
time, whether prior to, on or after the Contribution Date, by any member of the
Fresenius AG Group, other than the FWD Business.
Fresenius AG Group: Fresenius AG and the Fresenius AG Subsidiaries, other
than any member of the FWD Business Group.
Fresenius AG Indemnitees: Fresenius AG, each Affiliate of Fresenius AG and
each of their respective Representatives and each of the heirs, executors,
successors and assigns of any of the foregoing.
Fresenius AG Subsidiaries: all direct and indirect Subsidiaries of
Fresenius AG, other than FWD Business Subsidiaries and other than Fresenius USA
and its Subsidiaries; provided, however, that for purposes of this Agreement,
GmbH and the FWD Business Subsidiaries shall not be deemed to be Subsidiaries of
Fresenius AG.
Fresenius Tax Indemnification Agreement: a tax sharing agreement between
Fresenius AG and GmbH substantially in the form attached hereto as Exhibit B,
with such changes as may be mutually satisfactory to Fresenius AG, GmbH, and
Grace-Conn.
Fresenius USA: Fresenius USA, Inc., a Massachusetts Corporation.
Fresenius USA Merger: as defined in the Reorganization Agreement.
FWD Business: as defined in the Reorganization Agreement, but including
all business and operations of Fresenius USA.
FWD Business Assets: as defined in the Reorganization Agreement, but
including all Assets of Fresenius USA.
FWD Business Group: GmbH and each other FWD Business Subsidiary.
FWD Business Indemnitees: Grace-Conn., Newco, GmbH, each Affiliate of GmbH
and each of their respective Representatives and each of the heirs, executors,
successors and assigns of any of the foregoing.
FWD Business Subsidiary: (i) all FWD Business Subsidiaries (as defined in
the Reorganization Agreement), (ii) Fresenius USA and (iii) all corporations,
partnerships or other business entities in which any member of the FWD Business
Group has owned or will own any equity interest or other investment and which
predominantly relates to the FWD Business.
FWD Indemnitor: as defined in Section 2.01 of this Agreement.
GmbH: as defined in the preamble to this Agreement.
G-GmbH: as defined in Section 2.01 of this Agreement.
Grace: as defined in the Reorganization Agreement.
Grace-Conn.: as defined in the preamble to this Agreement.
Group: the Fresenius AG Group or the FWD Business Group.
Indemnifiable Losses: all losses, Liabilities, damages, claims, demands,
judgments or settlements of any nature or kind, known or unknown, fixed,
accrued, absolute or contingent, liquidated or unliquidated, including all
reasonable costs and expenses (legal, accounting or otherwise as such costs are
incurred) relating thereto, suffered (and not actually reimbursed by insurance
proceeds) by an Indemnitee, including any reasonable costs or expenses of
enforcing any indemnity hereunder.
Indemnifying Party: a Person who or which is obligated under this
Agreement to provide indemnification.
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Indemnitee: a Person who or which may seek indemnification under this
Agreement.
Indemnity Payment: an amount that an Indemnifying Party is required to pay
to or in respect of an Indemnitee pursuant to Article IV.
Information: all records, books, contracts, instruments, computer data and
other data and information.
Liabilities: all debts, liabilities and obligations, whether absolute or
contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, and whether or not the same would
properly be reflected on a balance sheet.
Litigation Matters: actual, threatened or future litigations,
investigations, claims or other legal matters that have been or may be asserted
against, or otherwise adversely affect, Fresenius AG and/or GmbH (or members of
either Group).
NMC: National Medical Care, Inc., a Delaware corporation and an indirect
wholly owned subsidiary of Grace.
Newco: as defined in the Reorganization Agreement.
NY Preferred Registration Statement: as defined in the Reorganization
Agreement.
Other Agreements: an employee benefits agreement, restructuring
agreements, an insurance procedures agreement, a lease consistent with the terms
set forth in Exhibit B hereto, a license consistent with the terms set forth in
Exhibit C hereto, the Fresenius Tax Indemnification Agreement and the other
agreements entered into or to be entered into in connection with the
Contribution referred to in any of the foregoing as contemplated by Section
2.03.
Person: an individual, a partnership, a joint venture, a corporation, a
limited liability company, a trust, an unincorporated organization or a
government or any department or agency thereof.
Privileged Information: with respect to either Group, Information
regarding a member of such Group, or any of its operations, Assets or
Liabilities (whether in documents or stored in any other form or known to
employees or agents) that is or may be protected from disclosure pursuant to the
attorney-client privilege, the work product doctrine or other applicable
privileges, that a member of the other Group may come into possession of or
obtain access to pursuant to this Agreement or otherwise.
Recapitalization: as defined in the Reorganization Agreement.
Registration Statement: a registration statement to effect the
registration of the Newco capital stock (or depositary receipts therefor) to be
issued pursuant to the Reorganization Agreement under the Securities Act.
Reorganization Agreement: as defined in the recitals to this Agreement.
Representative: with respect to any Person, any of such Person's
directors, officers, employees, agents, consultants, advisors, accountants,
attorneys and representatives.
Securities Act: the Securities Act of 1933, as amended, together with the
rules and regulations promulgated thereunder.
SP: as defined in the preamble to this Agreement.
Subsidiary: with respect to any specified Person, (i) any corporation or
other legal entity of which such Person or any of its subsidiaries controls or
owns, directly or indirectly, more than 50% of the stock or other equity
interest entitled to vote on the election of members to the board of directors
or similar governing body, and (ii) any corporation, partnership or other
business entity, in which such person has owned or shall own any equity interest
or other investment and which predominantly relates to the business and
operations conducted by such person's Group.
Tax: as defined in the Fresenius Tax Indemnification Agreement.
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Third-Party Claim: any claim, suit, derivative suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency or commission or any arbitration tribunal
asserted by a Person who or which is neither a party hereto nor an Affiliate of
a party hereto.
ARTICLE II
CERTAIN TRANSACTIONS PRIOR TO THE CONTRIBUTION DATE
SECTION 2.01 Certain Transfers. As promptly as practicable following the
date hereof (and in any event prior to the Contribution Date), Fresenius AG
shall contribute the FWD Business and all FWD Business Assets to Newco. In
furtherance of the foregoing:
(a) Fresenius AG shall identify all existing Subsidiaries engaged
solely in the FWD Business and contribute the capital stock of such
Subsidiaries to SP.
(b) Fresenius AG shall identify all German FWD Business Assets (other
than any capital stock, which is to be contributed pursuant to (a) above)
and shall contribute such assets to a newly formed GmbH ("G-GmbH").
(c) Fresenius AG shall contribute all capital stock of G-GmbH to SP.
(d) Fresenius AG shall use reasonable best efforts to cause each
remaining Subsidiary which conducts part of the FWD Business to divest
itself of all Assets which are not FWD Business Assets; and, immediately
thereafter, Fresenius AG shall contribute the capital stock of each such
Subsidiary to SP; provided, however, that in no event shall Fresenius AG
take any action which causes any representation set forth in the Fresenius
AG Tax Matters Certificate to be untrue.
(e) To the extent that any FWD Business Assets remain in Fresenius AG
Subsidiaries other than SP (or its direct Subsidiaries) and G-GmbH,
Fresenius AG shall cause each such Subsidiary to divest itself of such FWD
Business Assets and then shall cause such FWD Business Assets to be
contributed to other Subsidiaries, which may be newly formed, and shall
then contribute all of the capital stock of such Subsidiaries to SP.
(f) Fresenius AG shall contribute all capital stock of Fresenius USA
held by it to SP.
(g) The Subsidiaries contributed to SP shall collectively be "FWD
Indemnitor," on a joint and several basis, and none of such Subsidiaries
shall be a direct or indirect parent of Grace.
(h) Fresenius AG shall undertake such transactions as may be necessary
for SP to become Newco, consistent with the terms of the Reorganization
Agreement.
(i) The foregoing shall be effectuated pursuant to transfer documents
and agreements acceptable to Grace-Conn.
SECTION 2.02 Termination of Agreements. Except as agreed by Grace in
writing prior to the Contribution Date, Fresenius AG shall terminate all
agreements between any member of the Fresenius AG Group and any member of the
FWD Business Group except as specifically provided herein or in the Other
Agreements.
SECTION 2.03 Other Agreements. Each of Fresenius AG and GmbH shall enter
into, or cause the appropriate members of the Group of which it is a member, to
enter into, the Tax Indemnification Agreement and Other Agreements as may be
advisable in connection with the Distribution including, without limitation,
agreements with respect to employee benefits, restructuring, insurance
procedures and other matters, all such other agreements to be on terms
acceptable to Grace-Conn. prior to the Distribution Date.
ARTICLE III
[INTENTIONALLY OMITTED.]
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ARTICLE IV
SURVIVAL AND INDEMNIFICATION
SECTION 4.01 Survival of Agreements. All covenants and agreements of the
parties hereto contained in this Agreement shall survive the Contribution Date.
SECTION 4.02 Indemnification. (a) Except as specifically otherwise
provided in the Other Agreements, FWD Indemnitor shall indemnify, defend and
hold harmless the Fresenius AG Indemnitees from and against (1) all
Indemnifiable Losses arising from or relating to the FWD Business or the FWD
Business Assets, whether such Indemnifiable Losses relate to events, occurrences
or circumstances occurring or existing, or whether such Indemnifiable Losses are
asserted, before or after the Contribution Date; and (2) all Indemnifiable
Losses arising out of or based upon any untrue statement or alleged untrue
statement of a material fact, or omission or alleged omission to state a
material fact required to be stated, in the Registration Statement, NY Preferred
Registration Statement or the Proxy Statement supplied by Grace or its
subsidiaries or any preliminary or final form thereof or any amendment thereto,
or necessary to make the statements therein not misleading.
(b) Except as specifically otherwise provided in the Other Agreements,
Fresenius AG shall indemnify, defend and hold harmless the FWD Business
Indemnitees from and against (1) all Indemnifiable Losses of or relating to the
Fresenius AG Group (including, without limitation, relating to Fresenius USA or
its shareholders or the Fresenius AG Business), whether such Indemnifiable
Losses relate to events, occurrences or circumstances occurring or existing, or
whether such Indemnifiable Losses are asserted, before or after the Contribution
Date, other than those Indemnifiable Losses arising from the FWD Business; (2)
all Indemnifiable Losses arising from or relating to all litigation brought by
Fresenius USA shareholders acting in such capacity relating to the
Reorganization; and (3) all Indemnifiable Losses arising out of or based upon
any untrue statement or alleged untrue statement of a material fact, or omission
or alleged omission to state a material fact required to be stated, in the
Registration Statement, NY Preferred Registration Statement or the Proxy
Statement or any preliminary or final form thereof or any amendment thereto, or
necessary to make the statements therein not misleading, except that such
indemnifications shall not apply to any Indemnifiable Losses that arise out of
or are based upon any statement or omission, or alleged statement or omission,
in any portion of the Registration Statement, NY Preferred Registration
Statement or the Proxy Statement, or any preliminary or final form thereof or
any amendment thereto, supplied by Grace or its Subsidiaries.
(c) Notwithstanding anything to the contrary set forth herein,
indemnification relating to any arrangements between any member of the Fresenius
AG Group and any member of the FWD Business Group for the provision after the
Contribution of goods and services in the ordinary course shall be governed by
the terms of such arrangements and not by this Section 4.02.
SECTION 4.03 Procedures for Indemnification for Third-Party Claims. (a)
GmbH shall, and shall cause the other FWD Business Indemnitees to, notify
Fresenius AG in writing promptly after learning of any Third-Party Claim for
which any FWD Business Indemnitee intends to seek indemnification from Fresenius
AG under this Agreement. Fresenius AG shall, and shall cause the other Fresenius
AG Indemnitees to, notify GmbH in writing promptly after learning of any
Third-Party Claim for which any Fresenius AG Indemnitee intends to seek
indemnification from FWD Indemnitor under this Agreement. The failure of any
Indemnitee to give such notice shall not relieve any Indemnifying Party of its
obligations under this Article except to the extent that such Indemnifying Party
or its Affiliate is actually prejudiced by such failure to give notice. Such
notice shall describe such Third-Party Claim in reasonable detail considering
the information provided to the Indemnitee.
(b) Except as otherwise provided in subsection (c) of this Section 4.03, an
Indemnifying Party may, by notice to the Indemnitee and to FWD Indemnitor, if
Fresenius AG is the Indemnifying Party, or to the indemnitees and Fresenius AG,
if FWD Indemnitor is the Indemnifying Party, at any time after receipt by such
Indemnifying Party of such Indemnitee's notice of a Third-Party Claim, undertake
(itself or through another member of the Group of which the Indemnifying Party
is a member) the defense or settlement of such Third-Party Claim. If an
Indemnifying Party undertakes the defense of any Third-Party Claim, such
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Indemnifying Party shall thereby admit its obligation to indemnify the
Indemnitee against such Third-Party Claim, and such Indemnifying Party shall
control the investigation and defense or settlement thereof, and the Indemnitee
may not settle or compromise such Third-Party Claim, except that such
Indemnifying Party shall not require any Indemnitee, without its prior written
consent, to take or refrain from taking any action in connection with such
Third-Party Claim, or make any public statement, which such Indemnitee
reasonably considers to be against its interests, nor shall the Indemnifying
Party, without the prior written consent of the Indemnitee and of FWD
Indemnitor, if the Indemnitee is a FWD Business Indemnitee, or of the Indemnitee
and of Fresenius AG, if the Indemnitee is a Fresenius AG Indemnitee, consent to
any settlement that does not include as a part thereof an unconditional release
of the Indemnitees from liability with respect to such Third-Party Claim or that
requires the Indemnitee or any of its Representatives or Affiliates to make any
payment that is not fully indemnified under this Agreement or to submit to any
non-monetary remedy; and subject to the Indemnifying Party's control rights, as
specified herein, the Indemnitees may participate in such investigation and
defense, at their own expense. Following the provision of notice to the
Indemnifying Party, until such time as an Indemnifying Party has undertaken the
defense of any Third-Party Claim, as provided herein, such Indemnified Party
shall control the investigation and defense or settlement thereof, without
prejudice to its right to seek indemnification hereunder.
(c) If an Indemnitee reasonably determines that there may be legal defenses
available to it that are different from or in addition to those available to its
Indemnifying Party which make it inappropriate for the Indemnifying Party to
undertake the defense or settlement thereof, then such Indemnifying Party shall
not be entitled to assume undertake the defense or settlement of such
Third-Party Claim; and counsel for the Indemnifying Party shall be entitled to
conduct the defense of such Indemnifying Party and counsel for the Indemnitee
shall be entitled to conduct the defense of such Indemnitee, it being understood
that both such counsel shall cooperate with each other to conduct the defense or
settlement of such action as efficiently as possible.
(d) In no event shall an Indemnifying Party be liable for the fees and
expenses of more than one counsel for all Indemnitees in connection with any one
action, or separate but similar or related actions, in the same jurisdiction
arising out of the same general allegations or circumstances.
(e) FWD Indemnitor shall, and shall cause the other FWD Business
Indemnitees to, and Fresenius AG shall, and shall cause the other Fresenius AG
Indemnitees to, make available to each other, their counsel and other
Representatives, all information and documents reasonably available to them
which relate to any Third-Party Claim, and otherwise cooperate as may reasonably
be required in connection with the investigation, defense and settlement
thereof. Any joint defense agreement entered into by Fresenius AG or FWD
Indemnitor with any third party relating to any Third-Party Claim shall provide
that Fresenius AG or FWD Indemnitor may, if requested, provide information
obtained through any such agreement to the Fresenius AG Indemnitees or the FWD
Business Indemnitees.
SECTION 4.04 Remedies Cumulative. The remedies provided in this Article IV
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any other remedies against any Indemnifying
Party. However, the procedures set forth in Section 4.03 shall be the exclusive
procedures governing any indemnity action brought under this Agreement or
otherwise and relating to a Third-Party Claim, except as otherwise specifically
provided in any of the Other Agreements.
ARTICLE V
CERTAIN ADDITIONAL COVENANTS
SECTION 5.01 Notices to Third Parties. In addition to the actions
described in Section 5.02, the members of the Fresenius AG Group and the members
of the FWD Business Group shall cooperate to make all other filings and give
notice to and obtain consents from all third parties that may reasonably be
required to consummate the transactions contemplated by this Agreement and the
Other Agreements.
SECTION 5.02 Licenses and Permits. Each party hereto shall cause the
appropriate members of its Group to prepare and file with the appropriate
licensing and permitting authorities applications for the transfer
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or issuance as may be necessary or advisable in connection with the Contribution
to its Group of all material governmental licenses and permits required for the
members of its Group to operate its Business after the Contribution. The members
of the Fresenius AG Group and the members of the FWD Business Group shall
cooperate and use all reasonable efforts to secure the transfer or issuance of
the licenses and permits.
SECTION 5.03 Intercompany Agreements. All contracts, licenses, agreements,
commitments or other arrangements, formal or informal, between any member of the
Fresenius AG Group, on the one hand, and any member of the FWD Business Group
(or any unit of the FWD Business), on the other hand, in existence as of the
Contribution Date, pursuant to which any member of either Group provides to any
member of the other Group services (including, without limitation, management,
administrative, legal, financial, accounting, data processing, insurance, or
technical support), or the use of any Assets of any member of the other Group,
or the secondment of any employee, or pursuant to which rights, privileges or
benefits are afforded to members of either Group as Affiliates of the other
Group, shall terminate as of the close of business on the day prior to the
Contribution Date, except as specifically provided herein or in the Other
Agreements. From and after the Contribution Date, no member of either Group
shall have any rights under any such contract, license, agreement, commitment or
arrangement with any member of the other Group, except as specifically provided
herein or in the Other Agreements.
SECTION 5.04 Guarantee Obligations. (a) Fresenius AG and FWD Indemnitor
shall cooperate, and shall cause their respective Groups to cooperate, to
terminate, or to cause a member of the FWD Business Group to be substituted in
all respects for any member of the Fresenius AG Group in respect of, all
obligations of any member of the Fresenius AG Group under any loan, financing,
lease, contract, or other obligation in existence as of the Contribution Date
pertaining to the FWD Business for which such member of the Fresenius AG Group
may be liable, as guarantor, original tenant, primary obligor or otherwise. If
such a termination or substitution is not effected by the Contribution Date, (1)
FWD Indemnitor shall indemnify and hold harmless the Fresenius AG Indemnitees
for any Indemnifiable Loss arising from or relating thereto, and (2) without the
prior written consent of the Chief Financial Officer, Treasurer or any Assistant
Treasurer of Fresenius AG, from and after the Contribution Date, FWD Indemnitor
shall not, and shall not permit any member of the FWD Business Group or any of
its Affiliates to, renew or extend the term of, increase its obligations under,
or transfer to a third party, any loan, lease, contract or other obligation for
which any member of the Fresenius AG Group is or may be liable unless all
obligations of the Fresenius AG Group with respect thereto are thereupon
terminated by documentation reasonably satisfactory in form and substance to the
Chief Financial Officer, Treasurer or any Assistant Treasurer of Fresenius AG.
(b) Fresenius AG and FWD Indemnitor shall cooperate, and shall cause their
respective Groups to cooperate, to terminate, or to cause a member of the
Fresenius AG Group to be substituted in all respects for any member of the FWD
Business Group in respect of, all obligations of any member of the FWD Business
Group under any loan, financing, lease, contract or other obligation in
existence as of the Contribution Date pertaining to the Fresenius AG Business
for which such member of the FWD Business Group may be liable, as guarantor,
original tenant, primary obligor or otherwise. If such a termination or
substitution is not effected by the Contribution Date, (1) Fresenius AG shall
indemnify and hold harmless the FWD Business Indemnitees for any Indemnifiable
Loss arising from or relating thereto, and (2) without the prior written consent
of the Chief Financial Officer, Treasurer or any Assistant Treasurer of FWD
Indemnitor, from and after the Contribution Date, Fresenius AG shall not, and
shall not permit any member of the Fresenius AG Group to, renew or extend the
term of, increase its obligations under, or transfer to a third party, any loan,
lease, contract or other obligation for which any member of the FWD Business
Group is or may be liable unless all obligations of the FWD Business Group with
respect thereto are thereupon terminated by documentation reasonably
satisfactory in form and substance to the Chief Financial Officer, Treasurer or
any Assistant Treasurer of FWD Indemnitor.
SECTION 5.05 Further Assurances. In addition to the actions specifically
provided for elsewhere in this Agreement, each of the parties hereto shall use
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things reasonably necessary, proper or advisable under
applicable laws, regulations and agreements to consummate and make effective the
transactions contemplated by this Agreement including, without limitation, the
Asset transfers and debt and cash balances of the other party
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contemplated thereby following the Contribution. Without limiting the foregoing,
each party hereto shall cooperate with the other party, and execute and deliver,
or use reasonable efforts to cause to be executed and delivered, all
instruments, and to make all filings with, and to obtain all consents, approvals
or authorizations of, any governmental or regulatory authority or any other
Person under any permit, license, agreement, indenture or other instrument, and
take all such other actions as such party may reasonably be requested to take by
any other party hereto from time to time, consistent with the terms of this
Agreement and the Other Agreements, in order to effectuate the provisions and
purposes of this Agreement. Without limiting the foregoing the parties will as
promptly as practicable (and in the case of this Agreement and the
Reorganization Agreement within one week after the signing hereof in Germany or
Switzerland) apply for any notarial or similar registrations with respect to the
transactions contemplated hereby in foreign jurisdictions.
ARTICLE VI
ACCESS TO INFORMATION
SECTION 6.01 Provision of Corporate Records. Prior to or as promptly as
practicable after the Contribution Date, Fresenius AG shall deliver to GmbH all
corporate books and records of the FWD Business Group in its possession and
copies of the relevant portions of all corporate books and records of the
Fresenius AG Group relating directly and primarily to the FWD Business Assets,
the FWD Business, or the Liabilities of the FWD Business Group, including, in
each case, all active agreements, active litigation files and government
filings. From and after the Contribution Date, all such books, records and
copies shall be the property of GmbH. Prior to or as promptly as practicable
after the Contribution Date, GmbH shall deliver to Fresenius AG all corporate
books and records of the Fresenius AG Group in its possession and copies of the
relevant portions of all corporate books and records of the Fresenius AG Group
relating directly and primarily to the Fresenius AG Assets, the Fresenius AG
Business, or the Liabilities of the Fresenius AG Group, including, in each case,
all active agreements, active litigation files and government filings. From and
after the Contribution Date, all such books, records and copies shall be the
property of Fresenius AG.
SECTION 6.02 Access To Information. From and after the Contribution Date,
each of Fresenius AG and GmbH shall afford to the other and to the other's
Representatives reasonable access and duplicating rights during normal business
hours to all Information within the possession or control of such party's Group
relating to the other party's Group's pre-Contribution business, Assets or
Liabilities or relating to or arising in connection with the relationship
between the Groups on or prior to the Contribution Date, insofar as such access
is reasonably required for a reasonable purpose, subject to the provisions below
regarding Privileged Information. Without limiting the foregoing, Information
may be requested under this Section 6.02 for audit, accounting, claims,
litigation and Tax purposes, as well as for purposes of fulfilling disclosure
and reporting obligations.
In furtherance of the foregoing:
(a) Each party hereto acknowledges that: (1) Each of Fresenius AG and
GmbH (and the members of the Fresenius AG Group and the FWD Business Group,
respectively) has or may obtain Privileged Information; (2) there are a
number of Litigation Matters affecting each or both of Fresenius AG and
GmbH; (3) both Fresenius AG and GmbH have a common legal interest in
Litigation Matters, in the Privileged Information, and in the preservation
of the confidential status of the Privileged Information, in each case
relating to pre-Contribution business of the Fresenius AG Group or the FWD
Business Group or relating to or arising in connection with the
relationship between the Groups on or prior to the Contribution Date; and
(4) both Fresenius AG and GmbH intend that the transactions contemplated
hereby and by the Reorganization Agreement and the Other Agreements and any
transfer of Privileged Information in connection therewith shall not
operate as a waiver of any potentially applicable privilege.
(b) Each of Fresenius AG and GmbH agrees, on behalf of itself and each
member of the Group of which it is a member, not to disclose or otherwise
waive any privilege attaching to any Privileged Information relating to
pre-Contribution business of the FWD Business Group or the Fresenius AG
Group, respectively, or relating to or arising in connection with the
relationship between the Groups on or
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prior to the Contribution Date, without providing prompt written notice to
and obtaining the prior written consent of the other, which consent shall
not be unreasonably withheld and shall not be withheld if the other party
certifies that such disclosure is to be made in response to a likely threat
of suspension or debarment or similar action; provided, however, that
Fresenius AG and GmbH may make such disclosure or waiver with respect to
Privileged Information if such Privileged Information relates solely to the
pre-Contribution business of the Fresenius AG Group in the case of
Fresenius AG or the FWD Business Group in the case of GmbH. In the event of
a disagreement between any member of the Fresenius AG Group and any member
of the FWD Business Group concerning the reasonableness of withholding such
consent, no disclosure shall be made prior to a resolution of such
disagreement by a court of competent jurisdiction.
(c) Upon any member of the Fresenius AG Group or any member of the FWD
Business Group receiving any subpoena or other compulsory disclosure notice
from a court, other governmental agency or otherwise which requests
disclosure of Privileged Information, in each case relating to
pre-Contribution business of the FWD Business Group or the Fresenius AG
Group, respectively, or relating to or arising in connection with the
relationship between the Groups on or prior to the Contribution Date, the
recipient of the notice shall promptly provide to the other Group
(following the notice provisions set forth herein) a copy of such notice,
the intended response, and all materials or information relating to the
other Group that might be disclosed. In the event of a disagreement as to
the intended response or disclosure, unless and until the disagreement is
resolved as provided in subsection (b), the parties shall cooperate to
assert all defenses to disclosure claimed by either party's Group, and
shall not disclose any disputed documents or information until all legal
defenses and claims of privilege have been finally determined.
SECTION 6.03 Production of Witnesses. Subject to Section 6.02, after the
Contribution Date, each of Fresenius AG and GmbH shall, and shall cause each
member of the Fresenius AG Group and the FWD Business Group, respectively, to,
make available to Fresenius AG or GmbH or any member of the Fresenius AG Group
or of the FWD Business Group, as the case may be, upon written request, such
Group's directors, officers, employees and agents as witnesses to the extent
that any such Person may reasonably be required in connection with any
Litigation Matters, administrative or other proceedings in which the requesting
party may from time to time be involved and relating to pre-Contribution
business of the Fresenius AG Group or the FWD Business Group or relating to or
in connection with the relationship between the Groups on or prior to the
Contribution Date.
SECTION 6.04 Retention of Records. Except as otherwise agreed in writing,
or as otherwise provided in the Other Agreements, each of Fresenius AG and GmbH
shall, and shall cause the members of the Group of which it is a member to,
retain all Information in such party's Group's possession or under its control
relating directly and primarily to the pre-Contribution business, Assets or
Liabilities of the other party's Group that is less than ten years old until
such Information is at least ten years old except that if, prior to the
expiration of such period, any member of either party's Group wishes to destroy
or dispose of any such Information that is at least three years old, prior to
destroying or disposing of any of such Information, (1) the party whose Group is
proposing to dispose of or destroy any such Information shall provide no less
than 30-days' prior written notice to the other party, specifying the
Information proposed to be destroyed or disposed of, and (2) if, prior to the
scheduled date for such destruction or disposal, the other party requests in
writing that any of the Information proposed to be destroyed or disposed of be
delivered to such other party, the party whose Group is proposing to dispose of
or destroy such Information promptly shall arrange for the delivery of the
requested Information to a location specified by, and at the expense of, the
requesting party.
SECTION 6.05 Confidentiality. Subject to Section 6.02, which shall govern
Privileged Information, from and after the Contribution Date, each of Fresenius
AG and GmbH shall hold, and shall use its reasonable efforts to cause its
Affiliates and Representatives to hold, in strict confidence all Information
concerning the other party's Group obtained by it prior to the Contribution Date
or furnished to it by such other party's Group pursuant to this Agreement or the
Other Agreements and shall not release or disclose such Information to any other
Person, except its Affiliates and Representatives, who shall be bound by the
provisions of this Section 6.05, and each party shall be responsible for a
breach by any of its Affiliates or Representatives; provided, however, that any
member of the Fresenius AG Group or the FWD Business
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Group may disclose such Information to the extent that (a) disclosure is
compelled by judicial or administrative process or, in the opinion of such
Person's counsel, by other requirements of law, or (b) such party can show that
such Information was (1) available to such Person on a nonconfidential basis
(other than from a member of the other party's Group) prior to its disclosure by
the other party's Group, (2) in the public domain through no fault of such
Person or (3) lawfully acquired by such Person from another source after the
time that it was furnished to such Person by the other party's Group, and not
acquired from such source subject to any confidentiality obligation on the part
of such source, or on the part of the acquiror, known to the acquiror.
Notwithstanding the foregoing, each of Fresenius AG and GmbH shall be deemed to
have satisfied its obligations under this Section 6.05 with respect to any
Information (other than Privileged Information) if it exercises the same care
with regard to such Information as it takes to preserve confidentiality for its
own similar Information.
SECTION 6.06 Cooperation With Respect To Government Reports and
Filings. Fresenius AG, on behalf of itself and each member of the Fresenius AG
Group, agrees to provide any member of the FWD Business Group, and GmbH, on
behalf of itself and each member of the FWD Business Group, agrees to provide
any member of the Fresenius AG Group, with such cooperation and Information as
may be reasonably requested by the other in connection with the preparation or
filing of any government report or other government filing contemplated by this
Agreement or in conducting any other government proceeding relating to
pre-Contribution business of the Fresenius AG Group or the FWD Business Group,
Assets or Liabilities of either Group or relating to or in connection with the
relationship between the Groups on or prior to the Contribution Date. Such
cooperation and Information shall include, without limitation, promptly
forwarding copies of appropriate notices and forms or other communications
received from or sent to any government authority which relate to the Fresenius
AG Group, in the case of the FWD Business Group, or the FWD Business Group, in
the case of the Fresenius AG Group. Each party shall make its employees and
facilities available during normal business hours and on reasonable prior notice
to provide explanation of any documents or Information provided hereunder.
ARTICLE VII
NO REPRESENTATIONS OR WARRANTIES
SECTION 7.01 No Representations Or Warranties. Fresenius AG acknowledges
that, prior to the date of this Agreement, it has had primary responsibility for
the operation and management of the FWD Business Assets. GmbH understands and
agrees that no member of the Fresenius AG Group is, in this Agreement or in any
other agreement or document, representing or warranting to GmbH or any member of
the FWD Business Group in any way as to the FWD Business Assets, the FWD
Business or the Liabilities of the FWD Business Group or as to any consents or
approvals required in connection with the consummation of the transactions
contemplated by this Agreement, it being agreed and understood that GmbH and
each member of the FWD Business Group shall take all of the FWD Business Assets
"as is, where is". GmbH and each member of the FWD Business Group shall bear the
economic and legal risk that conveyances of the FWD Business Assets shall prove
to be insufficient, that the title of any member of the FWD Business Group to
any FWD Business Assets, shall be other than good and marketable and free from
encumbrances or that results from the failure of GmbH or any member of the FWD
Business Group to obtain any consents or approvals relating to the FWD Business
required in connection with the consummation of the transactions contemplated by
this Agreement. The foregoing shall be without prejudice to any rights under
Section 4.02 or Section 5.05 of this Agreement.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 Use of Fresenius AG Name and Mark. Prior to the Contribution
Date, Fresenius AG shall enter into a license agreement consistent with the
terms set forth in Exhibit C hereto, providing for the use of certain of
Fresenius AG's names and marks.
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SECTION 8.02 Complete Agreement. This Agreement, the exhibits and
schedules hereto and the agreements and other documents referred to herein shall
constitute the entire agreement between the parties hereto with respect to the
subject matter hereof (other than the Reorganization Agreement and the schedules
and exhibits thereto) and shall supersede all previous negotiations, commitments
and writings with respect to such subject matter.
SECTION 8.03 Expenses. Fresenius AG shall bear all costs with respect to
the transactions contemplated hereby and by the Other Agreements, except as
otherwise specifically provided in the Reorganization Agreement and the Other
Agreements.
SECTION 8.04 Jurisdiction and Forum. (a) The parties hereto agree that the
appropriate forum for any disputes between any of the parties hereto arising out
of this Agreement or the transactions contemplated hereby shall be any state or
federal court in the State of New York or the State of Delaware provided that
the foregoing shall not limit the rights of any person to obtain execution of
judgment in any other jurisdiction. The parties hereto further agree, to the
extent permitted by law, that final and unappealable judgment against any of
them in any action or proceeding contemplated above shall be conclusive and may
be enforced in any other jurisdiction within or outside the United States by
suit on the judgment, a certified or exemplified copy of which shall be
conclusive evidence of the fact and amount of such judgment.
(b) By the execution and delivery of this Agreement, each of the parties
hereto (i) irrevocably designates and appoints The Corporation Trust Company
("CTC-NY") care of CT Corporation System, at 1633 Broadway, 23rd floor, in the
City of New York, County of New York, State of New York, 10019, or The
Corporation Trust Company ("CTC-DE") care of Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware, 19801, as its authorized agent upon which
process may be served in any action or proceeding arising out of or relating to
this Agreement, (ii) submits to the personal jurisdiction of any state or
federal court in the State of New York or the State of Delaware in any such
action or proceeding, and (iii) agrees that service of process upon CTC-NY or
upon CTC-DE shall be deemed in every respect effective service of process upon
such person in any such action or proceeding. Each of the parties hereto further
agrees to take any and all action, including the execution and filing of any and
all such documents and instruments, as may be necessary to continue such
designation and appointment of CTC-NY or CTC-DE in full force and effect so long
as this Agreement shall be in effect. The foregoing shall not limit the rights
of any party to serve process in any other manner permitted by law.
(c) To the extent that either of the parties hereto has or hereafter may
acquire any immunity from jurisdiction of any court or from any legal process
(whether through service or notice, attachment prior to judgment, attachment in
aid of execution, execution or otherwise) with respect to itself or its
property, such person hereby irrevocably waives such immunity in respect of its
obligations with respect to this Agreement.
SECTION 8.05 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telegram, telex or other standard form of telecommunications, or by registered
or certified mail, postage prepaid, return receipt requested, addressed as
follows:
If to Fresenius AG or any member of the Fresenius AG Group:
Fresenius AG
Borkenberg 14
61440 Oberursel
61343 Bad Homburg
Germany
Attention: Mr. Udo Werle
Fax: 011-49-6171-60-2104
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with a copy to:
O'Melveny & Myers
Citicorp Center
153 East 53rd Street
New York, NY 10022-4611
Attention: Dr. Ulrich Wagner
Fax: (212) 326-2061
If to GmbH or any member of the FWD Business Group
GmbH
c/o Fresenius AG
Borkenberg 14
61440 Oberursel
61343 Bad Homburg
Germany
Attention: Mr. Udo Werle
Fax: 011-49-6171-60-2104
with a copy to:
W. R. Grace & Co.-Conn.
One Town Center Road
Boca Raton, Florida 33486-1010
Attention: Secretary
Fax: (407) 362-1635
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Andrew R. Brownstein, Esq.
Fax: (212) 403-2000
or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section 8.05.
SECTION 8.06 Amendment and Modification. This Agreement may be amended,
modified or supplemented only by a written agreement signed by all of the
parties hereto.
SECTION 8.07 Successors and Assigns; No Third-Party Beneficiaries. This
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties hereto and their successors and permitted assigns,
but neither this Agreement nor any of the rights, interests and obligations
hereunder shall be assigned by any party hereto without the prior written
consent of the other party. Except for the provisions of Sections 4.02 and 4.03
relating to indemnities, which are also for the benefit of the Indemnitees, this
Agreement is solely for the benefit of the parties hereto and their Subsidiaries
and Affiliates and is not intended to confer upon any other Persons any rights
or remedies hereunder.
SECTION 8.08 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
SECTION 8.09 Interpretation. The Article and Section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties hereto and shall not in any way affect the meaning or
interpretation of this Agreement.
SECTION 8.10 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable,
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the remaining provisions hereof, or the application of such provision to persons
or circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party.
SECTION 8.11 References; Construction. References to any "Article,"
"Exhibit," "Schedule" or "Section," without more, are to Articles, Exhibits,
Schedules and Sections to or of this Agreement. Unless otherwise expressly
stated, clauses beginning with the term "including" set forth examples only and
in no way limit the generality of the matters thus exemplified.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
FRESENIUS AG
By: /s/ GERD KRICK
------------------------------------
Name:
Title:
STERIL PHARMA GMBH
By: /s/ GERD KRICK
------------------------------------
Name:
Title:
W. R. GRACE & CO.-CONN.
By: /s/ ALBERT J. COSTELLO
------------------------------------
Name:
Title:
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APPENDIX B
FORM OF
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION
OF W. R. GRACE & CO.
UNDER SECTION 805 OF THE BUSINESS
CORPORATION LAW
The undersigned, being the President and the Secretary, respectively, of W.
R. Grace & Co., hereby certify that:
1. The name of the corporation is W. R. GRACE & CO. (the "Corporation").
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 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. Article FIRST of the Certificate of Incorporation of the Corporation is
hereby amended to be as follows:
The name of the Corporation is
FRESENIUS NATIONAL MEDICAL CARE, INC.
5. Article FOURTH, paragraphs (a) and (b) of the Certificate of
Incorporation of the Corporation are hereby amended to be as follows:
(a) The Corporation shall have authority to issue an aggregate of
600,000,000 shares of capital stock, divided into classes as set forth in
this Article.
(b) The designation of each class of shares which the Corporation
shall be authorized to issue, the authorized number of shares of each
class, and the par value thereof per share, shall be as follows:
<TABLE>
<CAPTION>
AUTHORIZED
PAR VALUE NUMBER OF
DESIGNATION OF CLASS PER SHARE SHARES
----------------------------------------------------- --------- -----------
<S> <C> <C>
6% Preferred......................................... $ 100 40,000
Class A Preferred.................................... $ 100 50,000
Class B Preferred.................................... $ 100 40,000
Class C Preferred.................................... $ 1 5,000,000
Class D Preferred.................................... $ .10 100,000,000
Common............................................... $ 1 300,000,000
</TABLE>
6. Article FOURTH, paragraph (c) of the Certificate of Incorporation of the
Corporation is hereby amended by the addition of new subparagraphs 5 through 9,
replacing the current subparagraphs 5 through 7, to be as follows:
5. CLASS D PREFERRED STOCK.
SECTION 1. DESIGNATION; NUMBER; LIQUIDATION PREFERENCE.
(a) The shares of such series shall be designated as Class D Preferred
Stock, and such series shall also be known as the "Class D Special Dividend
Preferred Stock". The number of shares authorized may be decreased (but not
increased) by the Board of Directors without a vote of shareholders; provided,
however,
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that such number may not be decreased below the number of then outstanding
shares of Class D Special Dividend Preferred Stock.
(b) Subject to Section 7, the Class D Special Dividend Preferred Stock
shall have, with respect to rights on liquidation, dissolution or winding up, a
liquidation preference of $.10 per share and with respect to dividend rights and
rights on liquidation, dissolution or winding up, shall rank, subsequent to all
shares of the 6% Preferred Stock, Class A Preferred Stock and Class B Preferred
Stock of the Corporation issued and outstanding as of the Issue Date, and prior
to all other shares of capital stock of the Corporation now or hereafter
authorized including, without limitation, the Class C Preferred Stock and the
Common Stock of the Corporation (collectively, the "Junior Stock").
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of shares of Class D Special Dividend Preferred Stock, in
preference to holders of shares of Junior Stock, shall be entitled to receive,
when, as and if declared by the Board of Directors, out of the assets of the
Corporation at the time legally available therefor, a special dividend (the
"Special Dividend") equal, in the aggregate with respect to all shares of Class
D Special Dividend Preferred Stock, to the Special Dividend Amount ("Special
Dividend Amount") determined pursuant to the formula set forth below. Upon such
a declaration, and subject to paragraph (d) below, the Special Dividend shall be
payable in cash in annual installments on October 1, 2002 and, thereafter, on
October 1 in each of the following years, if applicable (each such date, a
"Payment Date"); and the aggregate amount payable on any Payment Date shall be
equal to the lesser of (i) $100 million or (ii) the amount of the Special
Dividend Amount then remaining unpaid in accordance with the provisions hereof.
Subject to the requirements of applicable law, the Special Dividend shall be
declared in a single declaration irrespective of the number of installments in
which it will be paid. The Special Dividend Amount shall be publicly announced
by Fresenius Medical Care on or before May 1, 2002 (such announcement, the
"Public Announcement").
(b) Calculation of the Special Dividend Amount.
(i) The Special Dividend Amount shall be equal to the Target Face
Amount plus the Special Differential, if the Special Differential is a
positive number, and less the absolute value of the Special Differential,
if the Special Differential is a negative number.
(ii) The Special Differential shall be equal to (A) the Applicable
Percentage of the excess of the cumulative actual Adjusted Cash Flow of
Fresenius Medical Care on a consolidated basis for the five-year period
beginning on January 1, 1997 and ending on December 31, 2001 (the "Dividend
Accrual Period"), above $3.7 billion less (B) $200 million.
(iii) The Adjusted Cash Flow of Fresenius Medical Care on a
consolidated basis shall be equal to net income to common shareholders
(without regard to the Special Dividend), plus depreciation and
amortization, plus non-cash restructuring charges, provisions for
impairment in the value of long-term assets, and similar recorded reserves
as of December 31, 2001, as reflected on Fresenius Medical Care's
consolidated audited financial statements prepared in accordance with U.S.
GAAP, less any after-tax cash expenditures paid to third parties incurred
in connection with the matters underlying the investigations of NMC and its
subsidiaries by the OIG referenced in the five subpoenas received by NMC
from the OIG on October 17, 1995 not reflected in net income to common
shareholders during the Dividend Accrual Period.
(iv) The Applicable Percentage shall be 44.8%, which percentage shall
be increased and decreased proportionately to reflect issuances or
repurchases (to the extent that no Special Dividend is payable with respect
to such repurchased shares) of Class D Special Dividend Preferred Stock
following the Reorganization.
(v) Accompanying payment of the Special Dividend shall be a
Certificate of the Chief Financial Officer of Fresenius Medical Care
certifying that the amount of the Special Dividend has been calculated in
accordance with the provisions hereof, together with an opinion of
Fresenius Medical Care's independent public accountant to the same effect.
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(c) The Special Dividend payable pursuant to Section 2(b) shall begin to
accrue and shall be cumulative from January 1, 1997, and shall accrue on a
quarterly basis, in each case, whether or not declared, subject to decrease in
future periods to the extent that the Special Differential decreases after any
accrual. Any payment of the Special Dividend made in an amount less than the
total amount of such Special Dividend at the time payable shall be allocated pro
rata on a share-by-share basis among all such shares of Class D Special Dividend
Preferred Stock at the time outstanding. The Board of Directors may fix a record
date for the determination of holders of shares of Class D Special Dividend
Preferred Stock entitled to receive payment of a dividend declared thereon,
which record date shall be no more than 60 days or less than 10 days prior to
the date fixed for the payment thereof.
(d) The Special Dividend shall be paid in cash, except that if the Common
Stock is listed on the NYSE or quoted on the Nasdaq Stock Market, the Special
Dividend, or any installment thereof, may be paid, in the sole discretion of the
Corporation, either (i) in cash, (ii) in Common Stock, based upon the Market
Price as of the record date for such payment, or (iii) any combination of cash
and Common Stock, based upon the Market Price as of the record date for such
payment. All Common Stock issued as a dividend with respect to the Class D
Special Dividend Preferred Stock shall thereupon be duly authorized, validly
issued, fully paid and nonassessable.
(e) If at any time after May 1, 2002 any portion of the Special Dividend is
not declared, or is not paid on the applicable Payment Date, the Corporation
shall not make any Restricted Payment.
SECTION 3. ADJUSTMENTS.
The Board of Directors of the Corporation, with the concurrence of all of
the Independent Directors of Fresenius Medical Care, or a majority of such
Independent Directors if there are three or more, shall make appropriate
adjustments to the provisions of Section 2 hereof to preserve their intended
economic effect, in the light of changes in capitalization, accounting policy
and extraordinary transactions (including without limitation mergers,
consolidations or sales of assets). No adjustments of such provisions on account
of the foregoing or otherwise shall be made without the concurrence of a
majority of the Independent Directors of Fresenius Medical Care.
SECTION 4. VOTING RIGHTS.
In addition to any voting rights provided by law, the holders of shares of
Class D Special Dividend Preferred Stock shall have the following voting rights:
(a) Except as otherwise required by applicable law, each share of Class D
Special Dividend Preferred Stock shall entitle the holder thereof to vote, in
person or by proxy, at each special or annual meeting of shareholders, on all
matters voted on by holders of Common Stock voting together as a single class
with other shares entitled to vote thereon. With respect to any such vote, each
share of Class D Special Dividend Preferred Stock shall entitle the holder
thereof to cast 1/10(one-tenth) of a vote.
(b) If on any date after the earlier of (x) the Public Announcement or (y)
May 1, 2002, the Corporation shall have failed to declare, or shall have failed
to pay on the applicable Payment Date, the full amount of the installment of the
Special Dividend then payable on the Class D Special Dividend Preferred Stock,
then the number of directors constituting the Board of Directors shall, without
further action, be increased by two and the holders of shares of Class D Special
Dividend Preferred Stock shall have, in addition to the other voting rights set
forth herein with respect to the Class D Special Dividend Preferred Stock, the
exclusive right, voting separately as a single class, to elect two directors of
the Corporation to fill such newly created directorships, by written consent as
provided herein, or at a special meeting of such holders called as provided
herein. Any such additional directors shall continue as directors (subject to
reelection or removal as provided in Section 4(c)(ii)) and the holders of Class
D Special Dividend Preferred Stock shall have such additional voting rights
until such time as all installments of the Special Dividend then payable on the
Class D Special Dividend Preferred Stock shall have been declared and paid in
full at which time such additional directors shall cease to be directors, the
number of directors constituting the Board of Directors shall be reduced by two
and such additional voting rights of the holders of Class D Special Dividend
Preferred Stock shall terminate, subject to revesting in the event of each and
every subsequent event of the character indicated above.
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(c) (i) The foregoing right of holders of shares of Class D Special
Dividend Preferred Stock to take any action as provided in Section 4(b) may be
exercised at any annual meeting of shareholders in New York or at a special
meeting of holders of shares of Class D Special Dividend Preferred Stock in New
York, held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares required to take
such action. So long as such right to vote, as provided in Section 4(b),
continues (and unless such right has been exercised by written consent of the
minimum number of shares required to take such action), the President of the
Corporation may call, and upon the written request of holders of record of at
least 10% of the aggregate outstanding shares of Class D Special Dividend
Preferred Stock addressed to the Secretary of the Corporation at the principal
office of the Corporation, shall call, a special meeting of the holders of
shares of Class D Special Dividend Preferred Stock entitled to vote as provided
herein. Such meeting shall be called within 30 days after delivery of such
request to the Secretary, and held within 60 days of delivery after such request
or as soon thereafter as practicable at the place and upon the notice provided
by law and in the by-laws of the Corporation for the holding of meetings of
shareholders.
(ii) At each meeting of shareholders at which the holders of shares of
Class D Preferred Stock shall have the right, voting separately as a single
class, to elect two directors of the Corporation as provided in Section 4(b) or
to take any action, the presence in person or by proxy of the holders of record
of one-third of the total aggregate number of shares of Class D Special Dividend
Preferred Stock then outstanding and entitled to vote on the matter shall be
necessary and sufficient to constitute a quorum. At any such meeting or at any
adjournment thereof:
(A) the absence of a quorum of the holders of shares of Class D
Special Dividend Preferred Stock shall not prevent the election of
directors other than those to be elected by the holders of shares of Class
D Special Dividend Preferred Stock, and the absence of a quorum of the
holders of shares of any other class or series of capital stock shall not
prevent the election of directors to be elected by the holders of shares of
Class D Special Dividend Preferred Stock or the taking of any action as
provided in Section 4(b); and
(B) in the absence of a quorum of the holders of shares of Class D
Special Dividend Preferred Stock, a majority of the holders of such shares
present in person or by proxy shall have the power to adjourn the meeting
as to the actions to be taken by the holders of shares of Class D Special
Dividend Preferred Stock from time to time and place to place without
notice other than announcement at the meeting until a quorum shall be
present.
For taking of any action as provided in Section 4(b) by the holders of
shares of Class D Special Dividend Preferred Stock each such holder shall have
one vote for each share of such stock standing in his name on the transfer books
of the Corporation as of any record date fixed for such purpose or, if no such
date be fixed, at the close of business on the Business Day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the Business Day next preceding the day on which the meeting is held;
provided, however, that shares of Class D Special Dividend Preferred Stock held
by the Corporation or any Subsidiary of the Corporation shall not be deemed to
be outstanding for purposes of taking any action as provided in this Section 4.
Each director elected by the holders of shares of Class D Special Dividend
Preferred Stock, as provided in Section 4(b) shall, unless his term shall expire
earlier in accordance with the provisions thereof, or unless he shall be removed
as provided in this Section 4(c)(ii), hold office until the annual meeting of
shareholders next succeeding his election or until his successor, if any, is
elected and qualified.
If any director so elected by the holders of Class D Special Dividend
Preferred Stock shall cease to serve as a director before his term shall expire
(except by reason of the termination of the voting rights accorded to the
holders of Class D Special Dividend Preferred Stock in accordance with Section
4(b)), the holders of the Class D Special Dividend Preferred Stock then
outstanding and entitled to vote for such director may, by written consent as
provided herein or at a special meeting of such holders called as provided
herein, elect a successor to hold office for the unexpired term of the director
whose place shall be vacant.
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Any director elected by the holders of shares of Class D Special Dividend
Preferred Stock, voting together as a separate class, may be removed from office
with or without cause by the vote or written consent of the holders of at least
a majority of the aggregate outstanding shares of Class D Special Dividend
Preferred Stock at the time of removal. A special meeting of the holders of
shares of Class D Special Dividend Preferred Stock for such purpose may be
called in accordance with the procedures set forth in Section 4(c)(i).
SECTION 5. OPTIONAL REDEMPTION.
(a) (i) The Corporation shall not have any right to redeem any shares of
Class D Special Dividend Preferred Stock prior to the Public Announcement.
Thereafter, the Corporation shall have the right, at its sole option and
election, to redeem (an "Optional Redemption") all or a portion of the shares of
Class D Special Dividend Preferred Stock, on not more than 45 nor less than 30
days' notice of the date of redemption (any such date an "Optional Redemption
Date"), at a price per share (the "Optional Redemption Price") equal to the
greater of (A) the Liquidation Preference of such share, or (B) an amount per
share equal to any unpaid portion of the Special Dividend, whether or not
declared or payable, on the applicable Optional Redemption Date. The Optional
Redemption Price shall be paid in cash, except that if the Common Stock is
listed on the NYSE or quoted on the Nasdaq Stock Market, the Optional Redemption
Price may be paid, in the sole discretion of the Corporation, either in (i)
cash, (ii) Common Stock, based upon the Market Price as of the record date for
such Optional Redemption, or (iii) any combination of cash and Common Stock,
based upon the Market Price as of the record date for such Optional Redemption.
All Common Stock issued as a redemption amount with respect to the Class D
Special Dividend Preferred Stock shall thereupon be duly authorized, validly
issued, fully paid and nonassessable.
(ii) If the Corporation shall determine to redeem less than all the shares
of Class D Special Dividend Preferred Stock then outstanding pursuant to Section
5 (a)(i) of this subparagraph 5, the shares to be redeemed shall be selected pro
rata (as nearly as may be) so that the number of shares redeemed from each
holder shall be the same proportion of all the shares to be redeemed that the
total number of shares of Class D Special Dividend Preferred Stock then held by
such holder bears to the total number of shares of Class D Special Dividend
Preferred Stock then outstanding.
(b) Notice of any Optional Redemption shall specify the Optional Redemption
Date, the Optional Redemption Price, the place or places of payment, that
payment (including the amount and terms thereof) will be made upon presentation
and surrender of the shares of Class D Special Dividend Preferred Stock, and
shall be given by publication in a newspaper of general circulation in the
Borough of Manhattan, the City of New York (if such publication shall be
required by applicable law, rule, regulation or securities exchange
requirement), not less than 30, nor more than 45, days prior to the Optional
Redemption Date; and, in any case, a similar notice shall be mailed at least 30,
but not more than 45, days prior to the Optional Redemption Date to each holder
of shares of Class D Special Dividend Preferred Stock, at such holder's address
as it appears on the transfer books of the Corporation. In order to facilitate
the redemption of shares of Class D Special Dividend Preferred Stock, the Board
of Directors may fix a record date for the determination of shares of Class D
Special Dividend Preferred Stock to be redeemed, not more than 60 days or less
than 45 days prior to the Optional Redemption Date.
(c) On the date of any Optional Redemption that is specified in a notice
given pursuant to Section 5(b), the Corporation shall, and at any time after
such notice shall have been mailed and before the Optional Redemption Date the
Corporation may, deposit for the benefit of the holders of shares of Class D
Special Dividend Preferred Stock the funds necessary for such redemption with a
bank or trust company in the Borough of Manhattan, the City of New York, having
a capital and surplus of at least $100,000,000. Any moneys so deposited by the
Corporation and unclaimed at the end of two years from the Optional Redemption
Date shall revert to the general funds of the Corporation. After such reversion,
any such bank or trust company shall, upon demand, pay over to the Corporation
such unclaimed amounts and, thereupon, such bank or trust company shall be
relieved of all responsibility in respect thereof and any holder of shares of
Class D Special Dividend Preferred Stock to be redeemed shall look only to the
Corporation for the payment of the Optional Redemption Price.
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(d) Notice of redemption having been given as aforesaid, upon the deposit
of funds pursuant to Section 5(c) in respect of shares of Class D Special
Dividend Preferred Stock to be redeemed pursuant to Section 5(a),
notwithstanding that any certificates for such shares shall not have been
surrendered for cancellation, from and after the Optional Redemption Date, (i)
the shares represented thereby shall no longer be deemed outstanding, (ii) the
rights to receive dividends thereon shall cease to accrue, and (iii) all rights
of the holders of shares of Class D Special Dividend Preferred Stock to be
redeemed shall cease and terminate, excepting only the right to receive the
Optional Redemption Price therefor; provided, however, that, if the Corporation
shall default in the payment of the Optional Redemption Price, the shares of
Class D Special Dividend Preferred Stock shall thereafter be deemed to be
outstanding and the holders thereof shall have all of the rights of a holder of
Class D Special Dividend Preferred Stock until such time as such default shall
no longer be continuing or shall have been waived by holders of at least 66-2/3%
of the then outstanding shares of Class D Special Dividend Preferred Stock.
(e) Any notice that is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not the holder of shares of Class D
Special Dividend Preferred Stock receives such notice, and failure to give such
notice by mail, or any defect in such notice, to the holders of any shares
designated for redemption shall not affect the validity of the proceedings for
the redemption of any other shares of Class D Special Dividend Preferred Stock.
On or after the Optional Redemption Date, each holder of the shares called for
redemption shall surrender the certificate evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon be
entitled to receive payment of the Optional Redemption Price. If less than all
the shares evidenced by any such surrendered certificate are redeemed, a new
certificate shall be issued evidencing the unredeemed shares.
SECTION 6. ACQUIRED SHARES.
Any shares of Class D Special Dividend Preferred Stock acquired by the
Corporation or any of its Subsidiaries in any manner whatsoever shall be retired
and cancelled promptly after the acquisition thereof. All such shares of Class D
Special Dividend Preferred Stock shall upon their cancellation become authorized
but unissued shares of Preferred Stock of the Corporation.
SECTION 7. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) If the Corporation shall commence a voluntary case or proceeding under
the United States bankruptcy laws or any applicable bankruptcy, insolvency or
similar law of any state or other country, or consent to the entry of an order
for relief in an involuntary case under any such law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief or similar decree or order in respect of the Corporation shall be
entered by a court having jurisdiction in the premises in an involuntary case
under the United States bankruptcy laws or any applicable bankruptcy, insolvency
or similar law of any other country, or appointing a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or ordering the winding
up or liquidation of its affairs, and on account of any such event the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up, no distribution shall be made to the
holders of shares of Junior Stock unless, prior thereto, the holders of shares
of Class D Special Dividend Preferred Stock shall have received the Optional
Redemption Price.
(b) Neither the consolidation or merger of the Corporation with or into any
other Person nor the sale or transfer of all or any part of the Corporation's
assets for cash, securities or other property shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Section 7.
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SECTION 8. DEFINITIONS.
For the purposes of this Certificate of Amendment, the following terms
shall have the meanings indicated:
"Adjusted Cash Flow" shall have the meaning ascribed to such term in
Section (2)(b)(iii).
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act.
"Applicable Percentage" shall have the meaning ascribed to such term in
Section 2(b)(iv).
"Board of Directors" shall mean the Board of Directors of the Corporation.
"Business Day" shall mean any day other than a Saturday, Sunday or other
day on which commercial banks in the City of New York are authorized or required
by law or executive order to close.
"Common Stock" shall have the meaning ascribed to such term in Section 1(a)
of this Article FOURTH.
"Effective Time" shall have the meaning ascribed to such term in the
Reorganization Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Securities and Exchange Commission
thereunder.
"Fresenius Medical Care" shall mean Fresenius Medical Care AG, an
Aktiengesellschaft organized under the laws of the Federal Republic of Germany.
"Independent Directors" shall mean individuals without a substantial
business or professional relationship with the Corporation.
"Issue Date" shall mean the date of first issue of Class D Special Dividend
Preferred Stock.
"Junior Stock" shall have the meaning ascribed to such term in Section 1(b)
of this article FOURTH.
"Liquidation Preference," with respect to a share of Class D Special
Dividend Preferred Stock, shall mean $.10.
"Market Price" shall mean, per share of Common Stock, on any date specified
herein, the closing price per share of the Common Stock on such date published
in The Wall Street Journal or, if no such closing price on such date is
published in The Wall Street Journal, the average of the closing bid and asked
prices on such date, as officially reported on the principal national securities
exchange on which the Common Stock is then listed or admitted to trading, or, if
the Common Stock is not then listed or admitted to trading on any national
securities exchange, as quoted by the Nasdaq Stock Market.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Nasdaq Stock Market" shall mean the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotations System.
"NMC" shall mean National Medical Care, Inc., a Delaware corporation.
"NYSE" shall mean the New York Stock Exchange.
"OIG" shall mean the Office of the Inspector General of the United States
Department of Health and Human Services.
"Optional Redemption" shall have the meaning ascribed to such term in
Section 5(a) of this Article FOURTH.
"Optional Redemption Date" shall have the meaning ascribed to such term in
Section 5(a) of this Article FOURTH.
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"Optional Redemption Price" shall have the meaning ascribed to such term in
Section 5(a) of this Article FOURTH.
"Payment Date" shall have the meaning ascribed to such term in Section 2(a)
of this Article FOURTH.
"Person" shall mean any individual, firm, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
government (or an agency or political subdivision thereof) or other entity of
any kind, and shall include any successor (by merger or otherwise) of such
entity.
"Preferred Stock" shall mean any preferred stock of the Corporation.
"Public Announcement" shall have the meaning ascribed to such term in
Section 2(a) of this ARTICLE FOURTH.
"Reorganization" shall have the meaning ascribed to such term in the
Reorganization Agreement.
"Reorganization Agreement" shall mean the Agreement and Plan of
Reorganization dated as of February 4, 1996 by and between the Corporation and
Fresenius AG.
"Restricted Payment" shall mean any dividend payment or other distribution
of assets, properties, cash, rights, obligations or securities by the
Corporation on account of any shares of Junior Stock or the purchase, redemption
or other acquisition for value by the Corporation or any Subsidiary of the
Corporation of any shares of Junior Stock, except for distributions or purchases
paid exclusively in other Junior Stock.
"Special Differential" shall have the meaning ascribed to such term in
Section 2(b)(ii).
"Special Dividend" shall have the meaning ascribed to such term in Section
2(a).
"Special Dividend Amount" shall have the meaning ascribed to such term in
Section 2(a).
"Subsidiary" of any Person shall mean any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
"Target Face Amount" shall mean the sum of $200 million, in the aggregate
with respect to all shares of Class D Special Dividend Preferred Stock.
"U.S. GAAP" shall mean United States Generally Accepted Accounting
Principles.
"Voluntary Liquidation Event" shall have the meaning ascribed to such term
in Section 7(a).
SECTION 9. PREEMPTIVE RIGHTS.
The holders of Class D Special Dividend Preferred Stock shall not be
entitled to any preemptive or subscription rights in respect of any securities
of the Corporation.
6. In the event of the liquidation, dissolution or winding up (whether
voluntary or involuntary) of the Corporation, after payment to the holders of
the 6% Preferred Stock, the Class A Preferred Stock, the Class B Preferred
Stock, the Class C Preferred Stock and the Class D Preferred Stock of the
amounts to which such holders shall be entitled, the remaining assets of the
Corporation shall be distributed ratably to the holders of the Common Stock.
7. Except as may be otherwise required by the laws of the State of New
York, in voting upon all questions each holder of capital stock of the
Corporation shall be entitled to one hundred sixty votes for every share of 6%
Preferred Stock, sixteen votes for every share of Class A Preferred Stock,
sixteen votes for every share of Class B Preferred Stock, and one vote for every
share of Common Stock held by such holder, and except as may be otherwise
required by such laws, or specified by the Board of Directors with respect to
any series of the Class C Preferred Stock, all shares of stock shall vote as a
single class.
8. Before any stock authorized under this Certificate of Incorporation but
unissued is otherwise offered for sale, it shall first be offered to the
shareholders of the Corporation as follows: holders of 6% Preferred Stock, Class
A Preferred Stock and Class B Preferred Stock shall have the right to take at
par in proportion to their holdings all such additional 6% Preferred Stock; any
increase in Class A Preferred Stock shall be offered
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at the issue price to the holders of Class A Preferred Stock and to the holders
of Class B Preferred Stock in proportion to their holdings; any increase in
Class B Preferred Stock shall be offered at the issue price to the holders of
Class A Preferred Stock and to the holders of Class B Preferred Stock in
proportion to their holdings. No holder of any class of capital stock shall be
entitled as a matter of right to be offered any shares of Class C Preferred
Stock, Class D Preferred Stock or Common Stock, or any options, warrants or
rights to acquire Class C Preferred Stock, Class D Preferred Stock or Common
Stock, or any securities convertible into Class C Preferred Stock, Class D
Preferred Stock or Common Stock, which the Corporation may propose to issue.
IN WITNESS WHEREOF, we have signed this Certificate of Amendment on this
day of , 1996.
--------------------------------------
Name:
President
--------------------------------------
Name:
Secretary
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APPENDIX C
[LETTERHEAD OF MERRILL LYNCH]
February 4, 1996
Board of Directors
W.R. Grace & Co.
One Town Center Rd.
Boca Raton, FL 33486-1010
Dear Sirs and Mesdames:
We understand that W.R. Grace & Co. (the "Company") has entered into an
Agreement and Plan of Reorganization (the "Agreement") with Fresenius
Aktiengesellschaft ("Fresenius AG") and Fresenius USA, Inc. ("FUSA"), and the
Company, Fresenius AG and/or certain of their respective affiliates have entered
or will enter into certain related agreements, including a Contribution
Agreement (the "Contribution Agreement") by and between Fresenius AG, Fresenius
GmbH and W.R. Grace (Connecticut) Inc. ("Grace-CT"), and a Distribution
Agreement (the "Distribution Agreement") by and between the Company, Grace-CT
and Fresenius AG.
Pursuant to these agreements, among other things: (i) Fresenius AG will
contribute its worldwide dialysis businesses, including its interest in FUSA
(collectively, "FWD"), to a subsidiary ("Newco") and FUSA will merge with a
subsidiary of Newco; (ii) National Medical Care, Inc., a wholly owned subsidiary
of Grace-CT ("NMC"), will retain or assume $2.263 billion of indebtedness and
will distribute all of its cash and marketable securities to Grace-CT
(collectively, the "Distribution"); (iii) Grace-CT will distribute to the
Company the stock of NMC, and the Company will distribute to the holders of
common stock of the Company all of the outstanding shares of capital stock of
Grace-CT; and (iv) a subsidiary of Newco will merge into the Company (the
"Merger"), pursuant to which the outstanding shares of common stock and common
stock equivalents of the Company will be converted into the right to receive
American Depositary Receipts (the "ADRs") representing 44.8% of the ordinary
shares of Newco. The transactions contemplated by the Merger Agreement, the
Contribution Agreement and the Distribution Agreement are collectively referred
to herein as the "Transactions."
You have asked us to advise you with respect to the fairness to the holders
of the common stock of the Company, from a financial point of view, of the terms
of the Distribution and the Merger, taken together.
In arriving at our opinion, we have:
(i) reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the five fiscal years ended December 31, 1994 and
the Company's Forms 10-Q and the related unaudited financial information
for the quarterly periods ending March 31, 1995, June 30, 1995 and
September 30, 1995;
(ii) reviewed certain historical financial information with respect to
NMC furnished to us by the Company and reviewed NMC's Form 10 filed with
the SEC on September 25, 1995 which included audited financial information
for the three fiscal years ended December 31, 1994 and unaudited financial
information for the six month period ending June 30, 1995 and June 30,
1994;
(iii) reviewed certain historical financial information with respect
to Fresenius AG and FWD furnished to us by Fresenius and reviewed FUSA's
Annual Reports, Forms 10-K and related financial information for the five
fiscal years ended December 31, 1994 and FUSA's Forms 10-Q and the related
unaudited financial information for the quarterly periods ending March 31,
1995, June 30, 1995 and September 30, 1995;
(iv) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets and prospects of NMC,
FWD and FUSA, furnished to us by the Company, Fresenius
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AG and FUSA, including certain information with respect to potential
synergies which may result from the Merger;
(v) conducted discussions with members of senior management of the
Company and NMC, and with Fresenius AG and FUSA, with respect to the
businesses, operations and prospects of NMC, FWD and FUSA, respectively;
(vi) compared the results of operations of NMC and FWD with those of
certain other companies which we deemed to be reasonably similar to NMC and
FWD;
(vii) considered certain terms of the documents which govern the
rights of stockholders of Newco, including certain governance provisions
applicable to Fresenius AG and Newco;
(viii) compared the proposed financial terms of the Transactions with
the financial terms of certain other mergers and acquisitions which we
deemed relevant;
(ix) reviewed the financial terms and conditions of the proposed forms
of the Agreement, the Contribution Agreement and the Distribution
Agreement;
(x) reviewed the terms of the letter from Baxter International Inc.
("Baxter") to the Company dated January 31, 1996, setting forth a proposal
for the acquisition by Baxter of NMC; and
(xi) reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by the Company and
Fresenius AG, and we have not independently verified such information or
undertaken an independent appraisal of the assets of the Company or FWD. With
respect to the financial forecasts furnished by the Company and Fresenius AG, we
have assumed that they have been reasonably prepared and reflect the best
currently available estimates and judgment of the Company's and NMC's or
Fresenius AG's management as to the expected future financial performance of the
Company, NMC or FWD, as the case may be. We have also relied upon the views of
the Company's and Fresenius AG's managements concerning the business,
operational and strategic benefits and implications of the Merger, including
financial forecasts provided to us by the Company and Fresenius AG relating to
synergistic benefits to FWD and NMC. Our opinion is necessarily based upon
financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof. We are not expressing any opinion as to what the
value of the ADRs actually will be when issued to the Company's stockholders
pursuant to the Merger or the prices at which the ADRs will trade subsequent to
Merger. In addition, we understand that NMC is the target of certain
governmental and regulatory investigations relating to the conduct of its
business, which may result in substantial liabilities and obligations being
incurred by NMC in the future, the amount of which management of the Company is
presently unable to predict. We also understand that the financial statements,
pro forma financial statements and registration statement of Newco have not yet
been prepared.
We have assumed, with your consent, that the Transactions will comply with
applicable United States, foreign, federal and state laws, including, without
limitation, laws relating to the payment of dividends, bankruptcy, insolvency,
reorganization, fraudulent conveyance, fraudulent transfer or other similar laws
now or hereafter in effect affecting creditors' rights generally. We have
assumed, with your consent, that receipt of the ADRs will be tax-free for
federal income tax purposes to the stockholders of the Company and that none of
the Company, NMC, FWD, FUSA and Newco will recognize income, gain or loss as a
result of the Transactions. In addition, we have assumed, with your consent,
that Grace-CT and Fresenius AG will perform their respective indemnification
obligations which may arise under the Distribution Agreement and the
Contribution Agreement in accordance with their respective terms.
We have acted as financial advisor to the Company in connection with the
Transactions and certain other past and current transactions and will receive a
fee for our services in connection with the Transactions, a significant portion
of which is contingent upon the consummation of the Transactions.
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In the ordinary course of our business, Merrill Lynch and its affiliates
may actively trade the debt and equity securities of the Company and Fresenius
AG for their own account and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the
Transactions, does not constitute a recommendation to any stockholder as to how
such stockholder should vote on the Merger, and is not to be quoted or referred
to, in whole or in part, in any registration statement, prospectus or proxy
statement, or in any other document used in connection with the offering or sale
of securities, nor shall this letter be used for any other purposes, without
Merrill Lynch's prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the terms of the Distribution and the Merger, taken together, are
fair, from a financial point of view, to the holders of the common stock of the
Company.
Very truly yours,
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
By: /s/ Douglas W. Squires
------------------------------------
Managing Director
Investment Banking
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[LETTERHEAD OF CS FIRST BOSTON]
February 4, 1996
Board of Directors
W. R. Grace & Co.
One Town Center Rd.
Boca Raton, FL 33486-1010
Dear Sirs and Mesdames:
We understand that W. R. Grace & Co. (the "Company") has entered into an
Agreement and Plan of Reorganization (the "Agreement") with Fresenius
Aktiengesellschaft ("Fresenius AG") and Fresenius USA, Inc. ("FUSA"), and the
Company, Fresenius AG and/or certain of their respective affiliates have entered
or will enter into certain related agreements, including a Contribution
Agreement (the "Contribution Agreement") by and between Fresenius AG, Fresenius
GmbH and W.R. Grace (Connecticut) Inc. ("Grace-CT"), and a Distribution
Agreement (the "Distribution Agreement") by and between the Company, Grace-CT
and Fresenius AG.
Pursuant to these agreements, among other things: Fresenius AG will
contribute its worldwide dialysis businesses, including its interest in FUSA
(collectively, "FWD"), to a subsidiary ("Newco") and FUSA will merge with a
subsidiary of Newco; (ii) National Medical Care, Inc., a wholly owned subsidiary
of Grace-CT ("NMC"), will retain or assume $2.263 billion of indebtedness and
will distribute all of its cash and marketable securities to Grace-CT
(collectively, the "Distribution"); (iii) Grace-CT will distribute to the
Company the stock of NMC, and the Company will distribute to the holders of
common stock of the Company all of the outstanding shares of capital stock of
Grace-CT; and (iv) a subsidiary of Newco will merge into the Company (the
"Merger"), pursuant to which the outstanding shares of common stock and common
stock equivalents of the Company will be converted into the right to receive
American Depositary Receipts (the "ADRs") representing 44.8% of the ordinary
shares of Newco. The transactions contemplated by the Agreement, the
Contribution Agreement and the Distribution Agreement are collectively referred
to herein as the "Transactions."
You have asked us to advise you with respect to the fairness to the holders
of the common stock of the Company, from a financial point of view, of the terms
of the Distribution and the Merger, taken together.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company, NMC and FWD, as well
as the Agreement, the Contribution Agreement and the Distribution Agreement. We
have also reviewed certain other information, including financial forecasts and
certain information with respect to potential synergies which may result from
the Merger, provided to us by the Company and Fresenius AG, and have met with
management of the Company, Fresenius AG and FUSA to discuss the business and
prospects of NMC, FWD and FUSA.
We have also considered certain financial data of NMC, FWD and FUSA and we
have compared that data with similar data for other publicly held companies in
businesses similar to those of NMC, FWD and FUSA and we have considered the
financial terms of certain other business combinations and other transactions.
We have also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonable prepared on
bases reflecting the best currently available estimates and judgments of the
Company's and Fresenius AG's managements as to the future financial performance
of NMC and FWD. We have also relied upon the views of the Company's and
Fresenius AG's managements concerning the business, operational and strategic
benefits and implications of the Merger, including financial forecasts provided
to us by the Company and Fresenius AG relating to synergistic benefits to FWD
and NMC. We have not made an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of NMC or FWD, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based upon financial, economic, market and other
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conditions as they exist and can be evaluated on the date hereof. We are not
expressing any opinion as to what the value of the ADRs actually will be when
issued to the Company's stockholders pursuant to the Merger or the prices at
which the ADRs will trade subsequent to Merger. In addition, we understand that
NMC is the target of certain governmental and regulatory investigations relating
to the conduct of its business, which may result in substantial liabilities and
obligations being incurred by NMC in the future, the amount of which management
of the Company is presently unable to predict. We also understand that the
financial statements, pro forma financial statements and registration statement
of Newco have not yet been prepared.
We have assumed, with your consent that the Transactions will Comply with
applicable United States, foreign, federal and state laws, including, without
limitation, laws relating to the payment of dividends, bankruptcy, insolvency,
reorganization, fraudulent conveyance, fraudulent transfer or other similar laws
now or hereafter in effect affecting creditors' rights generally. We have
assumed, with your consent, that receipt of the ADRs will be tax-free for
federal income tax purposes to the stockholders of the Company and that none of
the Company, NMC, FWD, FUSA and Newco will recognize income, gain or loss as a
result of the Transactions. In addition, we have assumed, with your consent,
that Grace-CT and Fresenius AG will perform their respective indemnification
obligations which may arise under the Distribution Agreement and the
Contribution Agreement in accordance with their respective terms.
We have acted as financial advisor to the Company in connection with the
Transactions and will receive a fee for our services, a significant portion of
which is contingent upon the consummation of the Transactions.
In the ordinary course of our business, CS First Boston and its affiliates
may actively trade the debt and equity securities of the Company and Fresenius
AG for their own account and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the
Transactions, does not constitute a recommendation to any stockholder as to how
such stockholder should vote on the Merger, and is not to be quoted or referred
to, in whole or in part, in any registration statement, prospectus or proxy
statement, or in any other document used in connection with the offering or sale
of securities, nor shall this letter be used for any other purposes, without CS
First Boston's prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the terms of the Distribution and the Merger, taken together, are
fair, from a financial point of view, to the holders of the common stock of the
Company.
Very truly yours,
CS FIRST BOSTON CORPORATION
By: /s/ Charles H. Thomas
----------------------------------
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APPENDIX D
[LETTERHEAD OF SALOMON BROTHERS INC]
May 8, 1996
Independent Committee of the Board of Directors
Fresenius USA, Inc.
2637 Shadelands Drive
Walnut Creek, California 94598
Members of the Independent Committee:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders (other than Fresenius AG and W.
R. Grace & Co. and their subsidiaries) of shares of common stock, par value
$0.01 per share (the "Company Common Stock"), of Fresenius USA, Inc., a
Massachusetts corporation (the "Company"), of the exchange ratio (the "Fresenius
USA Public Stockholder Exchange Ratio") of 0.37067735 ordinary shares, nominal
value DM 5 per share (the "FMC Ordinary Shares") of Fresenius Medical Care AG
("Fresenius Medical Care"), to be represented by American Depositary Shares (the
"FMC ADSs"), for each share of Company Common Stock, pursuant to the Agreement
and Plan of Reorganization the "Reorganization Agreement") dated as of February
4, 1996, between W. R. Grace & Co. ("Grace") and Fresenius AG ("Fresenius"), and
the proposed letter agreement between Fresenius, Grace and the Company to be
dated May 8, 1996 and the proposed agreement between Fresenius and the Company
to be dated May 8, 1996, which set forth the Fresenius USA Public Stockholder
Exchange Ratio and the number of FMC Ordinary Shares that will be outstanding
following the Reorganization (together, the "Exchange Ratio Agreements").
Pursuant to the Reorganization Agreement, among other things, (i) Fresenius, the
owner of a majority of the fully diluted outstanding shares of Common Stock will
contribute (the "Contribution") all shares of Company Common Stock, warrants on
Company Common Stock and (unless theretofore converted into Company Common
Stock) shares of preferred stock of the Company it owns and the remainder of its
worldwide dialysis business ("FWD") to Fresenius Medical Care pursuant to the
Contribution Agreement (the "Contribution Agreement") attached as an exhibit to
the Reorganization Agreement, (ii) pursuant to a Distribution Agreement (the
"Distribution Agreement") attached as an exhibit to the Reorganization
Agreement, National Medical Care, Inc. ("NMC"), a wholly-owned subsidiary of W.
R. Grace (Connecticut) Inc. ("Grace-CT"), which is itself a wholly-owned
subsidiary of Grace, will borrow or otherwise assume approximately $2.3 billion
of indebtedness, and will distribute all of its cash and marketable securities
to Grace-CT, Grace-CT will distribute to Grace all of the stock of NMC, and
Grace will distribute to its stockholders all of the outstanding stock of
Grace-CT (with Grace-CT or its subsidiaries holding all of the assets, and
having retained or assumed all of the liabilities, of Grace and its subsidiaries
other than the assets and liabilities of NMC and its subsidiaries)
(collectively, the "Spin-Off Transactions"), (iii) subsequent to the Spin-Off
Transactions, Grace will be recapitalized (the "Recapitalization") and each
holder of common stock, $1.00 par value per share, of Grace (the "Grace Common
Stock") will receive shares of a new series of Grace preferred stock (the "Grace
New Preferred Shares"), (iv) subsequent to the Spin-Off Transactions and the
Recapitalization, a wholly-owned subsidiary of Fresenius Medical Care will merge
with and into Grace (the "Grace Merger"), and (v) pursuant to the Reorganization
Agreement and the Exchange Ratio Agreements, and subsequent to the Spin-Off
Transactions and the Recapitalization, a wholly-owned subsidiary of Fresenius
Medical Care will merge (the "Merger") with and into the Company (collectively,
the "Proposed Transactions"). In the Merger, each outstanding share of Company
Common Stock (other than shares owned by Fresenius or Grace and their
subsidiaries and shares as to which appraisal rights are exercised) will be
exchanged for FMC Ordinary Shares at the Fresenius USA Public Stockholder
Exchange Ratio (except that cash will be paid in lieu of fractional shares).
Prior to the Merger, as contemplated by the Exchange Ratio Agreements,
approximately 1.4 million of the Company's outstanding employee options will be
canceled in exchange for a combination of cash and promissory notes of the
Company in an aggregate amount of approximately $14 million. In the Grace Merger
(a) each outstanding share of Grace Common Stock (other than shares as to which
appraisal rights are exercised) will be exchanged for FMC Ordinary Shares as
determined pursuant to the Reorganization Agreement and (b) all
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outstanding shares of Grace preferred stock (including the Grace New Preferred
Shares) will remain outstanding. Pursuant to the Contribution Agreement and the
Exchange Ratio Agreements, in consideration of the Contribution, Fresenius will
receive FMC Ordinary Shares representing not less than 50.3% of the FMC Ordinary
Shares that will be outstanding on a fully diluted basis immediately following
the Proposed Transactions. We have assumed, with your consent, that pursuant to
the Reorganization Agreement, immediately after the consummation of the Proposed
Transactions there will be 70,000,000 outstanding FMC Ordinary Shares on a fully
diluted basis, resulting in the Fresenius USA public stockholders owning an
aggregate of 4.9% of the FMC Ordinary Shares outstanding on a fully diluted
basis immediately following the Proposed Transactions. We have assumed that
immediately prior to the Fresenius USA Merger, there will be outstanding no more
than 9,253,331 Fresenius USA Common Share Equivalents (as defined in the
Reorganization Agreement) as required by the Exchange Ratio Agreements.
As you are aware, Salomon Brothers Inc has acted as financial advisor to a
committee of the Company's independent directors (the "Independent Committee")
in connection with the Proposed Transactions and will receive a fee for our
services. We have provided and continue to provide financial advisory and
investment banking services to Grace, for which we have received and expect to
receive customary compensation. In addition, in the ordinary course of our
business, we (or our affiliates) may actively trade the securities of the
Company, Grace and Fresenius for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) the Reorganization Agreement, the
Distribution Agreement and the Contribution Agreement; (ii) the proposed forms
of the Exchange Ratio Agreements; (iii) a draft, dated May 7, 1996, of the Joint
Proxy Statement-Prospectus relating to the Proposed Transactions; (iv) certain
publicly available information concerning the Company, Grace, NMC and Fresenius;
(v) certain pro forma financial and other information concerning FWD furnished
to us by Fresenius; (vi) certain other internal information, primarily financial
in nature, including projections, concerning the business and operations of each
of the Company, NMC and FWD furnished to us by the respective companies; (vii)
certain estimates of anticipated synergies furnished to us by the Company, NMC,
Grace and Fresenius; (viii) certain publicly available information concerning
the trading of, and the trading market for, the Company Common Stock, Grace
Common Stock and Fresenius Ordinary Shares; (ix) certain publicly available
information with respect to certain other companies that we believe to be
comparable to the Company, NMC or FWD and the trading markets for certain of
such other companies' securities; and (x) certain publicly available information
concerning the nature and terms of certain other transactions that we consider
relevant to our inquiry. We have also considered such other information,
financial studies, analyses, and financial, economic and market criteria as we
have deemed relevant. We have also met with certain officers, employees and
representatives of the Company, NMC, FWD, Grace and Fresenius, to discuss the
foregoing as well as other matters we believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have not assumed
responsibility for verifying any of such information. We have not made or
obtained, or assumed any responsibility for making or obtaining, any independent
evaluations or appraisals of any of the properties or facilities of the Company,
NMC or FWD. With respect to the projections as to the future financial
performances of the Company, NMC and FWD and the estimates of synergies for
Fresenius Medical Care, we have assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
managements of the Company, NMC and FWD, and we express no view with respect to
such projections or estimates or the assumptions on which they were based.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of operations of the
Company, NMC and FWD; (ii) the business prospects of the Company, NMC, FWD and
Fresenius Medical Care; (iii) the historical and current market for the Company
Common Stock and for the equity securities of certain other companies that we
believe to be comparable to the Company, FWD, NMC or Fresenius Medical Care; and
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<PAGE> 453
(iv) the nature and terms of certain other transactions that we believe to be
relevant. We have also taken into account our assessment of general economic,
market and financial conditions as well as our experience in connection with
similar transactions and securities valuation generally. As you know, Fresenius
owns a majority of the fully-diluted outstanding shares of the Company Common
Stock and, pursuant to the Reorganization Agreement, was prohibited from selling
such shares. Accordingly, we were not authorized to, and we did not, solicit
potential third parties that might have been interested in acquiring the
Company.
We understand that NMC is the target of certain governmental and regulatory
investigations relating to the conduct of its business, which may result in
substantial liabilities and obligations being incurred by NMC in the future.
While we have participated with you in discussions by your special counsel with
respect to the potential outcome thereof, it is not possible to predict that
outcome and we express no view with respect thereto although, in conducting our
analysis and rendering our opinion we have, with your consent, made certain
assumptions with respect thereto.
In addition, in rendering our opinion we have assumed, with your consent,
that the Merger will qualify as a tax-free transaction under Section 351 of the
Internal Revenue Code of 1986, as amended (the "Code") and that the Spin-Off
Transactions will qualify as a tax-free distribution under Section 355 of the
Code. We have also assumed, with your consent, that following the Spin-Off
Transactions Grace will have no material liabilities other than the liabilities
of NMC. We have also assumed, with your consent, that Grace-CT and Fresenius
will perform their respective obligations (including indemnification
obligations) under the Distribution Agreement and the Contribution Agreement in
accordance with their respective terms. Furthermore, we have assumed, with your
consent, that none of the Proposed Transactions will constitute a fraudulent
conveyance or fraudulent transfer under any applicable law and that the Proposed
Transactions will comply with all applicable United States, foreign, federal and
state laws, including, without limitation, laws limiting payments of dividends
and distributions to stockholders.
Our opinion necessarily is based upon conditions as they exist and can be
evaluated on the date hereof and we assume no responsibility to update or revise
our opinion based upon circumstances or events occurring after the date hereof.
Our opinion is, in any event, limited to the fairness, from a financial point of
view, of the Fresenius USA Public Stockholder Exchange Ratio to the holders of
the Company Common Stock (other than Fresenius and Grace and their subsidiaries)
in the Proposed Transactions and does not address the Company's underlying
business decision to effect the Proposed Transactions or constitute a
recommendation to any holder of Company Common Stock as to how such holder
should vote with respect to the Merger.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that, as of the date hereof, the Fresenius USA Public
Stockholder Exchange Ratio is fair, from a financial point of view, to the
holders of Common Stock of the Company (other than Fresenius and Grace and their
subsidiaries).
Very truly yours,
SALOMON BROTHERS INC
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APPENDIX E
FRESENIUS USA, INC.
1987 STOCK OPTION PLAN
1. PURPOSE
The purpose of this 1987 Stock Plan (the "Plan") is to advance the
interests of Fresenius USA, Inc. (the "Company") by enhancing the ability of the
Company (a) to attract and retain employees who are in a position to make
significant contributions to the success of the Company; (b) to reward employees
for such contributions; and (c) to encourage employees to take into account the
long-term interests of the Company through ownership of shares of the Company's
Common Stock (the "Stock").
Options granted pursuant to the Plan may be incentive stock options as
defined in section 422 of the Internal Revenue Code of 1986 (as it may from time
to time be amended) (the "Code") (any option that is intended so to qualify as
an incentive stock option being referred to herein as an "incentive option"), or
options that are not incentive options, or both.
2. ADMINISTRATIVE
The Plan shall be administered by the Board of Directors of the Company
(the "Board").
The Board may, in its discretion, delegate its powers with respect to the
Plan to a committee (the "Committee"), in which event all references herein to
the Board shall be deemed to be references to the Committee. The Committee shall
consist of at least three Directors. A majority of the members of the Committee
shall constitute a quorum, and all determinations of the Committee shall be made
by a majority of its members. Any determination of the Committee shall be made
by a majority of its members. Any determination of the Committee under the Plan
may be made without notice or meeting of the Committee by a writing signed by a
majority of the Committee members. All members of the Committee shall be
disinterested persons within the meaning of Rule 16b-3 under the Act.
The Board shall have authority, not inconsistent with the express
provisions of the Plan, (a) to grant options to such eligible employees as the
Board may select; (b) to determine the time or times when options shall be
granted and the number of shares of Stock subject to each option; (c) to
determine which options are, and which options are not, incentive options; (d)
to determine the terms and conditions of each option; (e) to prescribe the form
or forms of instruments evidencing options and any other instruments required
under the Plan and to change such forms from time to time; (f) to adopt, amend
and rescind rules and regulations for the administration of the Plan; and (g) to
interpret the Plan and to decide any questions and settle all controversies and
disputes that may arise in connection with the Plan. Subject to Section 8 the
Board shall also have the authority, both generally and in particular instances,
to waive compliance by an employee with any obligation to be performed by him
under an option and to waive any condition or provision of an option, except
that the Board may not take any action with respect to an outstanding award that
would adversely affect the rights of a participant under such award without such
participants consent. Nothing in the preceding sentence shall be construed as
limiting the power of the Board to make adjustments required by Section 4(c).
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan shall become effective on the date on which the Plan is approved
by the shareholders of the Company. Grants of options under the Plan may be made
prior to that date (but after adoption of the Plan by the Board of Directors),
subject to approval of the Plan by such shareholders.
No option shall be granted under the Plan after the completion of ten years
from the date on which the Plan was adopted by the Board of Directors, but
options previously granted may extend beyond that date.
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4. SHARES SUBJECT TO THE PLAN
(a) Number of Shares; Maximum Number of Options. Subject to adjustment as
provided in Section 4(c), the maximum aggregate number of shares of Stock that
may be delivered upon the exercise of options granted under the Plan shall be
2,000,000. If any option granted under the Plan terminates without having been
exercised in full, the number of shares of Stock as to which such option was not
exercised shall be available for future grants within the limits set forth in
this Section 4(a).
Subject to adjustment as provided in Section 4(c), the maximum number of
shares for which options may be granted under the Plan to any one individual
over the period beginning on the date of the shareholder meeting held in 1996
and ending on the last day, determined under Section 3 above, on which options
may be granted under the Plan is 1,000,000. For purposes of the preceding
sentence, the repricing of an option shall be treated as an additional grant.
Solely for purposes of applying the 1,000,000 share option-grant limit described
in this paragraph, the grant of options made subject to approval by the
shareholders and approved by the shareholders at the meeting held in 1996 shall
be treated as subject to such limit.
(b) Shares to be Delivered. Shares delivered under the Plan shall be
authorized but unissued Stock or, if the Board so decides in its sole
discretion, previously issued Stock acquired by the Company and held in
treasury. No fractional shares of Stock shall be delivered under the Plan.
(c) Changes in Stock. In the event of a stock dividend, stock split or
combination of shares, recapitalization or other change in the company's capital
stock, the number and kind of shares of stock or securities of the Company
subject to options then outstanding or subsequently granted under the Plan, the
maximum number of shares or securities that may be delivered under the Plan, the
exercise price, and other relevant provisions shall be approximately adjusted by
the Board, whose determination shall be binding on all persons.
The Board may also adjust the number of shares subject to outstanding
options, the exercise price of outstanding options and the terms of outstanding
options, to take into consideration material changes in accounting practices or
principles, consolidations or mergers, acquisitions or dispositions of stock or
property or any other event if it is determined by the Board that such
adjustment is appropriate to avoid distortion in the operation of the Plan,
provided that no such adjustment shall be made in the case of an incentive
option, without the consent of the participant, if it would constitute a
modification, extension or renewal of the option within the meaning of section
424(h) of the Code, and further provided that no such adjustment shall affect
the maximum per-individual grant limitation set forth in the second paragraph of
Section 4(a) except to the extent consistent with continued qualification of
awards under the Plan for the performance-based compensation exception under
section 162(m) of the Code.
(d) Replacement Options. The Board may grant options under the Plan in
substitution for options held by employees of another corporation who
concurrently become employees of the Company or a subsidiary as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary or the acquisition by the Company or a subsidiary of property or
stock of the employing corporation. The Board may direct that the replacement
options be granted on such terms and conditions as the Board considers
appropriate in the circumstances.
5. ELIGIBILITY FOR OPTIONS
Employees eligible to receive options under the Plan shall be those key
employees of the Company and its subsidiaries who, in the opinion of the Board,
are in a position to make a significant contribution to the success of the
Company or such subsidiaries. A subsidiary for the purpose of the Plan shall be
a corporation in which the Company owns, directly or indirectly, stock
possessing 50% or more of the total combined voting power of all classes of
stock.
Directors who are not employees shall not be eligible to participate in the
Plan. Incentive options shall be granted only to "employees" as defined in the
provisions of the code or regulations thereunder applicable to incentive stock
options. Receipt of options under the Plan or of awards under any other employee
benefit plan
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of the Company or any of its subsidiaries shall not preclude an employee from
receiving options or additional options under the Plan.
6. TERMS AND CONDITIONS OF OPTIONS
(a) Exercise Price. The exercise price of each option shall be determined
by the Board but in the case of an incentive option shall not be less than 100%
(110%, in the case of an incentive option granted to a ten-percent shareholder)
of the fair market value per share of the Stock at the time the incentive option
is granted; nor shall the exercise price of any option be less, in the case of
an original issue of authorized stock, than par value per share. For this
purpose, "Fair market value" in the case of incentive options shall have the
same meaning as it does in the provisions of the Code and the regulations
thereunder applicable to incentive options: and "ten-percent shareholder" shall
mean any employee who at the time of grant owns directly, or is deemed to own by
reason of the attribution rules set forth in section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of any of its parent or subsidiary corporations.
(b) Duration of Options. In no case shall an option be exercisable more
than ten years (five years, in the case of an incentive option granted to a
"ten-percent shareholder" as defined in (a) above) from the date the option was
granted.
(c) Exercise of Options.
(1) Each option shall be made exercisable at such time or times,
whether or not in installments, as the Board shall prescribe at the time an
option is granted. In the case of an option not immediately exercisable in
full, the Board may at any time accelerate the time at which all or any
part of the option may be exercised.
(2) The award forms or other instruments evidencing incentive options
shall contain such provisions relating to exercise and other matters as are
required of incentive options under the applicable provisions of the Code
and the regulations thereunder, as from time to time in effect.
(3) Any exercise of an option shall be in writing, signed by the
proper person and delivered or mailed to the Company, accompanied by (a)
the option certificate and any other documents required by the Board and
(b) payment in full for the number of shares for which the option is
exercised.
(4) In the case of an option that is not an incentive option, the
Board shall have the right to require that the individual exercising the
option remit to the Company an amount sufficient to satisfy any federal,
state, or local withholding tax requirements (or make other arrangements
satisfactory to the Company with regard to such taxes) prior to the
delivery of any Stock pursuant to the exercise of the option. In the case
of an incentive option, if at the time the option is exercised the Board
determines that under applicable law and regulations the company could be
liable for the withholding of any federal or state tax with respect to a
disposition of the Stock received upon exercise, the Board may require as a
condition of exercise that the individual exercising the option agree (i)
to inform the company promptly of any disposition (within the meaning of
section 424(c) of the Code and the regulations thereunder) of Stock
received upon exercise, and (ii) to give such security as the Board deems
adequate to meet the potential liability of the Company for the withholding
of tax, and to augment such security from time to time in any amount
reasonably deemed necessary by the Committee to preserve the adequacy of
such security.
(5) If an option is exercised by the executor or administrator of a
deceased employee, or by the person or persons to whom the option has been
transferred by the employee's will or the applicable laws of descent and
distribution, the Company shall be under no obligation to deliver Stock
pursuant to such exercise until the Company is satisfied as to the
authority of the person or persons exercising the option.
(d) Payment for and Delivery of Stock. Stock purchased under the Plan
shall be paid for as follows: (i) in cash or by certified check, bank draft or
money order payable to the order of the Company or (ii) if so permitted by the
terms of the option, (A) through the delivery of shares of Stock having a fair
market value on the last business day preceding the date or exercise equal to
the purchase price or (B) by a combination of
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cash and Stock as provided in clauses (i) and (ii)(A) above or (iii) if so
permitted by the terms of the option, by delivery of a promissory note of the
employee containing such terms and conditions, including without limitation
interest rate and maturity, as the Board may specify in the option (except that
the option may provide that the rate of interest on the note will be such rate
as is sufficient at all times to avoid the imputation of any interest under the
applicable provisions of the Code), or by a combination of cash (or cash and
Stock) and such a promissory note; provided, that if the Stock delivered upon
exercise of the option is an original issue or authorized Stock, at least so
much of the exercise price as represents the par value of such Stock shall be
paid in cash or by a combination of cash and Stock.
An option holder shall not have the rights of a shareholder with regard to
awards under the Plan except as to Stock actually received by him under the
Plan.
The Company shall not be obligated to deliver any shares of Stock (a)
until, in the opinion of the Company's counsel, all applicable federal and state
laws and regulations have been complied with, and (b) if the outstanding Stock
is at the time listed on any stock exchange, until the shares to be delivered
have been listed or authorized to be listed on such exchange upon official
notice of issuance, and (c) until all other legal matters in connection with the
issuance and delivery of such shares have been approved by the Company's
counsel. If the sale of Stock has not been registered under the Securities Act
of 1933, as amended, the Company may require, as a condition to exercise of the
option, such representations or agreements as counsel for the Company may
consider appropriate to avoid violation of such Act and may require that the
certificates evidencing such Stock bear an appropriate legend restricting
transfer.
(e) Nontransferability of Options. No option may be transferred other than
by will or by the laws of descent and distribution, and during an employee's
lifetime an option may be exercised only by him.
(f) Death. If an employee's employment with the Company and its
subsidiaries terminates for any reason other than death, all options held by the
employee that are not then exercisable shall terminate. Options that are
exercisable on the date of termination shall continue to be exercisable for a
period of three months (subject to Section 6(b)) unless the employee was
discharged for cause which in the opinion of the Board casts such discredit on
him as to justify termination of his options. After completion of that three-
month period such options shall terminate to the extent not considered
terminated (i) in the case of sick leave or other bona fide leave of absence
approved for purposes of the Plan by the Board, so long as the employee's right
to reemployment is guaranteed either by statute or by contract, or (ii) in the
case of a transfer of employment between the Company and a subsidiary or between
subsidiaries, or to the employment of a corporation (or a parent or subsidiary
corporation of such corporation) issuing or assuming an option in a transaction
to which section 424(a) of the Code applies.
(g) Other Termination of Employment. If an employee's employment with the
Company and its subsidiaries terminates for any reason other than death, all
options held by the employee that are not then exercisable shall terminate.
Options that are exercisable on the date of termination shall continue to be
exercisable for a period of three months (subject to Section 6(b) unless the
employee was discharged for cause which in the opinion of the Board casts such
discredit on him as to justify termination of his options. After completion of
that three-month period such options shall terminate to the extent not
previously exercised, expired or terminated. For purposes of this Section 6(g),
employment shall not be considered terminated (i) in the case of sick leave or
other bona fide leave of absence approved for purposes of the Plan by the Board,
so long as the employee's right to reemployment is guaranteed either by statute
or by contract, or (ii) in the case of a transfer of employment between the
Company and a subsidiary or between subsidiaries, or to the employment of a
corporation (or a parent or subsidiary corporation of such corporation) issuing
or assuming an option in a transaction to which Section 424(a) of the Code
applies.
7. EMPLOYMENT RIGHTS
Neither the adoption of the Plan nor the grant of options shall confer upon
any employee any right to continued employment with the Company or any parent or
subsidiary or affect in any way the right of the company or parent or subsidiary
to terminate the employment of an employee at any time. Except as specifically
provided by the Board in any particular case, the loss of existing or potential
profit in options
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granted under this Plan shall not constitute an element of damages in the event
of termination of the employment of an employee even if the termination is in
violation of an obligation of the Company to the employee by contract or
otherwise.
8. EFFECTS OF DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
Neither adoption of the Plan nor the grant of options to an employee shall
affect the Company's right to grant to such employee options that are not
subject to the Plan, to issue to such employees Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued to
employees.
The Board may at any time discontinue granting options under the Plan. With
the consent of the employee, the Board may at any time cancel an existing option
in whole or in part and grant the employee another option for such number of
shares as the Board specifies. The Board may at any time or times amend the Plan
for the purpose of satisfying the requirements of section 422 of the Code or of
any changes in applicable laws or regulations and the Board of Directors may
amend the Plan for any other purpose which may at the time be permitted by law
or may at any time terminate the Plan as to any further grants of options,
provided that (except to the extent expressly required or permitted herein
above) no such amendment shall, without the approval of the shareholders of the
Company, (a) increase the maximum number of shares available under the Plan, (b)
change the group of employees eligible to receive options under the Plan, (c)
reduce the price at which incentive options may be granted, (d) extend the time
within which options may be granted, (e) alter the Plan in such a way that
incentive options already granted hereunder would not be considered incentive
stock options under section 422 of the Code, or (f) amend the provisions of this
Section 8, and no such amendment shall adversely affect the rights of any
employee (without his consent) under an option previously granted.
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APPENDIX F
910 RIGHT OF SHAREHOLDER TO RECEIVE PAYMENT FOR SHARES UPON MERGER OR
CONSOLIDATION, OR SALE, LEASE, EXCHANGE OR OTHER DISPOSITION OF ASSETS, OR SHARE
EXCHANGE. -- (a) A shareholder of a domestic corporation shall, subject to and
by complying with section 623 (Procedure to enforce shareholder's right to
receive payment for shares), have the right to receive payment of the fair value
of his shares and the other rights and benefit provided by such section, in the
following cases:
(1) Any shareholder entitled to vote who does not assent to the taking
of an action specified in subparagraphs (A), (B) and (C).
(A) Any plan of merger or consolidation to which the corporation is
a party; except that the right to receive payment of the fair value of
his shares shall not be available:
(i) To a shareholder of the parent corporation in a merger
authorized by section 905 (Merger of parent and subsidiary
corporations), or paragraph (c) of section 907 (Merger or
consolidation of domestic and foreign corporations); and
(ii) To a shareholder of the surviving corporation in a merger
authorized by this article, other than a merger specified in
subparagraph (i), unless such merger effects one or more of the
changes specified in subparagraph (b)(6) of section 806 (Provisions
as to certain proceedings) in the rights of the shares held by such
shareholder.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires
shareholder approval under section 909 (Sale, lease, exchange or other
disposition of assets) other than a transaction wholly for cash where
the shareholders' approval thereof is conditioned upon the dissolution
of the corporation and the distribution of substantially all its net
assets to the shareholders in accordance with their respective interests
within one year after the date of such transaction.
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the
right to receive payment of the fair value of his shares shall not be
available to a shareholder whose shares have not been acquired in the
exchange.
(2) Any shareholder of the subsidiary corporation in a merger
authorized by section 905 or paragraph (c) of section 907, or in a share
exchange authorized by paragraph (g) of section 913, who files with the
corporation a written notice of election to dissent as provided in
paragraph (c) of section 623. (Last amended by Ch. 390, L.'91, eff.
7-15-91.)
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623 PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT FOR SHARES.
- -- (a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any
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shareholder of shares represented by certificates who fails to submit his
certificates for such notation as herein specified shall, at the option of the
corporation exercised by written notice to him within forty-five days from the
date of filing of such notice of election to dissent, lose his dissenter's
rights unless a court, for good cause shown, shall otherwise direct. Upon
transfer of a certificate bearing such notation, each new certificate issued
therefor shall bear a similar notation together with the name of the original
dissenting holder of the shares and a transferee shall acquire no rights in the
corporation except those which the original dissenting shareholder had at the
time of the transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in
the case of merger or consolidation, the surviving or new corporation is a
foreign corporation without an office in this state, such proceeding shall
be brought in the county where the office of the domestic corporation,
whose shares are to be valued, was located.
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(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of
interest, the court shall consider all relevant factors, including the rate
of interest which the corporation would have had to pay to borrow money
during the pendency of the proceeding. If the court finds that the refusal
of any shareholder to accept the corporate offer of payment for his shares
was arbitrary, vexatious or otherwise not in good faith, no interest shall
be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and
fees incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. The court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by any or all of the dissenting shareholders who are parties to
the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer
or required advance payment was made by the corporation; (C) that the
corporation failed to institute the special proceeding within the period
specified therefor; or (D) that the action of the corporation in complying
with its obligations as provided in this section was arbitrary, vexatious
or otherwise not in good faith. In making any determination as
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provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined
exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificate for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for his shares,
which right the corporation shall be obliged to satisfy when the
restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations). (Last amended by Ch. 117, L. '86, eff. 9-1-86.)
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APPENDIX G
85 [PAYMENT FOR STOCK OF DISSENTING STOCKHOLDER]. -- A stockholder in any
corporation organized under the laws of Massachusetts which shall have duly
voted to consolidate or merge with another corporation or corporations under the
provisions of sections seventy-eight or seventy-nine who objects to such
consolidation or merger may demand payment for his stock from the resulting or
surviving corporation and an appraisal in accordance with the provisions of
sections eighty-six to ninety-eight, inclusive, and such stockholder and the
resulting or surviving corporation shall have the rights and duties and follow
the procedure set forth in those sections. This section shall not apply to the
holders of any shares of stock of a constituent corporation surviving a merger
if, as permitted by subsection (c) of section seventy-eight, the merger did not
require for its approval a vote of the stockholders of the surviving
corporation.
86 [RIGHT OF APPRAISAL]. -- If a corporation proposes to take a corporate
action as to which any section of this chapter provides that a stockholder who
objects to such action shall have the right to demand payment for his shares and
an appraisal thereof, sections eighty-seven to ninety-eight, inclusive, shall
apply except as otherwise specifically provided in any section of this chapter.
Except as provided in sections eighty-two and eighty-three, no stockholder shall
have such right unless (1) he files with the corporation before the taking of
the vote of the shareholders on such corporate action, written objection to the
proposed action stating that he intends to demand payment for his shares if the
action is taken and (2) his shares are not voted in favor of the proposed
action.
87 [NOTICE OF STOCKHOLDERS MEETING TO CONTAIN STATEMENT AS TO APPRAISAL
RIGHTS]. -- The notice of the meeting of stockholders at which the approval of
such proposed action is to be considered shall contain a statement of the rights
of objecting stockholders. The giving of such notice shall not be deemed to
create any rights in any stockholder receiving the same to demand payment for
his stock, and the directors may authorize the inclusion in any such notice of a
statement of opinion by the management as to the existence or non-existence of
the right of the stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable, but the following form of notice
shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the corporation
before the taking of the vote on the approval of such action, written objection
to the proposed action stating that he intends to demand payment for his shares
if the action is taken and (2) whose shares are not voted in favor of such
action has or may have the right to demand in writing from the corporation (or,
in the case of a consolidation or merger, the name of the resulting or surviving
corporation shall be inserted), within twenty days after the date of mailing to
him of notice in writing that the corporate action has become effective, payment
for his shares and an appraisal of the value thereof. Such corporation and any
such stockholder shall in such cases have the rights and duties and shall follow
the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the
General Laws of Massachusetts."
88 [NOTICE OF OBJECTING STOCKHOLDER THAT CORPORATE ACTIONS HAS BECOME
EFFECTIVE]. -- The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock. The notice shall be sent by registered or certified mail,
addressed to the stockholder at his last known address as it appears in the
records of the corporation.
89 [DEMAND FOR PAYMENT BY OBJECTING STOCKHOLDER]. -- If within twenty days
after the date of mailing of a notice under subsection (e) of section
eighty-two, subsection (f) of section eighty-three, or section eighty-eight any
stockholder to whom the corporation was required to give such notice shall
demand in writing from the corporation taking such action, or in the case of a
consolidation or merger
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from the resulting or surviving corporation, payment for his stock, the
corporation upon which such demand is made shall pay to him the fair value of
his stock within thirty days after the expiration of the period during which
such demand may be made.
90 [DETERMINATION OF VALUE OF STOCK BY SUPERIOR COURT]. -- If during the
period of thirty days provided for in section eighty-nine the corporation upon
which such demand is made and any such objecting stockholder fail to agree as to
the value of such stock, such corporation or any such stockholder may within
four months after the expiration of such thirty-day period demand a
determination of the value of the stock of all such objecting stockholders by a
bill in equity filed in the superior court in the county where the corporation
in which such objecting stockholder held stock had or has its principal office
in the commonwealth.
91 BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF ETC; PARTIES TO BILL ETC; SERVICE OF BILL ON
CORPORATION; NOTICE TO STOCKHOLDER PARTIES ETC. -- If the bill is filed by the
corporation, it shall name as parties respondent all stockholders who have
demanded payment for their shares and with whom the corporation has not reached
agreement as to the value thereof. If the bill is filed by a stockholder, he
shall bring the bill in his own behalf and on behalf of all other stockholders
who have demanded payment for their shares and with whom the corporation has not
reached agreement as to the value thereof, and service of the bill shall be made
upon the corporation by subpoena with a copy of the bill annexed. The
corporation shall file with its answer a duly verified list of all such other
stockholders, and such stockholders shall thereupon be deemed to have been added
as parties to the bill. The corporation shall give notice in such form and
returnable on such date as the court shall order to each stockholder party to
the bill by registered or certified mail, addressed to the last known address of
such stockholder as shown in the records of the corporation, and the court may
order such additional notice by publication or otherwise as it deems advisable.
Each stockholder who makes demand as provided in section eighty-nine shall be
deemed to have consented to the provisions of this section relating to notice,
and the giving of notice by the corporation to any such stockholder in
compliance with the order of the court shall be a sufficient service of process
on him. Failure to give notice to any stockholder making demand shall not
invalidate the proceedings as to other stockholders to whom notice was properly
given, and the court may at any time before the entry of a final decree make
supplementary orders of notice.
92 BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF, ETC; ENTRY OF DECREE DETERMINING VALUE OF
STOCK; DATE ON WHICH VALUE IS TO BE DETERMINED. -- After hearing the court shall
enter a decree determining the fair value of the stock of those stockholders who
have become entitled to the valuation of and payment for their shares, and shall
order the corporation to make payment of such value, together with interest, if
any, as hereinafter provided, to the stockholders entitled thereto upon the
transfer by them to the corporation of the certificates representing such stock
if certificated or if uncertificated, upon receipt of an instruction
transferring such stock to the corporation. For this purpose, the value of the
shares shall be determined as of the day preceding the date of the vote
approving the proposed corporate action and shall be exclusive of any element of
value arising from the expectation or accomplishment of the proposed corporate
action.
93 BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF, ETC.; COURT MAY REFER BILL, ETC., TO SPECIAL
MASTER TO HEAR PARTIES, ETC. -- The court in its discretion may refer the bill
or any question arising thereunder to a special master to hear the parties, make
findings and report the same to the court, all in accordance with the usual
practice in suits in equity in the superior court.
94 BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF, ETC.; STOCKHOLDER PARTIES MAY BE REQUIRED TO
SUBMIT THEIR STOCK CERTIFICATES FOR NOTATION THEREON OF PENDENCY OF BILL,
ETC. -- On motion the court may order stockholder parties to the bill to submit
their certificates of stock to the corporation for notation thereon of the
pendency of the bill, and may order the
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corporation to note such pendency in its records with respect to any
uncertificated shares held by such stockholder parties, and may on motion
dismiss the bill as to any stockholder who fails to comply with such order.
95 BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF, ETC.; TAXATION OF COSTS, ETC.; INTEREST ON
AWARD, ETC. -- The costs of the bill, including the reasonable compensation and
expenses of any master appointed by the court, but exclusive of fees of counsel
or of experts retained by any party, shall be determined by the court and taxed
upon the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided in
this chapter shall be paid by the corporation. Interest shall be paid upon any
award from the date of the vote approving the proposed corporate action, and the
court may on application of any interested party determine the amount of
interest to be paid in the case of any stockholder.
96 STOCKHOLDER DEMANDING PAYMENT FOR STOCK NOT ENTITLED TO NOTICE OF
STOCKHOLDERS' MEETINGS OR TO VOTE STOCK OR TO RECEIVE DIVIDENDS, ETC.;
EXCEPTIONS. -- Any stockholder who has demanded payment for his stock as
provided in this chapter shall not thereafter be entitled to notice of any
meeting of stockholders or to vote such stock for any purpose and shall not be
entitled to the payment of dividends or other distribution on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the date of the vote approving the proposed corporate action)
unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation, or
in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to
and an acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
97 CERTAIN SHARES PAID FOR BY CORPORATION TO HAVE STATUS OF TREASURY
STOCK, ETC. -- The shares of the corporation paid for by the corporation
pursuant to the provisions of this chapter shall have the status of treasury
stock or in the case of a consolidation or merger the shares or the securities
of the resulting or surviving corporation into which the shares of such
objecting stockholder would have been converted had he not objected to such
consolation or merger shall have the status of treasury stock or securities.
98 ENFORCEMENT BY STOCKHOLDER OF RIGHT TO RECEIVE PAYMENT FOR HIS SHARES
TO BE EXCLUSIVE REMEDY; EXCEPTION. -- The enforcement by a stockholder of his
right to receive payment for his shares in the manner provided in this chapter
shall be an exclusive remedy except that this chapter shall not exclude the
right of such stockholder to bring or maintain an appropriate proceeding to
obtain relief on the ground that such corporate action will be or is illegal or
fraudulent as to him.
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APPENDIX H
FRESENIUS AG
FRESENIUS USA, INC.
May 8, 1996
W. R. Grace & Co.
One Town Center Road
Boca Raton, FL 33486-1010
Ladies and Gentlemen:
We refer to the Agreement and Plan of Reorganization dated as of February
4, 1996 (the "Agreement") by and between W. R. Grace & Co. ("Grace") and
Fresenius AG ("Fresenius AG") and confirm our agreement as follows:
1. In each of (a) clause (iii) of the proviso to paragraph (e) of
Section 4.2 of the Agreement and (b) the second sentence of section 2.3(a)
of Exhibit D to the Agreement, the figure "50.3%" shall be substituted for
the figure "51%."
2. Subject to the terms of paragraph 6 hereof, and on the condition
that no more than 70 million Newco Ordinary Shares are outstanding
immediately following consummation of the Reorganization, in accordance
with Section 4.2(e) of the Agreement, Fresenius AG hereby notifies Grace
that the Fresenius USA Consideration Per Share shall be equal to 0.37067735
Newco Ordinary Shares.
3. Subject to the terms of paragraph 6 hereof and Section 9.1 of the
Agreement, in accordance with Section 9.13 of the Agreement, Fresenius USA
hereby undertakes the obligations contained therein as a party and, for
itself, makes directly to Grace the representations and warranties
contained in the Agreement with respect to itself.
4. Subject to the terms of Section 9.1 of the Agreement, Fresenius USA
hereby represents and warrants to Grace that subject only to the receipt of
the requisite approval of its shareholders, Fresenius USA has the requisite
corporate power and authority and has taken all corporate action necessary
in order to execute, deliver and perform each Transaction Agreement to
which it is a party and to consummate the transactions contemplated by the
Agreement and the Transaction Agreements including, without limitation, the
approval of the Board of Directors of Fresenius USA and the resolution of
the Board of Directors of Fresenius USA to recommend the transactions
contemplated by the Agreement and the Transaction Agreements for approval
by Fresenius USA shareholders, subject to their fiduciary duties.
5. All notices, requests, claims, demands and other communications to
Fresenius USA under the Agreement shall be in writing and shall be given
(and shall be deemed to have been duly given upon receipt) by delivery in
the manner set forth in the Agreement, addressed as follows:
Fresenius USA, Inc.
2637 Shadelands Drive
Walnut Creek, CA 94598
Attn: Dr. Ben Lipps
Fax: (510) 988-1941
with copies to:
Ropes & Gray
One International Place
Boston, MA 02110-2624
Attn: Winthrop G. Minot, Esq.
Fax: (617) 951-7051
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<PAGE> 468
W. R. Grace & Co.
May 8, 1996
Page 2
and
O'Melveny & Myers
Citicorp Center
153 East 53rd Street
New York, NY 10022-4611
Attn: Dr. Ulrich Wagner
Fax: (212) 326-2061
6. If there shall be in excess of 9,253,331 Fresenius USA Common Share
Equivalents outstanding immediately prior to the effective time of the
Fresenius USA Merger, the terms of paragraphs 2, 3 and 4 hereof shall be
automatically void and of no further force or effect, without any action on
the part of any party hereto.
7. Terms capitalized but not defined in this letter shall have the
meanings ascribed to them in the Agreement.
8. This letter agreement may be executed in several counterparts, each
of which shall be an original and all of which shall be deemed to be one
and the same Agreement.
9. This letter agreement shall be governed by and construed in
accordance with the laws of the State of New York.
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<PAGE> 469
Please confirm your agreement to the foregoing by executing duplicate
copies of this letter and returning one executed copy to each of Fresenius AG
and Fresenius USA.
Very truly yours,
FRESENIUS AG
By: /s/ GERD KRICK
------------------------------------
Name: Gerd Krick
Title: Chief Executive Officer
By: /s/ MATHIAS KLINGLER
------------------------------------
Name: Mathias Klingler
Title: President and Chief
Operating
Officer -- Dialysis Systems
Division
FRESENIUS USA, INC. (with
respect only to paragraphs 3
through 9, inclusive)
By: /s/ BEN LIPPS
------------------------------------
Name: Ben Lipps
Title: President
AGREED
W. R. Grace & Co.
By: /s/ Paul McMahon
----------------------------------
Name: Paul McMahon
Title: Vice President
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<PAGE> 470
APPENDIX I
AGREEMENT
Agreement dated as of May 8, 1996, between Fresenius AG, an
Aktiengesellschaft organized under the laws of the Federal Republic of Germany
("Fresenius AG"), and Fresenius USA, Inc., a Massachusetts corporation
("Fresenius USA").
RECITALS
WHEREAS, Fresenius AG and W. R. Grace & Co., a New York Corporation
("Grace") have entered into an Agreement and Plan of Reorganization, dated as of
February 4, 1996 (as amended, the "Reorganization Agreement"); and
WHEREAS, the Reorganization Agreement contemplates that Fresenius USA will
join in the Reorganization Agreement as a party and agree to be bound by the
terms of the Reorganization Agreement; and
WHEREAS, the board of directors of Fresenius USA and a special committee of
independent directors of Fresenius USA approved and ratified the Reorganization
Agreement and the other Transaction Agreements (as such term is defined in the
Reorganization Agreement) and, by letter agreement of even date herewith,
Fresenius USA has undertaken the obligations contained therein as a party and
desires to submit the Reorganization, including the Fresenius USA Merger (as
such terms are defined in the Reorganization Agreement) to a vote of its
stockholders; and
WHEREAS, Fresenius AG and Fresenius USA desire to set forth their agreement
with respect to certain matters under the Reorganization Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. Any liquidated damages payable pursuant to Section 6.13 of the
Reorganization Agreement shall be payable $49.5 million to Fresenius AG and
$25.5 million to Fresenius USA. Fresenius AG and Fresenius USA agree that
if the Reorganization is not consummated, Fresenius AG and Fresenius USA
shall bear 66% and 34%, respectively, of the aggregate costs and expenses
of the Fresenius Parties, and shall make such payments between themselves
as may be necessary to effect such allocation.
2. (a) It is currently anticipated that 70,000,000 Newco Ordinary
Shares (the "Actual Anticipated Number of Outstanding Newco Shares") will
be outstanding immediately following the consummation of the
Reorganization, and it was previously anticipated that there would be
217,170,000 such shares (the "Previously Anticipated Number of Outstanding
Newco Shares") so outstanding, each on a fully diluted basis. The
Independent Committee of the Board of Directors of Fresenius USA (the
"Fresenius USA Independent Committee"), based on the Previously Anticipated
Number of Outstanding Newco Shares, acting upon advice from their advisors,
approved Fresenius USA Consideration Per Share equal to 1.15 Newco Ordinary
Shares as being fair to the holders (other than Fresenius AG, Grace and
their subsidiaries) of the common stock of Fresenius USA. Based on the
Actual Anticipated Number of Outstanding Newco Shares, the equivalent
Fresenius USA Consideration Per Share to be allocated among holders of
Fresenius USA Common Share Equivalents is equal to 0.37067735 Newco
Ordinary Shares, which shall also be the maximum number of Newco Ordinary
Shares issuable in respect of each Fresenius USA Common Share underlying
Fresenius USA Options assumed by or otherwise rolled over into Newco.
(b) Fresenius AG and Fresenius USA confirm that, prior to the
Fresenius USA Merger, Fresenius USA intends to repurchase (the
"Repurchase") certain vested and nonvested options held by employees of
Fresenius USA and certain other securities of Fresenius USA so that,
immediately prior to the Fresenius USA Merger, there shall be outstanding
no more than 9,253,331 Fresenius USA Common Share Equivalents (the
"Specified Maximum Number of Fresenius USA Common Share Equivalents"), and
that such repurchase shall be for a combination of cash and promissory
notes of Fresenius USA.
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(c) If the Specified Maximum Number of Fresenius USA Common Share
Equivalents were to be outstanding at the time of the Fresenius USA Merger,
the Aggregate Fresenius USA Common Share Consideration would be 4.9% of the
Newco Shares that will be outstanding immediately following the
consummation of the Reorganization on a fully diluted basis.
3. If there shall be in excess of the Specified Maximum Number of
Fresenius USA Common Share Equivalents outstanding immediately prior to the
effective time of the Fresenius USA Merger, the terms of paragraphs 1 and 2
hereof shall be automatically void and of no further force or effect,
without any action on the part of any party hereto.
4. Terms capitalized but not defined in this Agreement shall have the
meanings ascribed to them in the Reorganization Agreement.
5. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
6. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given (and shall be deemed to
have been duly given upon receipt) by delivery in person, by cable,
telegram, telex or other standard form of telecommunications, or by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to Fresenius AG:
As provided in the Reorganization Agreement; and
If to Fresenius USA:
Fresenius USA, Inc.
2637 Shadelands Drive
Walnut Creek, CA 94598
Attn.: Dr. Ben Lipps
Fax: (510) 988-1941
with copies to:
Ropes & Gray
One International Place
Boston, MA 02110-2624
Attn.: Winthrop G. Minot, Esq.
Fax: (617) 951-7050
7. This Agreement may be executed in several counterparts, each of
which shall be an original and all of which shall be deemed to be one and
the same agreement.
8. Nothing in this Agreement, expressed or implied, is intended to
confer upon any person or entity other than the parties hereto, any
benefit, right or remedies.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FRESENIUS AG
By: /s/ GERD KRICK
------------------------------------
Name: Gerd Krick
Title: Chief Executive Officer
/s/ MATHIAS KLINGLER
------------------------------------
Name: Mathias Klingler
Title: President and Chief
Operating Officer --Dialysis
Systems Division
FRESENIUS USA, INC.
By: /s/ BEN LIPPS
------------------------------------
Name: Ben Lipps
Title: President
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