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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
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Commission file number 1-3720
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FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-3461988
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
(Jurisdiction of incorporation or organization)
TWO LEDGEMONT CENTER, 95 HAYDEN AVE., LEXINGTON, MA 02173
(Address of principal executive offices)
Registrant's telephone number, including area code: 617-402-9000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. /X/
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405). $14,480,000 at February 28, 1997.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of March 28, 1997, 90,000,000 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Information Statement with respect to its 1997 Annual
Meeting of Stockholders, to be filed on or before April 30, 1997. (Part III)
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Item 1. Business ................................................................................ 4
Item 2. Properties .............................................................................. 37
Item 3. Legal Proceedings ....................................................................... 38
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 50
PART II.......................................... 50
Item 5. Market Price for Registrant's Common Equity and Related Stockholder Matters ............. 50
Item 6. Selected Financial Data ................................................................. 51
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 51
Item 8. Financial Statements and Supplementary Data ............................................. 66
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .... 66
PART III.......................................... 66
Item 10. Directors and Executive Officers of the Registrant ...................................... 66
Item 11. Executive Compensation .................................................................. 66
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 66
Item 13. Certain Relationships and Related Transactions .......................................... 66
PART IV.......................................... 67
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 67
</TABLE>
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ITEM 1. BUSINESS
The discussion under this section contains forward-looking statements.
These forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting Fresenius National Medical Care
Holdings, Inc., but no assurance can be given that such events will occur or
that results will be as anticipated.
The Company is a majority-owned subsidiary of Fresenius Medical Care AG.
The operating results and other financial information of the Company included
in this report are not necessarily indicative of the operating results and
financial condition of Fresenius Medical Care AG at the dates or for the
periods presented herein. Users of the Company's financial statements wishing
to obtain financial and other information regarding Fresenius Medical Care AG
should consult the Annual Report on Form 20-F of Fresenius Medical Care AG,
which is expected to be filed with the Securities and Exchange Commission and
the New York Stock Exchange on or about April 7, 1997.
Fresenius National Medical Care Holdings, Inc., a New York corporation (the
"Company" or ("FNMC") is a subsidiary of Fresenius Medical Care AG, a German
corporation ("Fresenius Medical Care"), the world's largest integrated provider
of dialysis products and services. The Company conducts its operations through
two principal subsidiaries, National Medical Care, Inc., a Delaware corporation
("NMC") and Fresenius USA, Inc., a Massachusetts corporation ("Fresenius USA").
The Company conducts business in three main areas: Dialysis Treatment and Other
Services, Dialysis Products, and Home Care Services, which accounted for 77%,
10%, and 13% of 1996 net revenues, respectively.
- DIALYSIS TREATMENT AND OTHER SERVICES. The Company is the largest
provider in the U.S. of kidney dialysis and related services and
is the largest private international provider of kidney dialysis
and ancillary services with operations in 14 other countries.
FNMC operates 753 outpatient dialysis centers worldwide, treating
approximately 55,600 patients. Additionally, the Company provides
inpatient dialysis services at approximately 500 hospitals in the
U.S. The Company treats approximately 21% of the dialysis
patients in the U.S., and believes its market share is over three
times larger than the Company's next largest competitor. The
Company also offers related services including clinical
laboratory and diagnostic testing and imaging services.
- DIALYSIS PRODUCTS. The Company manufactures a comprehensive line of
dialysis products, including hemodialysis machines, peritoneal
dialysis systems and disposable products. The Company
manufactures innovative and technologically advanced products,
including the Fresenius Polysulfone(TM) dialyzer, which the
Company believes is the best-performing, mass-produced dialyzer
on the market, and Delflex(R) peritoneal solutions with
Safe-Lock(R) connectors.
- HOME CARE SERVICES. The Company is a leading provider in the U.S. of
integrated home care services, offering primarily comprehensive
intravenous infusion (prescription medications and nutrition) and
respiratory therapies, as well as home health services (primarily
nursing and personal support services). As of December 31, 1996,
the Company operated from 99 locations in 32 states, providing
infusion services from 79 of these locations, home respiratory
services from 81 locations and home health services from 41
locations.
HISTORICAL DEVELOPMENT
Until September 30, 1996 the Company (then named W.R. Grace and Co.), was
primarily engaged, through other subsidiaries, in the packaging and specialty
chemical businesses on a worldwide basis and, through its wholly owned
subsidiary National Medical Care, Inc. ("NMC"), in health care activities. The
Company's health care operations were acquired by Fresenius Medical Care in a
series of transactions (the "Reorganization") consummated on September 30, 1996
by and between Fresenius AG ("Fresenius AG") a German corporation, and W. R.
Grace & Co. In the Reorganization, Fresenius AG contributed its global dialysis
business, including its controlling interest in Fresenius USA Inc., ("Fresenius
Worldwide Dialysis"), to Fresenius Medical Care. NMC effected borrowings under a
Credit Agreement (the "NMC Credit Agreement") and made a cash distribution in
the form of a dividend payment to Grace Chemicals, a wholly owned subsidiary of
W. R. Grace & Co. ("Grace Chemicals"). Immediately thereafter, Grace contributed
the capital stock of Grace Chemicals to a Delaware corporation and a wholly
owned subsidiary of the Company ("New Grace"), and spun off New Grace to its
common shareholders (the "Distribution"). Immediately following the
Distribution, in a recapitalization, W. R. Grace changed its name to Fresenius
National Medical Care Holdings, Inc., and each holder of Grace Common Stock
received one share of the Company's Class D Preferred Stock for each share of
Grace Common Stock previously held. Holders of the Class D Preferred Stock are
entitled to receive, when and if declared by the board of directors of FNMC, a
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 the adjusted cash flow of Fresenius Medical Care from January 1, 1997
to December 31, 2001. Immediately following such recapitalization, each of FNMC
and Fresenius USA merged with wholly owned subsidiaries of Fresenius Medical
Care, with FNMC and Fresenius USA being the surviving corporations. As a result,
both FNMC (whose sole asset was its shares of
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NMC) and Fresenius USA became subsidiaries of Fresenius Medical Care. Fresenius
Medical Care then contributed Fresenius USA to FNMC. In the Reorganization,
Fresenius AG, the public stockholders of Fresenius USA and the common
stockholders of FNMC received approximately 50.3%, approximately 4.9% and
approximately 44.8%, respectively, on a fully diluted basis, of the Ordinary
Shares of Fresenius Medical Care.
In November and December 1996, Fresenius Medical Care issued 5,400,000
non-voting preference shares, and a subsidiary of Fresenius Medical Care issued
$360,000,000 aggregate liquidation amount of 9% Trust Preferred Securities,
guaranteed by Fresenius Medical Care. The aggregate net proceeds of these
offerings, approximately $731,000,000, were used to refinance indebtedness under
the NMC Credit Agreement. Also in November 1996, Fresenius Medical Care became a
guarantor under the NMC Credit Agreement.
The Company's principal executive office is located at Two Ledgemont
Center, 95 Hayden Avenue, Lexington, MA 02173. Its telephone number is (617)
402-9000.
RENAL INDUSTRY OVERVIEW
END STAGE RENAL DISEASE
End-stage renal disease ("ESRD") is the state of advanced chronic kidney
disease that is characterized by the irreversible loss of kidney function and
requires routine dialysis treatment or kidney transplantation to sustain life. 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 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.
Based on information published by the Health Care Financing Administration
("HCFA") of the Department of Health and Human Services ("HHS"), the number of
patients in the U.S. who received chronic dialysis grew from approximately
66,000 in 1982 to approximately 200,000 at December 31, 1995. The Company
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. The
Company estimates that during this period, the number of dialysis patients in
Europe grew at an annual rate of 6%. According to data published by HCFA and the
European Dialysis and Transplantation Association ("EDTA"), the number of
non-U.S. 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. The Company 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 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 currently only two methods for the treatment of ESRD: dialysis
and kidney transplantation. Transplants are limited by the scarcity of
compatible kidneys. Approximately 11,900 patients received kidney transplants in
the U.S. during 1995. Transplantation rates vary from country to country in
Europe. According to the EDTA Registry Report 1996, in Europe in 1995, 2% of new
ESRD patients age 15 or over received transplants as the first mode of
treatment. 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 commonly used 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.
According to HCFA, as of December 31, 1995, there were approximately 2,800
outpatient dialysis centers in the U.S. Ownership of these centers is extremely
fragmented. The Company estimates that the seven largest multi-center providers
account for approximately 42% of the market and that private treatment centers
(primarily physician-owned) and hospital-affiliated centers comprise the
remaining 28% and 30%, respectively, of these centers. According to HCFA, as of
December 31, 1995, approximately 83% of the dialysis patients in the U.S.
received in-center hemodialysis treatment and approximately 17% were treated at
home. Of those treated at home, more than 93% received peritoneal dialysis.
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According to a Fresenius Worldwide Dialysis market survey, there were
approximately 146,000 dialysis patients in Western Europe as of December 31,
1995, of whom approximately 84% receive hemodialysis and 16% receive peritoneal
dialysis. The Company estimates that there are approximately 2,800 dialysis
centers in Western Europe, approximately 55% of which are government-owned,
approximately 33% of which are privately owned (primarily by physicians),
approximately 7% of which are operated by non-profit organizations and
approximately 5% of which are owned or operated by provider companies. In Japan,
the world's second largest dialysis market after the U.S., there are
approximately 154,000 dialysis patients, of whom approximately 93% receive
hemodialysis and approximately 7% receive peritoneal dialysis. In the rest of
the world, there are approximately 200,000 dialysis patients, of whom 34% and
28% reside in Asia and Latin America, respectively. Approximately 85% of these
patients are treated by hemodialysis and approximately 15% are treated by
peritoneal dialysis.
TREATMENT OPTIONS FOR ESRD
Hemodialysis. Hemodialysis removes waste products and excess fluids from
the blood extracorporeally. In hemodialysis, the blood flows outside the body by
means of plastic tubes known as bloodlines into a specially designed filter -- a
dialyzer, which functions as an artificial kidney by separating waste products
and excess water from the blood by diffusion and ultrafiltration. 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.
According to HCFA, as of December 31, 1995, hemodialysis patients
represented 84% of all dialysis patients in the U.S. According to published
reports as of December 1994, hemodialysis patients represented approximately 85%
of all dialysis patients worldwide. 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. The majority of hemodialysis patients are
referred to outpatient dialysis centers, such as those operated by FNMC; where
hemodialysis treatments are performed with the assistance of a nurse or dialysis
technician under the general supervision of a physician. 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.
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 introduction and disposal of solution
four times a day. With CCPD 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. Certain 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.
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STRATEGY
Fresenius Medical Care's objective is to capitalize on the continued rapid
growth in the dialysis industry and its leading position in the market. The
worldwide dialysis patient population is estimated to be growing at
approximately 9% annually, driven primarily by (i) the aging of the population
worldwide, (ii) better treatment and survival of patients with illnesses that
lead to ESRD, including diabetes and hypertension, and (iii) increases in
reimbursements for treatments in many countries.
Fresenius Medical Care's dialysis services and product sales
businesses have grown faster than the market in terms of revenues over the past
five years. Fresenius Medical Care believes that it is well positioned to
continue this growth by focusing on the following strategies, and the Company
will pursue those strategies in the provider business worldwide and in the
product business in the North American market.
- PROVIDE HIGH STANDARDS OF PATIENT CARE IN DIALYSIS SERVICES,
LABORATORY SERVICES AND HOME CARE. The Company believes that its
reputation for providing the highest standards of patient care is
a competitive advantage in an environment increasingly focused on
cost containment and quality outcomes. The Company believes that
its proprietary Patient Statistical Profile ("PSP") database,
which contains clinical and demographic data on over 45,000
dialysis patients and laboratory results and demographic data on
an additional 16,000 patients, provides a unique advantage in
continuing to improve dialysis treatment outcomes, reduce
mortality rates and improve the quality and effectiveness of
dialysis products.
- ENHANCE THE COMPANY'S MARKET POSITION IN THE PROVIDER BUSINESS
THROUGH STRATEGIC EXPANSION AND ACQUISITIONS. The Company intends
to capitalize on the continuing shift in the U.S. from
physician-owned and hospital-based dialysis clinics to
multi-center providers by acquiring existing dialysis centers and
establishing new dialysis centers. The Company believes that it
is an attractive acquirer and joint venture partner to dialysis
center owners worldwide due to its reputation for quality of
patient care, the Company's proprietary Patient Statistical
Profile database, its comprehensive clinical and administrative
systems, manuals and policies, and its ability to provide
ancillary services for dialysis centers and their patients. From
January 1, 1993 through December 31, 1996, the Company acquired
211 existing dialysis centers, developed 155 new centers and
closed or sold 32 centers.
- ESTABLISH A DIALYSIS SERVICES PROVIDER PRESENCE IN SELECTED NEW
GEOGRAPHIC MARKETS BY LEVERAGING WORLDWIDE CONTACTS. While
Fresenius Medical Care and its affiliates currently sell dialysis
products in over 100 countries, they provide dialysis services in
only 17 countries (in 15 countries through the Company).
Fresenius Medical Care and the Company plan to capitalize on
their established global experience and contacts with physicians
and providers in its dialysis products business to expand their
service operations in Europe, South America and the Asia/Pacific
region, particularly in markets where they already maintain
strong product sales and in regions of the world where dialysis
treatment is not yet universally available.
- CONTINUE TO OFFER COMPLETE HEMODIALYSIS AND PERITONEAL DIALYSIS
PRODUCT LINES. The Company offers 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, systems and disposable
products from a single source.
- EXTEND FRESENIUS MEDICAL CARE'S POSITION AS A TECHNOLOGY INNOVATOR
IN THE DIALYSIS PRODUCTS INDUSTRY, UTILIZING ITS EXPERTISE IN
PATIENT TREATMENT AND ITS CLINICAL DATA. Fresenius Medical Care
is committed to being a technology leader in both hemodialysis
and peritoneal dialysis products. It has an approximately 190
member research and development team focused on developing
dialysis systems that are safer, more effective and easier to use
and that can be easily customized to meet the differing needs of
customers around the world. The Company believes that its
extensive expertise in patient treatment and clinical data will
further enhance the ability to develop more effective products
and treatment methodologies.
The Company believes 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 a
competitive advantage in a health care environment increasingly focused on cost
containment. The Company believes its strengths in clinical data systems, its
professional affiliations with broad networks of providers and institutions,
extensive geographic market
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coverage in dialysis services and products and ongoing internal development of
an integrated care capability should afford the Company attractive partnering
opportunities with managed care enterprises. In addition, the Company is
developing a disease management capability intended to enable the Company to
manage a larger portion of total ESRD treatment costs. The Company believes that
this strategy, based on its extensive clinical information database and large
dialysis center and physician network, may enable the Company to improve overall
ESRD patient care and therefore contain hospitalization and other ESRD treatment
costs.
For a description of other elements of the Company's strategy see "--
Dialysis Treatment and Other Services" and "-- Dialysis Products Business."
DIALYSIS TREATMENT AND OTHER SERVICES
OVERVIEW
The Company is the largest international private provider of kidney
dialysis and related services to patients suffering from chronic kidney disease.
The Company also provides laboratory services for dialysis patients in the U.S.,
Puerto Rico, Portugal, and Spain. In addition, the Company provides diagnostic
testing services to the outpatient market (physicians, clinics and hospitals)
and also serves dialysis facilities (Company and non-Company clinics). Such
testing services include ultrasound, nuclear medicine, magnetic resonance
imaging, computerized axial tomography, bone densitometry, nerve conduction
velocity, mammography and other tests.
The Company's provider business is primarily operated through the Dialysis
Services Division of NMC ("DSD"). The laboratory services are primarily provided
by NMC's LifeChem subsidiary ("LifeChem"). Diagnostic testing services are
provided through DSD's Diagnostic Services Division ("DSI").
DIALYSIS SERVICES
The Company owns or manages approximately 753 outpatient dialysis centers
located in 15 countries throughout the world. The Company owns or manages
approximately 623 dialysis centers in the U.S. and owns or manages approximately
130 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). Approximately 8% of DSD's
1996 net revenues were attributable to foreign operations. NMC's first renal
care program outside the U.S. was established in Portugal in 1980.
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, 1996, the Company acquired 211 existing centers, developed
155 new centers and closed or sold 32 centers. The number of patients treated at
the Company's centers has increased from approximately 30,400 at December 31,
1991 to approximately 55,600 at December 31, 1996. In March 1997, the Company
acquired the chronic dialysis, home dialysis, laboratory and inpatient acute
dialysis operations of Neomedica, Inc. and its affiliates in Metropolitan
Chicago, Illinois. Neomedica, Inc. and its affiliates operate 15 dialysis
facilities serving nearly 1,500 patients and have acute dialysis contracts with
40 hospitals.
At the Company'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 the
Company's centers operate two or three patient shifts per day.
Each of the Company's dialysis centers is under the general supervision of
a medical director ("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.
The Company 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
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care reports generated by the Company's PSP system, setting goals for quality
enhancement and monitoring the progress of quality assurance initiatives. The
Company believes that it enjoys a reputation of providing high quality care to
dialysis patients.
The Company's centers also offer services for home dialysis patients, the
majority of whom are treated with peritoneal dialysis. For such patients, the
Company's dialysis centers provide certain materials, training and patient
support services, including clinical monitoring, supply of Erythropoietin
("EPO"), follow-up assistance and arranging for delivery of the supplies to the
patient's residence. See "-- Regulatory and Legal Matters," "-- Reimbursement--
U.S." and "Item 3. Legal Proceedings" for a discussion of 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 the Company'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, although equipment,
regardless of brand, is typically purchased by the center in consultation with
the medical director through the Company's central purchasing operations.
The Company also provides dialysis services under contract to approximately
500 hospitals in the U.S. on an "as needed" basis for patients suffering from
acute kidney failure and for ESRD patients who are hospitalized. The Company
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 are higher than the
Medicare reimbursement rates for chronic in-center treatments.
The Company provides various ancillary medications and services to ESRD
patients in the U.S. 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 the Company's patients. Revenues from EPO (the substantial majority of
which are reimbursed through the Medicare and Medicaid programs) accounted for
approximately 22% of DSD's domestic net revenues in 1996 and materially
contribute to DSD's operating earnings in the U.S. Medicare reimbursement for
EPO was reduced effective January 1, 1994. See "--Reimbursement-U.S." NMC's
billing practices for EPO are also the subject of a "whistle-blower" lawsuit.
See "Item 3. Legal Proceedings-- Qui Tam Actions". EPO is produced by a single
source manufacturer, Amgen Inc., and any interruption of supply could materially
adversely affect the Company'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 to ESRD patients in the U.S. include the
administration of Calcijex(R) (calcium), INFED(R) (iron) and hepatitis vaccine;
the provision of Intradialytic Parenteral Nutrition ("IDPN"), in which nutrients
are added to the patient's blood during hemodialysis; the provision, through
LifeChem, of clinical laboratory testing; the provision by Diagnostic Services
Division 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.
The Company employs a centralized approach with respect to certain
administrative functions common to its operations. For example, the Company has
standardized operating and billing procedures which are contained in proprietary
manuals used by each dialysis center. The Company believes that the
centralization and standardization of these functions enhance its ability to
perform services on a cost-effective basis.
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LABORATORY SERVICES
The Company provides laboratory services through LifeChem. 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
1996, LifeChem performed approximately 17 million tests for more than 61,000
dialysis patients across the U.S. LifeChem also provides testing services to
clinical research projects and others. The Company plans to expand LifeChem into
related markets, including servicing physician (particularly nephrologist)
office practices. In 1996, approximately 30% of LifeChem's patient base was
receiving treatment at dialysis centers not owned or operated by the Company.
LifeChem's clinical laboratory results have been a critical element in the
development of the Company's proprietary PSP database, which contains clinical,
laboratory and demographic data on over 45,000 dialysis patients and laboratory
results and demographic data on an additional 16,000 patients. The Company 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
the Company and at outside research institutions, to decrease mortality rates
among dialysis patients and improve their quality of life.
In 1996, LifeChem represented approximately 4% of the Company's net
revenues and 14% of the Company's operating earnings. Approximately 79% of
LifeChem's 1996 net revenues were derived from Medicare. For financial reporting
purposes, LifeChem is included in DSD operations. See "-- Reimbursement" for a
description of certain billing problems relating to LifeChem.
The Company also offers laboratory services to dialysis and non-dialysis
patients at 16 clinical testing laboratories in Portugal and one in Spain.
DIAGNOSTIC SERVICES
The Company provides diagnostic testing services to the primary care market
through its Diagnostic Services Division ("DSI") and is the largest dialysis
diagnostic testing supplier in the U.S. DSI provides diagnostic testing services
to patients at the Company's centers and unaffiliated dialysis facilities and
provides outpatient diagnostic services at physicians' offices, clinics and
hospitals through mobile equipment at DSI imaging centers. DSI conducts testing
at 310 of the Company's facilities and provides outpatient testing to the
non-dialysis market in 23 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,
echocardiography, obstetrical and gynecological ultrasound, nuclear medicine,
magnetic resonance imaging, computerized axial tomography, mammography and
x-ray. Of DSI's approximately $90 million of revenues for the twelve months
ended December 31, 1996, approximately $75 million was related to patients other
than dialysis patients. DSI has grown through its acquisitions of the diagnostic
services businesses of Mediq Imaging Services, Inc., MedAlliance, Inc. and PML,
Inc. (a Park Medical company). A separate investigation is being conducted by
the OIG concerning the possible submission of false or improper claims to the
Medicare program by DSI and a business acquired by DSI in 1994. See "Item 3.
Legal Proceedings--Diagnostics Subpoena."
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 and Medicare regulatory requirements.
SOURCES OF DIALYSIS SERVICES NET REVENUES
The following table provides information for the periods indicated
regarding the total revenues and percentage of FNMC's U.S. dialysis treatment
services net revenues (excluding net revenues from DSI which are primarily not
related to dialysis services and the provision of IDPN which was supplied during
such periods through the Company's home care operations) 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.
10
<PAGE> 11
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Medicare ESRD program 56.7% 58.1% 63.0%
Private/alternative payors 34.2 32.7 28.1
Medicaid and other government sources 4.5 4.2 4.0
Hospitals 4.6 5.0 4.9
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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 payment methodology commonly referred to as the
composite rate method ("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 "--
Reimbursement -- U.S."
A significant portion of the Company's revenues for dialysis services are
derived 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 health maintenance
organizations ("HMOs"). Managed care plans are increasing their market share
overall, and in the Medicare population in particular. 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, 1996 was
attributable to managed care plans.
Non-governmental payors generally reimburse for dialysis treatments at
higher rates than 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 the Company 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 is seeking permission to allow ESRD Medicare
beneficiaries to enroll in managed care plans and has recently announced a pilot
project pursuant to which approximately four managed care companies will be
allowed to recruit ESRD patients 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 the Company to ESRD patients,
which could limit the Company's future payments for such services.
11
<PAGE> 12
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 the Company.
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. The Company is presently seeking to expand the portion of
its revenues attributable to non-governmental private payors. However, the
Company 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 the Company join managed care plans or such plans reduce
reimbursements to the Company, the Company's business and results of operations
could be adversely affected, possibly materially. See "-- Reimbursement," "--
Changes in the Health Care Industry" and "Item 7. MD&A."
PHYSICIAN AND OTHER RELATIONSHIPS
The Company 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 the
Company's relationships with any particular group of physicians in a local
market could adversely affect its centers in such local market. In this regard,
the Company 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 the Company in the
U.S. are subject to extensive regulation. See "-- 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 the Company's clinics maintain open staff privileges for local
nephrologists. The Company's ability to provide quality dialysis care and
otherwise to meet the needs of local physicians is central to its ability to
attract nephrologists to the Company's centers and to receive referrals from
such physicians.
The Company'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, the Company 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 the Company 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 the
Company's Medical Directors maintain their own active private practices.
The Company has written agreements through NMC 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 "Item 3. Legal
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.
12
<PAGE> 13
Virtually all of the U.S. Medical Director agreements, as well as the
typical contract under which the Company 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 FNMC
or particular centers or to buy or use specific medical products. In certain
states, non-competition covenants may not be enforceable.
ACQUISITIONS
FNMC'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.
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 the Company 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, the Company believes that it
will be an attractive acquirer or partner to many dialysis center owners due to
its reputation for patient treatment, its proprietary PSP database (which
contains clinical and demographic data on over 45,000 dialysis patients and
laboratory results and demographic data on an additional 16,000 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. The Company believes that
these factors will also be advantages in expanding by opening new centers. The
Company 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.
The U.S. health care industry has experienced significant consolidation in
recent years, particularly in the dialysis and home care service sectors in
which the Company 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. The Company's ability
to make acquisitions also will depend, in part, on the Company's available
financial resources and the limitations imposed under the NMC Credit Agreement.
See "Item 7. MD&A." The inability of the Company 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. See also
"Item 3. Legal Proceedings."
The Company regularly evaluates and holds discussions with various other
health care companies and other businesses regarding acquisitions and joint
business ventures. The Company recently completed the acquisition of the assets
of Neomedica, Inc., a regional dialysis services provider based in Chicago.
13
<PAGE> 14
COMPETITION
Dialysis Services. The dialysis services industry is highly competitive.
Ownership of dialysis centers in the U.S. is fragmented, with a large number of
operators owning 10 or fewer centers and a small number of larger multi-center
providers, the largest of which is the Company. In urban areas, where many of
the Company's dialysis centers are located, there frequently are many competing
centers in proximity to the Company's centers. The Company 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. The Company believes that it competes effectively in
all of these areas. In particular, based upon the Company's knowledge and
understanding of other providers of kidney dialysis, as well as from information
obtained from publicly available sources, the Company believes that it 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, the
Company 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., the Company 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.
Laboratory Services. LifeChem competes in the U.S. with large nationwide
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.
The Company believes that LifeChem's services are competitive in these areas.
Diagnostic Services. The diagnostic imaging industry is highly fragmented.
No single participant has dominant market share beyond a local or regional
market. The Company'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.
14
<PAGE> 15
DIALYSIS PRODUCTS BUSINESS
The Company manufactures and distributes equipment and disposable products
for the treatment of kidney failure by hemodialysis and by peritoneal dialysis.
The Company 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. Other products manufactured by third parties and distributed by the
Company include dialyzers, special blood access needles, heparin (used to
prevent blood clotting) and commodity supplies such as bandages, clamps and
syringes.
OVERVIEW
The following table shows, for each of the past three years, total pro
forma net revenues of the FNMC products business related to hemodialysis
products, peritoneal dialysis products and other activities, principally
technical service:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996
---------------------------------------------------------------------
TOTAL % OF TOTAL % OF TOTAL % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Hemodialysis Products $229,655 63% $279,569 67% $294,137 66%
Peritoneal Dialysis Products 126,661 35 132,058 32 137,020 31
Other 7,377 2 3,804 1 13,777 3
-------- --- -------- --- -------- ---
Total $363,693 100% $415,431 100% $444,934 100%
======== ======== ========
</TABLE>
HEMODIALYSIS PRODUCTS
The Company believes that Fresenius Medical Care 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. In North America, the Company 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,
data management systems, machines and supplies for the reuse of dialyzers and
other similar supplies.
Dialysis Machines. Through Fresenius USA, the Company assembles, tests and
calibrates hemodialysis machines and sells these machines in the U.S., Canada
and Mexico. Components for these machines are provided by Fresenius Medical Care
and other vendors. Hemodialysis machines manufactured by the Company 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. The Company also
provides machine upgrade kits to allow for advanced therapy modes, thus offering
the customer maximum performance with highly permeable polysulfone dialyzers.
The Company's hemodialysis machines are capable of operating with dialyzers
manufactured by all manufacturers, and are compatible with a wide variety of
bloodlines and dialysis solutions. Fresenius USA has extended the Fresenius
Series 2008 hemodialysis machine for the North American market through the
development of the model 2008H, which combines the reliable hydraulic system of
the Series 2008 with electronic systems developed by Fresenius USA. Dialysis
machines sold by the Company employ the same modular design as those of
Fresenius Medical Care, but are tailored to local markets. Modular design also
permits the Company 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.
15
<PAGE> 16
Dialyzers. Most dialyzers manufactured by the Company use hollow fiber
polysulfone membranes, a synthetic material. The Company believes that the
Fresenius Polysulfone(TM) dialyzer is the best-performing mass-produced dialyzer
on the market. Fresenius Medical Care is the leading worldwide producer of
polysulfone dialyzers. While competitors currently sell polysulfone membranes in
the market, Fresenius Medical Care developed and is the only manufacturer with
more than 12 years' experience in applying the technology required to mass
produce polysulfone membranes. The Company believes that polysulfone has
superior performance characteristics compared to other materials used in
dialyzers, including a higher biocompatibility and greater clearing capacities
for uremic toxins. The Company's Fresenius Polysulfone(TM) 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(TM) dialyzers are also available in an ultra-flux version for acute
dialysis. The Company also manufactures cuprophane low-flux dialyzers and
distributes (primarily to its own dialysis centers) dialyzers manufactured by
others.
The Company 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 dialyzers and, therefore, permit hemodialysis providers to reduce
operating costs. The reuse business of Seratronics is managed by the Company
through Fresenius USA.
Other Hemodialysis Products. The Company manufactures and distributes
arterial, venous, single needle and pediatric bloodlines. The Company 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. The Company 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 products include solutions for disinfecting and
decalcifying hemodialysis machines , fistula needles, hemodialysis catheters,
and products for acute renal treatment.
New Hemodialysis Products. Fresenius USA has recently developed 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.
PERITONEAL DIALYSIS PRODUCTS
The Company offers a full line of products for peritoneal dialysis
patients. Peritoneal dialysis products manufactured by the Company include
peritoneal dialysis solutions in bags, peritoneal dialysis cycling machines for
CCPD and disposable products for both CAPD and CCPD, such as tubing, sterile
solutions and sterile kits to prepare patients for dialysis. The Company also
distributes (primarily to its own dialysis centers) other manufacturers'
peritoneal dialysis products.
Peritoneal Dialysis Systems. The Company manufactures standard and
specialized peritoneal dialysis solutions. The Company 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) standard 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. The Company also manufactures 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. These
double bag systems further reduce possible entry of contaminants during
peritoneal dialysis. The Company's Inpersol(R) line of peritoneal dialysis
products acquired by Fresenius USA from Abbott Laboratories in 1993 (the "Abbott
Acquisition") is interchangeable and competitive with the peritoneal dialysis
products offered by Baxter, the Company's major competitor in this field.
Therefore, the addition of the Inpersol(R) product line to the Company's
16
<PAGE> 17
other products enables the Company to expand the potential customer base for
which it competes, because the Company now supplies peritoneal dialysis products
usable by all peritoneal dialysis patients in the U.S.
Cyclers. Although CAPD is the predominant form of peritoneal dialysis
therapy, the Company 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. The
Company's 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. With nighttime cycling, the patient has complete
daytime freedom, wearing only the surgically-implanted catheter and capping
device. In addition, the Company 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 offered by the
Company in other parts of the world. Normally, a CCPD patient undergoes five or
six two-liter solution exchanges at night, and carries no solution during the
day. PD-Plus(TM) therapy provides a more tailored therapy using a simpler
nighttime cycler, and, where necessary, one exchange during the day. Compared
with typical CCPD therapy, the Company believes that PD-Plus(TM) therapy is less
costly and easier to administer. In addition, compared with CAPD therapy, the
Company believes that PD-Plus(TM) therapy improves toxin removal by more than
40% and therefore is 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(TM) 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(TM) therapy, as developed by Fresenius
USA, can only be performed using the Fresenius Freedom Cycler and special tubing
using Safe-Lock(R) connectors.
Other Peritoneal Dialysis Products. The Company 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(TM) (a computer program which analyzes patient and peritoneal
characteristics to present a range of treatment options for individual
therapies), disinfectants, bag heating plates, adapters, and products to assist
and enhance connector sterility. The Company 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 Medical Care 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,
the introduction of new solution, and the tight closure of the line. 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.
In March 1996, Fresenius USA received approval by the U.S. Food and Drug
Administration ("FDA") 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 began limited marketing of the Premier
twin bag system during July 1996.
17
<PAGE> 18
MARKETING, DISTRIBUTION AND SERVICE
Most of the Company's products are sold to hospitals, clinics and
specialized treatment centers. With its comprehensive product line and years of
experience in dialysis, the Company 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 the Company's sales force and research and
development personnel enables concepts and ideas that develop in the field to be
considered and integrated into product development. The Company maintains a
direct sales force of trained salespersons engaged in the sale of both
hemodialysis and peritoneal dialysis products. This sales force engages in
direct promotional efforts, including visits to physicians, clinical
specialists, hospitals, clinics and dialysis centers, and represents the Company
at industry trade shows. The Company also sponsors medical conferences and
scientific symposia as a means for disseminating product information. The sales
force is assisted by clinical nurses who provide clinical support, training and
assistance to customers. The Company also utilizes outside distributors to
provide sales coverage in countries not serviced by its internal sales force.
Fresenius USA's products are distributed in Canada through a wholly-owned
subsidiary and in Mexico through distributors. Inpersol(R) products are not
distributed by Fresenius USA in Canada or Mexico, where Abbott retains exclusive
rights to those products.
All of the Company'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. 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 Company drivers. The 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. Products of the RPD
division of NMC are distributed 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. At the time of the Abbott Acquisition by Fresenius USA, Abbott
Laboratories had agreements with numerous hospitals pursuant to which these
hospitals could order the full line of Abbott Laboratories products, including
renal dialysis products, from Abbott Laboratories. Abbott Laboratories has
agreed to act as Fresenius USA's distributor for the continued sale of
Inpersol(R) products to hospitals until 1998.
FNMC offers customer service, training and education, and technical support
such as field service, spare parts, repair shops, maintenance, and warranty
regulation. The Company also provides training sessions on the Company's
equipment. The Company's management believes its service organizations have a
reputation for reliability and high quality service.
MANUFACTURING OPERATIONS
The Company assembles equipment, including hemodialysis machines, dialyzer
reuse devices and peritoneal dialysis cyclers, at its facility in Walnut Creek,
California. Components of the Company's hemodialysis machines are supplied by
Fresenius Medical Care as well as other suppliers, and the Company has
experienced no difficulties in obtaining sufficient quantities of such
components. In connection with the sale and installation of the machines,
Company technicians and engineers calibrate the machines and add computer
software for record keeping and monitoring.
The Company owns a 344,000 square-foot facility in Ogden, Utah for the
manufacture of disposable products, including polysulfone dialyzers, peritoneal
dialysis solutions, other sterile solutions, plastic tubing and medical devices.
This facility uses automated equipment for the production of polysulfone
dialyzers and sterile solutions in flexible plastic containers. The design of
the Company's Ogden facility is based on the design of a Fresenius Medical Care
facility in St. Wendel, Germany, and was constructed in consultation with
Fresenius AG. The Company, through Fresenius USA, also purchases dialyzers and
polysulfone bundles from Fresenius Medical Care. The Company believes that it is
the principal manufacturer of polysulfone dialyzers in the U.S. While the
Company obtains the film used in the manufacture of its plastic bags from one
supplier located in The Netherlands, the Company believes that there are readily
available alternative sources of supply for which the FDA could grant expedited
approval. The Company also intends to manufacture its own plastic film for
peritoneal dialysis solution bags.
The Company also manufactures dialysis products at 8 additional plants
(five in the U.S., one in Europe and two in Latin America). Bloodlines are
produced at facilities in Reynosa, Mexico, and McAllen, Texas, and concentrates
are produced at three facilities in the U.S. and one plant in each of Brazil,
Argentina, and the U.K.
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<PAGE> 19
Over the next two years, the Company also intends to transfer the
production of the products acquired by Fresenius USA from Abbott to the
Company'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 the Company's products, from the initial
processing of raw materials through the final packaging of the completed
product, is carried out under controlled quality assurance procedures required
by law and under Good Manufacturing Practices ("GMP"), as well as under
comprehensive quality management systems, such as the internationally recognized
ISO 9000-9004 standards, which are mandated by regulatory authorities in the
countries in which the Company operates.
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 ensure
sterility, safety and potency of finished products. The Company maintains
continuing quality control and GMP education and training programs for its
employees. See "-- Regulatory and Legal Matters."
SOURCES OF SUPPLY
Raw materials essential to the Company's dialysis products 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 Medical Care has single supplier agreements for many of its
polymers, including polysulfone, polyvinylpyrrolidone, and polyurethane for
dialyzer production, and for certain other raw materials. Wherever single
supplier agreements exist, the Company believes an alternative suppliers are
available. However, use of raw materials obtained from alternative suppliers
could cause costs to rise due to necessary adjustments in the production process
or interruptions in supply.
One of the Company's subsidiaries, Fresenius USA, obtains 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 released MDS from the exclusivity
provisions of the supply agreement.
RESEARCH AND DEVELOPMENT
Current research and development activities of the Company are primarily
conducted through Fresenius Medical Care and 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 the Company's products. Research and development is conducted
through the Fresenius Medical Care's 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.
Fresenius Medical Care intends to continue to maintain its central research
and development operations for disposable products, including dialyzers and
peritoneal solutions, at its St. Wendel facility and for durable products at a
facility in Schweinfurt, Germany. It expects that as its dialysis products
business continues to expand internationally, research and
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<PAGE> 20
development activities by its international operations, including the Company,
will rely primarily on the research and development activities conducted at St.
Wendel and Schweinfurt, with local activities focusing on cooperative efforts
with those facilities to develop new products and product modifications for
local markets. The Company's product development staff works closely with the
Fresenius Medical Care research and development group in this regard. The
Company employs approximately 50 persons in research and development (including
medical doctors, engineers, technicians and research scientists), and conducts
its activities in Rockleigh, New Jersey, Walnut Creek, California and Ogden,
Utah. The Company's research and development expenses, on a pro forma basis,
were $5 million in 1996.
The Company 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. The Company also establishes
scientific advisory boards and works with medical and other consultants.
PATENTS, TRADEMARKS AND LICENSES
In connection with the Reorganization, Fresenius Medical Care and its
subsidiaries acquired or licensed all intellectual property rights of Fresenius
AG relating to Fresenius Worldwide Dialysis.
As the owner of or licensee under patents and trademarks throughout the
world, Fresenius Medical Care holds rights under more than 600 patents and
patent applications relating to dialysis technology in major markets. Patented
technologies 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, 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 Medical Care holds rights 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. 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.
The patent family covering Fresenius Polysulfone(TM) high flux membranes
has been subject to opposition by competitors in Europe and Japan. While
Fresenius Medical Care believes that these patents are valid in the relevant
jurisdictions, a successful opposition could have a material adverse effect on
the Company.
The Company believes that its success will depend, in large part, on
Fresenius Medical Care's technology. While Fresenius Medical Care, 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 Medical Care's existing intellectual
property, which reduction could be rapid and unanticipated.
COMPETITION
The markets in which the Company sells its dialysis products are highly
competitive. Among The Company's competitors in the sale of hemodialysis and
peritoneal dialysis products are CGH Medical (an affiliate of Gambro AB),
Baxter, Inc., Althin CD Medical, Inc., Asahi Medical Co., Ltd., Bellco S.p.A. (a
subsidiary of Sorin Biomedica S.p.A.), Bieffe Medital S.p.A., B. Braun Melsungen
AG, Nissho Corporation (including Nissho Nipro Corporation Ltd.), Nikkiso Co.,
Ltd., Terumo Medical Corporation and Toray Medical Co., Ltd. Some the Company's
competitors possess greater financial, marketing and research and development
resources than the Company.
The Company 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. The
Company believes
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<PAGE> 21
its products are highly competitive in all of these areas. Independent dialysis
centers and those operated by other chains that were customers of Fresenius
Worldwide Dialysis prior to the Reorganization may elect to limit or terminate
their purchases of the Company dialysis products in order to avoid purchasing
products manufactured by a competitor. The Company believes, however, that
customers will continue to consider its long-term customer relationships and
reputation for product quality in making product purchasing decisions, and the
Company intends to compete vigorously for such customers.
HOME CARE SERVICES
GENERAL
The Company, through the NMC Homecare division, is a leading U.S. provider
of integrated home care services, offering primarily comprehensive intravenous
infusion (prescription medications and nutrition) and respiratory therapies, as
well as home health services (primarily nursing and personal support services)
in the U.S. The Company believes that by providing all three of these key
components of home patient care (either directly or through subcontractors), the
Company offers quality care on a cost-effective and integrated basis. As of
December 31, 1996, the Company operated from approximately 99 locations in 32
states, providing infusion services from 79 of these locations, home respiratory
services from 81 locations and home health services from 41 locations.
Approximately 72% of Homecare's 1996 net revenues were derived from infusion
therapies, approximately 19% from home respiratory therapies and approximately
9% from home health services.
In all three of its areas of service, the Company 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 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. The Company
purchases or leases the products and equipment needed to support the provision
of its clinical services.
The home care 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 home care by the medical community, patients and payors, and the
significant increase in the over-65 population. The Company believes that the
home care 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.
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. The Company's clinical employees include licensed pharmacists and
registered and licensed nurses who have specialized skills in home infusion
therapy.
One form of infusion therapy is IDPN, which is furnished at a dialysis
clinic during dialysis treatment. Approximately 37% of Homecare infusion net
revenues in 1996 were derived from the provision of IDPN. Approximately 53% 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
Homecare's operating profits. Subsequent to the Reorganization, the Company
determined that commencing
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in 1997, IDPN will be included within dialysis services operations for financial
reporting purposes. Certain regulatory changes may materially restrict the
Company'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 "-- Reimbursement" and "Item 7. MD&A." The use of IDPN by NMC and certain of
its billing practices are also a subject of the OIG Investigation. See Item 3.
"Legal Proceedings -- OIG Investigation."
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. The Company 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. The Company 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. Homecare entered the home health
services business in late 1993 through its acquisition of PCHS, which operated
nine home health service locations in California. Homecare has internally
developed eight additional locations outside of California from which it offers
home health services. The Company is currently investigating possible strategies
for its home health services operations including the disposition of portions of
that business. The Company has agreed in principle to sell a substantial
portion of its home health services business.
SOURCES OF NET REVENUES
Virtually all of the Homecare net revenues of the Company 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
home care service providers, the Company experiences lengthy payment collection
periods, typically of up to 150 days, as a result of third-party payment
procedures.
The following table sets forth the approximate percentages of Homecare's
1996 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>
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). 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 "--
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 home care industry has facilitated payor
efforts to competitively bid for contracts and reduce payment rates. An
increasing percentage of Homecare'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, Homecare has had
to accept reimbursement rate decreases to preserve current market share.
Through 1996, IDPN has accounted for substantially all of Homecare's
operating profit because IDPN is had been predominantly reimbursed by Medicare
and has not been subject to managed care pricing pressures. Recently
reimbursement policies have significantly reduced reimbursement for IDPN. See
"-- Reimbursement -- U.S." and "Item 3. Legal Proceedings -- IDPN." Subsequent
to the Reorganization, the Company determined that commencing in 1997 IDPN will
be included within dialysis services operations for financial reporting
purposes.
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Marketing
The Company markets its home care 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 home care 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. The Company has implemented a number of initiatives
directed at the managed care market, including broadening the range of home care
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 reimbursable days of
treatment and price levels, in certain instances to levels which the Company
believes are below the cost of providing such services. The cost pressures
applied by managed care plans have affected Homecare's recent operating
performance and are expected to continue. See "Item 7. MD&A."
COMPETITION
Homecare competes with a large number of companies in all of the geographic
areas in which its facilities are located. While the U.S. home care market is
fragmented, consisting of thousands of local providers and a limited number of
regional and national providers, several of Homecare's major competitors have
recently expanded through acquisition. The Company 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 the Company
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.
The Company's principal competitors in home care 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 home care market historically, have entered the
market and expanded the variety of therapies offered. There are relatively few
barriers to entry in the home care markets that the Company 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 the Company's major competitors are larger and some have greater financial
resources than the Company. 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 home care services. Such a trend, if it continues,
could have a material adverse effect on the Company's home care business and
results of operations.
The Company's home care operations compete 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. The Company believes that the ability to
develop and maintain contractual relationships with managed care organizations
also is an important competitive factor.
EMPLOYEES
At December 31, 1996, the Company employed approximately 27,070 employees,
including part-time and per diem employees. Such persons are employed by the
Company's principal businesses as follows: dialysis products, approximately
3,030 employees; dialysis treatment and laboratory services, approximately
19,880 employees; and home care, approximately 4,160 employees. Medical
Directors of the Company's dialysis centers are retained as independent
contractors. Management believes that its relations with its employees are good.
Approximately 550, or 2% of the Company's U.S. employees are covered by union
agreements.
During the third quarter of 1995, certain of Fresenius USA's employees at
its former Maumee, Ohio facility voted in favor of being represented by the
International Longshoremen's Association. Subsequent to that election, for
business reasons unrelated
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to the election, Fresenius USA decided to close the Maumee, Ohio facility and
transfer its production of dialysate concentrate to a facility in Lewisberry,
Pennsylvania. In 1996, 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive
officers. All of the Company's executive officers were designated as such in
connection with the closing of the Reorganizaton on September 30, 1996.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Dr. Gerd Krick 58 Chairman of the Board
Dr. Ben J. Lipps 56 President and Assistant Secretary
Mathias Klingler 44 Vice President
Geoffrey W. Swett 47 Vice President
William F. Grieco 43 Secretary
Udo Werle 52 Treasurer
Robert W. Armstrong, III 47 Principal Accounting Officer
</TABLE>
Dr. Gerd Krick has been Chairman of the Fresenius Medical Care Management
Board since 1996 and 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 AG Management Board. Since 1987 he has been
a director and, since 1989 the Chairman of the Board, of Fresenius USA. Dr.
Krick is also a director of Gull Laboratories, Inc., a publicly-held
manufacturer and distributor of diagnostic test products.
Dr. Ben J. Lipps has been a member of the Management Board and Chief
Executive Officer for North America of Fresenius Medical Care since 1996. He has
served as President, Chief Executive Officer, Chief Operating Officer and a
director of Fresenius USA since October 1989, and in various capacities with
Fresenius USA's predecessor 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 Fresenius USA's predecessor, Dr. Lipps
was a Vice President of Research and Development for Cordis Dow Corporation.
Mathias Klinger has been a member of the Management Board and Chief
Executive Officer for Europe, Asia, and Latin America of Fresenius Medical Care
since 1996 and a member of the Management Board and President of the Dialysis
Systems Division of Fresenius AG since April 1993. From June 1993 until
September 1996 he was a director of Fresenius USA. 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 Siemens AG after it acquired Pacesetter Systems GmbH.
Geoffrey S. 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 University.
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.
Udo Werle has been a member of the Management Board and Chief Financial
Officer of Fresenius Medical Care since 1996 and a member of the Management
Board and Chief Fianncial Officer and Labor Relations Director of Fresenius AG
since
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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
of the Power Generation segment. Mr. Werle joined ABB Power Ventures Ltd. in
1970.
Robert W. Armstrong, III has spent over 16 years with NMC and is currently
the Vice President of Finance, Treasurer and Controller of NMC. Prior to his
current appointment, Mr. Armstrong served as NMC's Vice President and
Controller, Audit Manager and as the Director, Financial Reporting & Budgeting.
Prior to joining NMC, Mr. Armstrong worked as an Audit 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.
REGULATORY AND LEGAL MATTERS
REGULATORY OVERVIEW
The operations of the Company and Fresenius Medical Care are subject to
extensive governmental regulation by virtually every nation in which they
operate, including, most notably 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, the Company works within the
framework of local laws to establish alternative contractual arrangements for
the management of facilities.
Any failure by the Company or its subsidiaries to receive required
licenses, certifications or other approvals, significant delays in such
receipt, loss of its various federal certifications in the U.S., termination of
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 the Company or its subsidiaries could have a material adverse effect on the
business, financial condition and results of operations of the Company.
The Company must comply with all U.S. and non-U.S. legal and regulatory
requirements under which it operates, including the illegal remuneration
provisions of the Social Security Act of 1935, as amended (sometimes referred to
as the "anti-kickback statutes"), 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 investigation (the "OIG Investigation") by the
Office of the Inspector General ("OIG") of the HHS. See "Item 3. Legal
Proceedings" for information about the OIG's investigations and about additional
regulatory, investigatory and legal proceedings with respect to the Company.
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 the Company, any one of
which could have a material adverse effect on its business, reputation,
financial condition and results of operations. Sanctions for violations of these
statutes may include criminal or civil penalties, such as imprisonment, fines or
forfeitures, 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. The Company, and the health care industry in
general, will continue to be subject to extensive federal, state and foreign
regulation, the full 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.
To increase the effectiveness of its compliance activities, the Company
initiated a review and enhancement of NMC's compliance systems. It also secured
the services of a nationally recognized consulting firm and hired a
senior-level corporate compliance officer to assist with such efforts.
The Company has implemented an enhanced compliance program. Following the
Reorganization, the Company established a toll-free Employee Action Line
accessible to all NMC employees to seek guidance or report violations or
suspected violations of applicable laws or NMC policies. A Code of Ethics and
Business Conduct was developed and distributed to all employees Company-wide
January, 1997. Compliance training for all employees has begun with sessions
having been held at the corporate level. Training for all employees throughout
the Company is being designed and will be delivered over the next several
months. Compliance-related communications to all employees have been and will
continue to be made regularly. In addition, compliance audits will be a part of
the Company's overall compliance program.
25
<PAGE> 26
PRODUCT REGULATION
U.S.
In the U.S., the FDA and comparable state regulatory agencies impose
requirements on certain subsidiaries of the Company as a manufacturer and a
seller of medical products and supplies under their jurisdiction. These require
that products be manufactured in accordance with GMP and that the Company comply
with FDA requirements regarding the design, safety, advertising, labeling,
recordkeeping and reporting of adverse events related to the use of its
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, the Company 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
the Company 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 the Company.
The Company'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., the Company 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. The Company believes that it has filed for or
obtained all necessary approvals for the manufacture and sale of its products in
jurisdictions in which those products are currently produced or sold.
See "Item 3. Legal 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.
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 superseded by treaties or other international law and by
standards and guidelines issued thereunder.
26
<PAGE> 27
Some of the Company's 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 ("PIC"), an international treaty, 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.
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.
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 company's renal products division ("RPD") manufacturing facilities
have been awarded a "CE" mark and have received ISO certifications, and all RPD
products are labeled with a "CE" mark.
27
<PAGE> 28
FACILITIES AND OPERATIONAL REGULATION
U.S.
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") subject
virtually all clinical laboratory testing facilities, including those of the
Company, 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. Certain of the operations of the Company also subject
it 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 the Company 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 Homecare
are subject to specific disposal requirements. The operations the Company are
also subject to various air emission and wastewater discharge regulations.
Federal, state and local regulations require the Company 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 the Company in the
U.S. 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, the Company's dialysis centers, home health services locations
and laboratories must be certified by HCFA. All of the Company's dialysis
centers, home health services locations and laboratories that furnish Medicare
services are so certified. In addition, all of the locations operated by
Homecare are accredited by the Joint Commission for the Accreditation of Health
Care Organizations.
Certain facilities of the Company 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 "Item 3. Legal 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 against blood-borne pathogens.
The regulatory requirements apply to all health care facilities, including
dialysis centers, laboratories and home care 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 the Company 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. The Company currently
operates in 16 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 the Company'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, the Company's 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.
28
<PAGE> 29
The Company is subject to a broad spectrum of regulation. Its operations
must comply with various environmental and transportation regulations in the
various countries in which it operates. Its 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 the Company
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 the Company and its subsidiaries 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. 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 the Company subsidiaries and joint ventures in these and
other countries.
The Company believes its 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. The Company's dialysis centers provide outpatient
hemodialysis treatment for ESRD patients. In addition, some of the Company's
centers offer services for the provision of peritoneal dialysis treatment at
home.
The Medicare program is the primary source of DSD's revenues from dialysis
treatment. For example, in 1996, approximately 63% 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 the Company's dialysis centers. As described in the next
paragraph, other payment methodologies apply to Medicare reimbursement for other
products and services provided at the Company's dialysis centers and for
products (such as those sold by the Company) and support services furnished to
ESRD patients receiving dialysis treatment at home (such as those of RPD).
Medicare reimbursement rates are fixed 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 the Company with
predictable and recurring per treatment revenues and allows the Company 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 the Company 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 the Company is
designated as the direct supplier ("Method II"), the Company 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.
Certain items and services that the Company 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 the
Company's facilities of items and services that are not included in the
Composite Rate is a subject of the OIG Investigation. See "Item 3. Legal
Proceedings -- OIG Investigation."
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<PAGE> 30
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. The Company
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 the Company's provider business
and, because the demand for products is affected by Medicare reimbursement, on
its products business. 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 the Company's business 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 the Company
is actually paid the full co-payment 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 the Company frequently does not
collect fully despite reasonable collection efforts. In certain cases, the
Company has paid, or provided 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 in most cases this
practice was lawful prior to the effective date of the Kennedy - Kassenbaum
Bill. The practice of providing loans or grants for the payment of supplemental
medical insurance premiums by NMC is one of the subjects of review by the
government as part of the OIG Investigation. See "Item 3. Legal Proceedings --
OIG Investigation" and "Item 3. Legal Proceedings -- Supplemental Medical
Insurance." NMC has notified the government of its intention to terminate such
payments, absent agency guidance, effective on the effective date of the
Kennedy-Kassenbaum Bill. The Company is involved in an industry wide effort to
work with a non-profit organization that has volunteered to undertake to make
these payments on behalf of indigent ESRD patients, including patients of the
Company. Although the Company is not certain that such payments, if made by the
Company, would violate the Kennedy - Kassenbaum Bill, the Company does believe
that the prudent course of action is to encourage its patients to seek this
assistance from the independent non-profit agency in light of the provisions of
the new law. Private payors reimburse the Company for dialysis and
dialysis-related services not covered by Medicare, Medicaid or other government
programs at contractually set amounts or at its usual and customary rates.
Laboratory Tests. A substantial portion of LifeChem's net revenues (79% in
1996) are derived from Medicare, which pays for clinical laboratory services
provided to dialysis patients in two ways. First, 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 raised issues under the anti-kickback statute, as such an arrangement with
an ESRD facility appeared to be an offer of something of value (composite rate
tests at below market value) in return for the ordering of additional tests
billed directly to Medicare. 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 "Item 3. Legal Proceedings -- OIG
Investigation" and "Item 3. Legal Proceedings -- LifeChem."
Second, other 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
30
<PAGE> 31
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. In addition, LifeChem's practice of billing
Medicare directly for certain laboratory tests is a subject of the OIG
Investigation and, therefore, recent changes in such direct billing practices
could materially adversely affect LifeChem's revenues.
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 "Item 3. Legal Proceedings -- OIG Investigation" and "Item 3. Legal
Proceedings -- LifeChem," 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 administers IDPN to chronic dialysis
patients who suffer from gastrointestinal malfunctions. These services
are covered by the Medicare program under the Medicare Parenteral and Enteral
Nutrition ("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 malnourished dialysis patients
because NMC believes that to be the only clinically and ethically responsible
course of action. Analyses of data from the Company's PSP database, both
internal and as published in peer-reviewed medical journals, indicate 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 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. A statistical review conducted in March 1996 suggested that
about 5% of dialysis patients suffer from albumin concentration that is 3.0 g/dl
or less.
Because the management of NMC believes 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 Homecare have ceased
providing IDPN. Some of these competitors' patients have subsequently become
Homecare patients for IDPN.
<Bs,14.>
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 "Item 3. Legal 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 became 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.
31
<PAGE> 32
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 75% of NMC's
historical patient level may no longer qualify for continued IDPN coverage under
the new policies, which would adversely impact revenues by up to $63 million
annually. NMC has made modifications to its IDPN program in an effort to
consolidate operations and in response to these regulatory changes.
If NMC is unable to collect its IDPN accounts receivable or if IDPN/PEN
coverage is reduced or eliminated the Company's business, financial position and
results of operations could be materially adversely affected. See "Item 3 --
Legal Proceedings -- IDPN Coverage Issues"
See "Item 3. Legal Proceedings -- OIG Investigation" for information on
issues raised by the OIG with respect to the provision of IDPN by Homecare and
related billing practices.
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 the Company's business and results of operations,
possibly materially. See "Item 3. Legal Proceedings -- Qui Tam Actions."
Non-Dialysis-Related Services. 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 the Company
for such non-dialysis-related services at contractually established amounts or
at the Company's usual and customary rates. Medicare and 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. DSI has made modifications to its non-dialysis-related
services in an effort to consolidate operations and in response to these
regulatory changes.
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 patients age 65 and older who are eligible for Medicare and are also
covered by an employer health plan ("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
the Company'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, 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 the employer health plans. The
vast majority of the Company'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
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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 overpayment. The process by
which NMC notified Medicare intermediaries with respect to overpayment received
as a result of amounts rebilled to employer health plans is a subject of the OIG
Investigation. See "Item 3. Legal 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 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 "Item 3. Legal 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 "Item 7. MD&A."
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 the Company 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 the Company'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 modeled after those in Europe.
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ANTI-KICKBACK STATUTES, FALSE CLAIMS ACT, STARK LAW AND FRAUD AND ABUSE LAWS
Various operations of the Company 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 statutes,
the False Claims Act, the Stark Law, other federal fraud and abuse laws and
similar state laws. These laws apply because the Company's Medical Directors and
other physicians with whom the Company has financial relationships refer
patients to, and order diagnostic and therapeutic services from, the Company'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 the Company's
centers maintain open staff privileges for local nephrologists. The ability of
the Company 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 "Item 3. Legal Proceedings" for information
concerning the OIG's investigations of NMC's activities under these provisions.
NMC has undertaken to review and enhance its compliance activities. The
review is multifaceted and includes internal review of current practices
company-wide to determine whether any changes in existing policies are
advisable. The Company 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. The Company does not expect these compliance efforts to have a
material impact on its financial position or results of operations.
ANTI-KICKBACK STATUTES
The anti-kickback statutes establish criminal prohibitions against and
civil penalties for 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
statutes broadly, for example as prohibiting payments intended to induce the
referral of Medicare business, irrespective of any other legitimate motives.
However, one federal appellate court, in a civil case, 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. Federal district
courts in other circuits, however, have expressly declined to follow this
precedent. Sanctions for violations of the anti-kickback statutes 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 and other
federal 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 statutes, substantial
uncertainty has resulted regarding which practices violate the statutes and
which practices are legitimate. Two methods the OIG uses periodically to give
guidance to providers about the anti-kickback statutes 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 safe harbors from prosecution, in addition to the statutory
exceptions, for certain business arrangements that would otherwise be prohibited
by the anti-kickback statutes. An arrangement that satisfies all of the
standards of the applicable safe harbors is deemed not to be subject to
prosecution. Arrangements that fall outside of the safe harbors do not
necessarily violate the anti-kickback statutes; 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
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<PAGE> 35
violate the anti-kickback statutes. See "Item 3. Legal Proceedings" for
information concerning the OIG's investigations of certain of NMC's activities,
including Medical Director contracts and compensation.
Some states also have enacted statutes similar to the anti-kickback
statutes, which may include criminal penalties, applicable to referrals of
patients regardless of payor source, and may contain exceptions different from
state to state and from those contained in the federal anti-kickback statutes.
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 statutes 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 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.
THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
In August 1996, President Clinton signed the Health Insurance Portability
and Accountability Act Public Law 104-191 (the "Kennedy-Kassenbaum Bill") which
substantively changes federal fraud and abuse laws by expanding their reach to
all federal health care programs, establishing new bases for exclusions and
mandating minimum exclusion terms, creating an additional exception to the
anti-kickback penalties for risk-sharing arrangements, requiring the Secretary
of HHS to issue advisory opinions, increasing civil money penalties to $10,000
(formerly $2,000) per item or service and assessments to three times (formerly
twice) the amount claimed, creating a specific health care offense and related
health fraud crimes, and expanding investigative authority and sanctions
applicable to health care fraud. It also prohibits provider payments which could
be deemed an inducement to patient selection of a provider.
In addition to establishing minimum periods of exclusion from government
health programs, the statute authorizes exclusion of an individual with a direct
or indirect ownership or control interest in a sanctioned entity if the
individual "knows or should know" of the activity leading to the conviction or
exclusion of the entity or where the individual is an officer or managing
employee of the entity.
The law requires the Secretary of HHS to issue advisory opinions regarding
what constitutes a violation under the anti-kickback statutes and whether an
arrangement satisfies a statutory exception or regulatory safe harbor to the
anti-kickback law.
Significantly, the law expands criminal sanctions for health care fraud
involving any governmental or private health benefit program, including freezing
of assets and forfeiture of property traceable to commission of a health care
offense.
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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 financial relationship, unless
certain exceptions apply. 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 and Medicaid programs. The statutory exceptions
in many cases are similar to the OIG's safe harbors applicable to the
anti-kickback statutes.
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 financial relationship exists. The provisions of Stark II
generally became effective on January 1, 1995. 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. 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 Homecare. The Company also
believes that the Stark Law may apply to its sales of peritoneal dialysis
products for home use in the U.S.
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 intended 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 "Item 3. Legal Proceedings -- OIG
Investigation" and "-- Medical Director Compensation."
On August 14, 1995, HCFA promulgated a final regulation implementing Stark
I and its statutory 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 the Company 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.
OTHER FRAUD AND ABUSE LAWS
The Company'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 penalty 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.
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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 the
Company or its subsidiaries and the results of their operations.
CHANGES IN THE HEALTH CARE INDUSTRY IN THE U.S.
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 the Company 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.
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 the Company join managed care plans or if such plans reduce
reimbursements or capitate competitor companies, FNMC's business and results of
operations could be adversely affected, possibly materially.
ITEM 2. PROPERTIES
The table below describes the Company's principal facilities as of the date
hereof.
<TABLE>
<CAPTION>
CURRENTLY OWNED
FLOOR AREA OR LEASED
(APPROXIMATE BY FRESENIUS
LOCATION SQUARE FEET) MEDICAL CARE USE
-------- ------------ ------------ ---
<S> <C> <C> <C>
Lexington, Massachusetts 200,000 leased Corporate headquarters and administration.
Walnut Creek, California 85,000 leased Warehousing; machine manufacture and assembly; and
customer service.
Ogden, Utah 334,000 owned Production of disposable products.
Delran, New Jersey 112,324 leased Manufacture of liquid hemodialysis concentrate
solutions.
Perrysburg, Ohio 12,000 leased Manufacture of dry hemodialysis concentrates.
Livingston, California 32,000 leased Manufacture of liquid hemodialysis concentrate
solutions.
McAllen, Texas 92,856 leased/owned(1) Manufacture of bloodlines.
Reynosa, Mexico 48,745 owned Manufacture of bloodlines.
Notts,United Kingdom 55,000 leased Manufacture of hemodialysis concentrate solutions.
</TABLE>
- - ----------
(1) Land is leased, building is owned.
The lease on Fresenius USA's Walnut Creek facility expires in 2002. Fresenius
USA owns one warehouse and leases 14 warehouses throughout the U.S. These
warehouses are used as regional distribution centers for Fresenius USA's
peritoneal
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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. At December 31, 1996,
RPD distributed its products through 17 warehouse facilities (11 in the U.S., 3
in Europe, 2 in Latin America, and 1 in Asia).
NMC has recently consolidated its headquarters with Fresenius USA at the
Lexington, Massachusetts facility which is leased by Fresenius USA. This lease
expires on October 31, 2007.
The Company leases most of the dialysis centers, Homecare locations and
manufacturing, laboratory, distribution and administrative and sales facilities
in the U.S. and foreign countries on terms which the Company believes are
customary in the industry. The Company owns those dialysis centers and
manufacturing facilities that it does not lease.
In connection with proceedings before the Federal Trade Commission ("FTC")
for pre-merger clearance of the Reorganization under the Hart-Scott-Rodino
Anti-Trust Improvements Act of 1976, as amended, Fresenius USA entered into a
consent agreement pursuant to which it agreed to divest its Lewisberry,
Pennsylvania facility. This facility was divested effective November 8, 1996.
In February 1997, the Company announced that it would discontinue
production of dialyzers at its Dublin, Ireland facility. In 1996, the facility
produced approximately 750,000 units, primarily cuprophane dialyzers. During 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 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.
ITEM 3. LEGAL PROCEEDINGS
As discussed in greater detail below, most aspects of NMC's domestic
businesses are 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 and Medicaid programs, which provide over 60% of NMC's revenues. In
addition, NMC could be required to change billing or other practices which could
adversely affect NMC's revenues. As discussed below, NMC has also become aware
that it is the subject of qui tam or "whistleblower" actions with respect to
some or all of the issues raised by the government investigations, which
whistleblower actions are filed under seal as a matter of law in the first
instance, thereby preventing disclosure to the Company and to the public except
by court order. In the process of unsealing federal whistleblower complaints, it
is not unusual for courts to allow the government to inform the Company and its
counsel of a complaint prior to the time the Company may be legally permitted to
disclose it to the public. NMC may be the subject of other "whistleblower"
actions. The Company and Fresenius Medical Care have guaranteed NMC's
obligations relating to or arising out of the OIG Investigation and the qui tam
proceedings and indemnified Grace-Conn. for any such liabilities. See "OIG
Agreements" An adverse result in any of such governmental investigations or
"whistleblower" proceedings could have a material adverse effect on the
Company's business, financial condition and results of operation.
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 statutes and the False Claims Act. The subpoenas call for extensive
document production relating to various aspects of NMC's business. A sixth
subpoena, clarifying the scope of one originally served, was received in May
1996.
The five subpoenas cover the following areas: (a) NMC's corporate
management, personnel and employees, organizational structure, financial
information and internal communications; (b) NMC's dialysis services business,
principally relating to its
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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 overpayments totaling approximately $4.9
million that were received by LifeChem from the Medicare program with respect to
laboratory services rendered between 1989 and 1993; and (e) 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 may receive additional subpoenas from time to time
in connection with this investigation.
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 statutes, the False Claims Act and other federal and state
statutes and regulations applicable to NMC's business can be substantial. See
"Item 1. Description of Business Regulatory and Legal Matters -- Anti-kickback
Statutes, 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
many of 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, three and
possibly other qui tam actions alleging that NMC submitted false claims to the
government 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 result in the payment of substantial fines, penalties and
forfeitures or the suspension of payments or exclusion of NMC or one or more of
its subsidiaries from the Medicare program and other federal programs and
changes in billing practices that could adversely affect the Company's revenues.
Any such result could have a material adverse effect on the Company's business,
financial condition and results of operations. Under the terms of the
Reorganization, any potential resulting monetary liability has been retained by
the Company, and the Company has indemnified New Grace against all potential
liability arising from or relating to the OIG Investigation. 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.
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<PAGE> 40
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 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 but, to comply with Stark II if Designated Health Services are
involved, such compensation must not exceed fair market value and may not take
into account the volume or value of referrals or other business generated
between the parties.
The compensation that DSD has paid and is continuing to pay to a material
number of its Medical Directors could be viewed by the government 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 NMC 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 and 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, but there can be no
assurance that the government will accept NMC's views. The Government may also
investigate whether other divisions including HomeCare, LifeChem and DSI have
appropriately treated Medicare credit balances.
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
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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.
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 in most cases the practice was
lawful prior to the effective date of the Kennedy-Kassenbaum Bill, but there can
be no assurance that the government will accept NMC's view. In addition, the
government has indicated that it is investigating the method by which NMC made
Medigap payments on behalf of its indigent patients. NMC has notified the
government of its intentions to terminate such payments, absent agency guidance,
effective on the effective date of the Kennedy-Kassenbaum Bill. See "Item 1.
Business--Reimbursement" for information on the Company's method of addressing
these issues in the future.
OVERPAYMENTS FOR HOME DIALYSIS SERVICES
FNMC 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 prior to the effective date of the
Kennedy-Kassenbaum Bill, but there can be no assurance that the government will
accept NMC's view.
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, but there can be no assurance that the
government will accept LifeChem's view.
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. In addition,
in March 1997, LifeChem advised the government that an additional overpayment
of approximately $100,000 was made by Medicare relating to some of the billing
errors described in its application to the voluntary disclosure program.
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
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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 continued its effort to determine whether any other overpayments
occurred relating to the "billing rules" problem and, in March 1997, advised
the government that an additional overpayment of approximately $260,000 was
made by Medicare.
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 statutes. See "Item 1. Description of
Business -- Reimbursement." In response to this alert, LifeChem changed its
practices with respect to testing covered 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 DSD or any 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 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
Homecare is to provide IDPN therapy to dialysis patients at both NMC-owned
facilities and at facilities owned by other providers. 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 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, 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, 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." Homecare revised its billing practices in response to
this advisory for claims filed for items provided on or after July 1, 1992.
Homecare was not asked to refund any amounts relating to its billings for
administration kits following the issuance of the second advisory.
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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 for administration
kits were proper, but there can be no assurance that the government will accept
NMC's view. The government may claim that 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 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, 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 Homecare's billings for infusion pumps and IV
poles.
As noted above, under the new policies published by HCFA with respect to
IDPN therapy, the Company has not been 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 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, Homecare followed the practice common
in the industry 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. NMC has stopped paying "hang fees" to both DSD and third-party
facilities.
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 Homecare as well as payments by Homecare to physicians whose
patients have received IDPN therapy. The government may claim that the payments
by Homecare to dialysis centers violate, among other things, the anti-kickback
statutes.
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 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 Homecare. Since 1994, the rate of
approval for Medicare reimbursement for IDPN claims submitted by 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 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 provides IDPN has increased as a result.
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 or, in certain instances,
inaccurate 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
Homecare to seek Medicare reimbursement for IDPN therapy prescribed by the
patient's treating physician in accordance with the requirements published by
HCFA and its carrier agents.
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There can be no assurance that the government will accept NMC's view or that the
government will not claim that Homecare submitted IDPN claims for individuals
who were not eligible for coverage or with inadequate or, in certain instances,
inccurate documentation of eligibility.
QUI TAM ACTIONS
The Company and NMC have become aware that a qui tam action has been filed
in the United States District Court for the Southern District of Florida,
Southern Division (the "South Florida Action"). The original complaint in the
South Florida Action was filed under seal in 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 FNMC and NMC with a copy of the Amended Complaint. FNMC 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 FNMC to
provide copies of the Amended Complaint to Fresenius AG, lenders involved in the
NMC Credit Facility and their respective counsel and to permit the Company and
NMC to describe the allegations of the Amended Complaint in their securities
filings with respect to the Reorganization. At the government's request, and
with the Company's consent, this action was recently transferred to the United
States District Court for the District of Massachusetts.
The Amended Complaint alleges, among other things, that the FNMC, 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.
FNMC, and NMC have become aware that a qui tam action has been filed in the
United States District Court for the Middle District of Florida, Tampa Division
(the "Tampa Action"). The original complaint in the Tampa Action was filed under
seal in 1995. The seal with respect to the complaint was partially lifted
pursuant to court order to permit the government to provide W. R. Grace & Co.
and NMC with a copy of the complaint. Pursuant to a court order dated November
7, 1996, the seal was further modified to permit Fresenius Medical Care and NMC
to disclose the complaint to the underwriters involved in two public securities
offerings by Fresenius Medical Care (the "Offerings") and their counsel, to
Fresenius AG, and to lending institutions to whom NMC has contractual
obligations, their successors and assigns and their respective counsel and to
disclose allegations in the complaint in Fresenius Medical Care's and the
Company's filings under the Securities Act of 1933, as amended, with respect to
the Offerings and in Fresenius Medical Care's and FNMC's periodic filings under
the Exchange Act, as amended.
The complaint in the Tampa Action alleges, among other things, that FNMC
(then named "W. R. Grace & Co."), NMC and certain NMC subsidiaries violated the
False Claims Act in connection with the alleged retention of over-payments made
under the Medicare program, the alleged submission of claims in violation of
applicable cost caps and the payment of supplemental Medicare insurance premiums
as an alleged inducement to patients to obtain dialysis products and services
from NMC. The complaint alleges that as a result of this allegedly wrongful
conduct, the United States suffered damages and that the defendants are liable
to the United States for three times the amount of the alleged damages plus
civil penalties of up to $10,000 per false claim. Plaintiff alleges that, in the
aggregate, such amounts exceed $10 million.
Fresenius Medical Care, FNMC and NMC have become aware that a qui tam
action has been filed in the United States District Court for the Eastern
District of Pennsylvania (the "Pennsylvania Action"). The original complaint in
the Pennsylvania Action was filed under seal in February of 1996. The seal with
respect to the complaint was partially lifted pursuant to court order to permit
the government to provide NMC with a copy of the complaint. Pursuant to a court
order dated November 15, 1996, the seal was further modified to permit Fresenius
Medical Care and NMC to disclose the complaint to the underwriters involved in
the Offerings and their counsel, to Fresenius AG, and to lending institutions to
whom NMC has contractual obligations, their successors and assigns and their
respective counsel and to disclose allegations in the complaint in Fresenius
Medical Care's filings under the Securities Act with respect to the Offerings
and in Fresenius Medical Care's and FNMC's periodic filings under the Exchange
Act.
The complaint in the Pennsylvania Action alleges, among other things, that
a pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC
violated the False Claims Act in connection with the submission of claims to the
Medicare program
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for a nonsterile intravenous drug and for intravenous drugs which were allegedly
billed in excess of permissible Medicare reimbursement rates. The complaint also
claims that the defendants violated the Medicare and Medicaid anti-kickback
statutes in connection with the receipt of discounts and other in kind payments
as alleged inducements to purchase intravenous drugs. The complaint is focused
on the business relationship between the pharmaceutical manufacturer and several
providers, one of which is NMC. The complaint claims that as a result of this
allegedly wrongful conduct, the United States suffered damages and that the
defendants are liable to the United States for three times the amount of the
alleged damages plus civil penalties of up to $10,000 per false claim. An
adverse result in the Pennsylvania Action or in any other qui tam action could
have a material adverse effect on the Company's business, financial condition or
results of operations.
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 (an "Obligation") relating to or arising out of the OIG
Investigation and the South 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, FNMC 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.
Pursuant to the OIG Agreements, upon consummation of the Reorganization,
Fresenius Medical Care, FNMC and NMC provided the United States with a joint and
several unconditional guarantee of payment when due of all Obligations (the
"Primary Guarantee"). As credit support for this guarantee, NMC delivered 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 was 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.
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, FNMC
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, FNMC
or Grace Chemicals to excuse performance of their respective obligations under
the OIG Agreements.
The foregoing describes the material terms of the OIG Agreements, copies of
which were previously filed with the U.S. Securities and Exchange Commission
(the "SEC" or the "Commission"), copies of which may be examined without charge
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street N.W., Washington D.C. 20549, and at the regional offices of the
Commission at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois, 60661-2551 and Room 1300, 7 World Trade Center, New York, New York
10048. Copies of such mateiral will also be made available from the Public
Reference Branch of the Commission, 450 Fifth Street N.W., Washington D.C.
20549, at prescribed rates. The foregoing description does not purport to be
complete and is qualified in its entirety by reference to such agreements.
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DIAGNOSTICS SUBPOENA
On October 31, 1996, Biotrax International, Inc. ("Biotrax") and NMC
Diagnostics, Inc. ("DSI"), both of which are subsidiaries of FNMC, received an
investigatory subpoena from the OIG. The subpoena calls for the production of
extensive documents and was issued in connection with an investigation being
conducted by the OIG in conjunction with the U.S. Attorney for the Eastern
District of Pennsylvania concerning the possible submission of false or improper
claims to, and their payment by, the Medicare program. The subpoena calls for
the production of documents by December 30, 1996 on corporate organization,
business plans, document retention, personnel files, sales and marketing and
Medicare billing issues relating to certain procedures offered by the prior
owner of the Biotrax business before its assets were acquired by NMC in March
1994 and by DSI following the acquisition. The Company has reviewed the subpoena
with its legal counsel and has begun to make extensive document production in
response to the subpoena. The outcome of this investigation, its duration, and
its effect, if any, on NMC, FNMC and the Company cannot be predicted at this
time. If, however, the results of this investigation are adverse to NMC, NMC or
the Company could face the same types of potential consequences as the OIG
Investigation discussed above under "-- OIG Investigation."
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
January 1995 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 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 the Company's business, financial
condition 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.
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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 "Item 7. MD&A." The Consent Decree was lifted in January 1997.
Also in February 1997, the Company announced the closing of its Dublin, Ireland
facility. See "Properties"
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 GMPs 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 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 August 1996, Fresenius USA undertook a voluntary North American recall
of certain lots of its peritoneal dialysis solutions which were associated with
aseptic peritonitis. This condition is an inflammation of the abdominal cavity
not caused by infection. The patients affected in the episode recovered quickly
after using non-suspect product lots. In the recall, Fresenius USA notified
hospitals and dialysis centers that received the recalled lots as well as
individual patients. Patients with recalled lots were provided with replacement
solution, and a toll free telephone number for patient inquiries was
established. Fresenius USA cooperated with the FDA and other government
agencies in resolving the matter.
In addition, the FDA may inspect facilities in the ordinary course of
business to ensure compliance with GMP and other applicable regulations. The
Company intends to address expeditiously any FDA findings resulting from such
inspections.
INTERNATIONAL LEGAL PROCEEDINGS AND 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 the Company is dependent upon NMC's 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.
The Company has conducted an investigation regarding suspected fraudulent
activity of the General Manager of the Company's dialysis and laboratory
operations in Portugal. The Company recently completed an analysis of the
effect of such activities and expensed approximately $10 million related to the
fraud and increased reserves by $10 million related to uncollectible accounts
and tax matters, none of which was material to any prior year, during the
third quarter 1996. The Company is pursuing actions against the responsible
individuals and possible recovery of such losses under insurance coverage.
Additionally, the Company has written off $9 million related to franchise fees
for its operations in Brazil.
47
<PAGE> 48
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, Pennsylvania, South
Carolina, West Virginia and Ohio, have implemented or are considering the
implementation of 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.
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
"Item 1. Description of Business -- 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 December
31, 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 affected 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 "Item 1. Description of
Business -- 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 "Item 7. MD&A."
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In April 1996, FNMC (formerly known as W.R. Grace & Co.) received a formal
order of investigation issued by the Commission directing an investigation into,
among other things, whether FNMC 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, FNMC
received a subpoena from the Southeast Regional Office of the Commission
requiring NMC to produce documents relating to reserves (net of applicable
taxes) established by FNMC and NMC during the period from January 1, 1990 to the
date of the subpoena (the "Covered Period"). FNMC believes that all financial
statements filed by FNMC with the Commission during the Covered Period,
including the financial statements of FNMC included in the NMC Form 10 filed
with the Commission on September 25,
48
<PAGE> 49
1995, and the consolidated financial statements of FNMC filed in FNMC'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, independent certified
public accountants), have been fairly stated, in all material respects, in
conformity with US GAAP. FNMC and NMC are cooperating with the Commission. The
outcome of this investigation and its impact, if any, on NMC or FNMC cannot be
predicted at this time. The Company has recently received a subpoena from the
Commission requesting the production of certain corporate records and personnel
materials.
IDPN COVERAGE ISSUES
The Company 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 has
responded to those objections. The District Court Judge is expected to issue an
order granting or denying the government's motion to dismiss.
Although NMC management believes 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. Such claims represent substantial accounts receivable of NMC,
amounting to approximately $140 million as of December 31, 1996, and currently
increasing at the rate of approximately $3 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 condition and results
of operations could be materially adversely affected.
SHAREHOLDER LITIGATION
In 1995, nine purported class action lawsuits were brought against FNMC
(formerly known as W.R. Grace & Co.) 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 FNMC 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
W.R. Grace & Co., certain of its directors and its former President and Chief
Executive Officer, alleging, inter alia, 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 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 FNMC, NMC and the
individual defendants believe that they have substantial defenses to the claims
asserted.
49
<PAGE> 50
In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against FNMC 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 and by
failing to negotiate with certain other companies that had made proposals for
business combinations 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. Pursuant to a case management order issued by
the Court in February 1996, the parties in the consolidated litigation have
begun discovery, including the exchange of documents. The parties are currently
exploring the possibility of settlement before engaging in further discovery,
and mediation has been proposed as a possible method of dispute resolution. The
outcomes of these actions cannot be predicted, although the Company, NMC and the
individual defendants believe they have substantial defenses to the claims
asserted.
Grace Chemicals has indemnified the Company and its affiliates for any
losses related to these lawsuits.
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 the Company and Fresenius Medical
Care can be expected to continue from time to time to be, subject to such suits
due to the nature of the Company's business. Additionally, NMC, in connection
with its diagnostics business, has been the subject of a "wrongful life"
lawsuit. Although the Company maintains insurance at a level which it believes
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 the Company or any of its
subsidiaries in excess of insurance coverage could have a material adverse
effect upon the Company and/or Fresenius Medical Care and their results of its
operations. Any claims, regardless of their merit or eventual outcome, also may
have a material adverse effect on the reputation and business of the Company
and/or Fresenius Medical Care. NMC has identified two instances in which a low
level employee and/or 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, and the
Company cannot predict whether such law enforcement authorities may use such
information to initiate further investigations of the business practices
disclosed or any other business activities of the Company. In addition, the
Company asserts claims and suits arising in the ordinary course of business, the
ultimate resolution of which would not, in the opinion of the Company, have a
material adverse effect on its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the Company's common stock is held by Fresenius Medical Care. The
NMC Credit Agreement and the indenture pertaining to the Senior Subordinated
Notes of Fresenius Medical Care impose certain limits on the Company's payment
of dividends. See Item 7 - "MD&A".
50
<PAGE> 51
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------------------------- -----------------
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED THREE MONTHS ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996 DECEMBER 31, 1996
---- ---- ---- ---- ------------------ ------------------
(DOLLARS IN MILLIONS, EXCEPT SHARES
AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales ............................. $ 1,214 $ 1,456 $ 1,818 $ 2,033 $ 1,615 $ 631
Cost of sales ......................... 700 840 1,027 1,176 969 394
------- ------- ------- ------- ------- -------
Gross profit .......................... 514 616 791 857 646 237
Selling, general and administrative
and research and development ........ 362 413 561 625 501 177
------- ------- ------- ------- ------- -------
Operating income ...................... 152 203 230 232 145 60
Interest expense (net) ................ 12 12 16 26 16 45
------- ------- ------- ------- ------- ------
Income before income taxes ............ 140 191 214 206 129 15
Income tax expense .................... 60 87 112 109 66 9
------- ------- ------- ------- ------- ------
Net income ............................ $ 80 $ 104 $ 102 $ 97 $ 63 $ 6
======= ======= ======= ======= ======= ======
Net Income Per Common and Common
Equivalent Share:
Primary ............................... $ 0.89 $ 1.12 $ 1.08 $ 1.01 $ 0.66 $ 0.07
Weighted average number of shares of
common stock and
common stock equivalents:
Primary (000's) ....................... 89,543 91,974 93,936 95,822 95,188 90,000
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
AT DECEMBER 31, AT DECEMBER 31,
--------------------------------------------- ---------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ................ $ (46) $ 74 $ 145 $ 125 $ 282
Total assets ................... 900 1,245 1,644 1,998 4,596
Total long term debt and capital
lease obligations ............ 6 14 17 35 1,438
Stockholders' equity ........... 533 880 1,159 1,363 1,768
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For purposes of the following discussion, Fresenius National Medical Care
Holdings, Inc., ("FNMC") formerly known as W. R. Grace & Co. ("Grace New
York"), together with the wholly owned subsidiaries, National Medical Care, Inc.
and its subsidiaries ("NMC") and Fresenius USA, Inc. and its subsidiaries
("FUSA") and together with FNMC, (the "Company") was formed as a result of a
series of transactions pursuant to the Agreement and Plan of Reorganization
dated as of February 4, 1996 by and between Grace New York and Fresenius AG
("the Reorganization"). The following is a discussion of the financial condition
and results of operations of FNMC. The discussion should be read in conjunction
with the financial statements included elsewhere in this document.
This section contains certain forward-looking statements. These
forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting FNMC , 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
FNMC, government reimbursement, future plans and management's expectations
regarding future performance.
OVERVIEW
FNMC, through its subsidiaries, 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 the Company's history,
a significant portion of the Company's growth has resulted form the development
of new dialysis centers and the
51
<PAGE> 52
acquisition of existing dialysis centers, as well as from the acquisition and
development of complementary businesses in the health care field.
FNMC derives a significant portion of its net revenues from Medicare,
Medicaid and other government health care programs (approximately 62% in 1996).
The reimbursement rates under these programs, including the Composite Rate, the
reimbursement rate for EPO (which accounted for approximately 22% of DSD's
domestic net revenues in 1996), and the reimbursement rate for other dialysis
and non-dialysis related services and products, as well as other material
aspects of these programs, have in the past and may in the future be changed as
a result of deficit reduction and health care reform measures. In connection
with its consideration of the fiscal year 1998 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 FNMC's results of operations. Had a six-month
extension of the coordination of benefits period had been in effect for the full
calendar 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, if ever, any proposed legislation will be enacted. See
"Item 1. Business--Regulatory and Legal Matters--Reimbursement--U.S."
FNMC's business, financial position and results of operations also could
be materially adversely affected by an adverse outcome in the OIG
investigations, any whistleblower action, the pending challenge by FNMC 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. FNMC's business, financial position
and results of operations would also be materially adversely affected by an
adverse outcome in the pending litigation concerning the implementation of
certain provisions of OBRA 93 relating to the coordination of benefits between
Medicare and employer health plans in the case of certain dual
52
<PAGE> 53
eligible ESRD patients. See "Item 1. Business -- Regulatory and Legal
Matters -- Reimbursement -- U.S."
FNMC also derives a significant portion of its net revenues from
reimbursement by non-government payors. Historically, reimbursement rates paid
by these payors generally have been higher than Medicare and other government
program rates in all areas except for certain services provided by NMC Homecare.
However, non-government payors are imposing cost containment measures that are
creating significant downward pressure on reimbursement levels that FNMC
receives for its services and products. See "Item 1. Business -- Regulatory and
Legal Matters -- Reimbursement -- U.S."
DSD operated or managed dialysis centers in 14 foreign countries at
December 31, 1996. In certain countries, FNMC experiences lower reimbursement
rates per treatment for dialysis services than are generally realized in the
U.S. FNMC'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 table summarizes certain operating results of FNMC by
principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Renal Products to DSD. The table
presents the year 1996 where there is a combination of 9 months of operations on
a predecessor basis and 3 months of operations on a successor basis. These bases
of accounting are not entirely compatible. In particular, the successor basis
has a significant increase in interest expense and depreciation and amortization
when compared to the predecessor basis.
53
<PAGE> 54
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------
1994 1995 1996
---- ---- ----
(dollars in millions)
<S> <C> <C> <C>
Net Revenues:
Dialysis Services ............................ $ 1,391 $ 1,594 $ 1,760
Dialysis Products
Renal Products Division .................... 273 290 323
FUSA ....................................... -- -- 92
------- ------- -------
273 290 415
NMC Homecare ................................. 318 327 288
Intercompany Eliminations .................... (164) (178) (218)
------- ------- -------
Total Net Revenues .............................. $ 1,818 $ 2,033 $ 2,245
======= ======= =======
Operating Earnings:
Dialysis Services ............................ $ 287 $ 287 $ 244
Dialysis Products
Renal Products Division .................... (34) (11) 41
FUSA ....................................... -- -- 1
------- ------- -------
(34) (11) 42
NMC Homecare ................................. 49 42 (6)
------- ------- -------
302 318 280
------- ------- -------
Other Expenses:
General Corporate, including Grace
Allocations ................................. 48 66 72
Research and Development, including Grace
Allocations .................................. 24 20 3
Interest Expense, Net ........................ 16 26 61
------- ------- -------
Total Other Expenses ............................ 88 112 136
------- ------- -------
Earnings Before Income Taxes .................... 214 206 144
Provision for Income Taxes ...................... 112 109 75
------- ------- -------
Net Earnings .................................... $ 102 $ 97 $ 69
======= ======= =======
</TABLE>
EFFECT OF REORGANIZATION ON RESULTS OF OPERATIONS
In accordance with U.S. GAAP relating to purchase accounting rules, the
Company has adjusted to fair value its assets and liabilities which, on a pro
forma basis, would have resulted in increased amortization of approximately $41
million for 1996, in the pro forma Statement of Operations shown as part of
general corporate expenses. In addition, as part of the Reorganization, the
Company has incurred
54
<PAGE> 55
additional debt, which would have resulted in a net increase in interest
expense, including amortization of debt issuance costs and other fees, in the
amount of $89 million for 1996 on a pro forma basis. In connection with the
Reorganization, the addition of FUSA for the entire year would have resulted in
increased revenues for Renal Products of $211 million and decreased operating
earnings for Renal Products of $3 million in 1996, on a pro forma basis. The
addition of FUSA for the entire year would have also resulted in a $2 million
increase in research and development expense, on a pro forma basis. The
Reorganization would have resulted in a decrease in the Company's provision for
income taxes of $43 million in 1996, on a pro forma basis. As a result of the
above adjustments, on a pro forma basis, the Company would have reported a net
loss of $24 million in 1996, as compared to its actual net profit of $69 million
in 1996.
The following table represents the unaudited pro forma statements of
operations of the Company for the fiscal year 1995 and 1996, assuming the
Reorganization occurred on January 1, 1995.
55
<PAGE> 56
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
1995 1996
---- ----
(dollars in millions)
<S> <C> <C>
Net Revenues:
DSD ............................................... $ 1,594 $ 1,760
Renal Products .................................... 582 667
NMC Homecare ...................................... 327 288
Intercompany Eliminations ......................... (216) (259)
------- -------
Total Net Revenues ................................... $ 2,287 $ 2,456
======= =======
Operating Earnings:
DSD ............................................... $ 287 $ 244
Renal Products .................................... 15 39
NMC Homecare ...................................... 42 (6)
------- -------
344 277
Other Expenses:
General Corporate, including Grace Allocations .... 105 114
Research and Development, including Grace
Allocations ....................................... 6 5
Interest Expense, Net ............................. 157 150
------- -------
Total Other Expenses ................................. 268 269
------- -------
Earnings Before Income Taxes ......................... 76 8
Provision for Income Taxes ........................... 55 32
------- -------
Net Earnings ......................................... $ 21 $ (24)
======= =======
</TABLE>
1996 COMPARED TO 1995
Net revenues for 1996 increased by 10% ($212 million) over 1995, with DSD and
Renal Products accounting for most of the increase. Net earnings for 1996
decreased 29% ($28 million) as compared to 1995 as a result of decreased
operating earnings and higher general corporate and interest expenses.
Dialysis Services. Dialysis Services net revenues for 1996 increased by 10%
($166 million) over 1995, primarily as a result of an 11% increase in the number
of treatments provided worldwide and a $35 million increase in revenues in
diagnostic services, offset somewhat by the absence of the comparable profit
contribution from OBRA 93 recorded in the first six months of
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<PAGE> 57
1995 ($38 million). See Item 1. "Business -- Regulatory and Legal Matters --
Reimbursement -- U.S." The treatment increase was largely due to an increase
in the number of dialysis centers (753 at December 31, 1996 as compared
to 681 at December 31, 1995). The growth in diagnostic services was primarily
due to a significant increase in the number of primary care treatments resulting
from three acquisitions consummated in 1995. LifeChem revenues increased by $2
million in 1996, as compared to 1995.
DSD's operating earnings for 1996 decreased by 15% ($43 million) as
compared to 1995 primarily as a result of the absence of the comparable profit
contribution from OBRA 93 ($38 million), writedowns in Portugal related to
fraudulent activities ($10 million), increased reserves for certain Portuguese
uncollectible accounts and tax matters ($10 million), and write-offs of Brazil
franchise fees ($9 million), somewhat offset by increased treatment volume.
Diagnostic Services operating earnings decreased by $1 million, primarily caused
by an increase in bad debt expense. These decreases were partially offset by an
increase in LifeChem profits of 13% ($4 million) due to increases in the number
of billable tests performed and the charges, recorded in 1995, related to the
repayment to the government of certain overpayments received from Medicare.
Dialysis Products. Dialysis Products net revenues for 1996 increased by
43% ($125 million) over 1995 due to increases at NMC's Renal Products Division
and $92 million of fourth quarter revenues of FUSA, which was contributed to
FNMC by Fresenius Medical Care AG effective October 1, 1996. RPD's net revenues
for 1996 increased by 11% ($33 million) over 1995, primarily due to higher
domestic volume in hemodialysis disposables, and increased international market
penetration, partially offset by the effect of the Renal-tec and Renamed
divestments ($4 million).
Dialysis Products operating earnings improved by $53 million as compared
to 1995, primarily due to higher revenues, increased capacity utilization, lower
manufacturing costs,
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<PAGE> 58
reduction in operating expense and distribution costs, and one-time charges
recorded in the third quarter of 1995 for asset impairments and writedowns.
FUSA's fourth quarter operating earnings were less than $1 million.
NMC Homecare. NMC Homecare's net revenues for 1996 decreased by 12% ($39
million) as compared to 1995, primarily due to changes in Medicare qualification
procedures for IDPN patients ($7 million), and decreases in infusion therapy
revenues mainly due to continued price compression from managed care ($40
million), partially offset by increases in respiratory therapy revenues ($6
million) and home health revenues ($2 million).
NMC Homecare's operating earnings for 1996 decreased by $48 million over
1995, primarily due to continued pressure resulting from managed care, the
decline in the number of Medicare IDPN patients who qualify for coverage under
the government's new procedures and provisions for bad debt expense ($11
million) and restructuring charges ($2 million) recorded in the third quarter of
1996.
Other Expenses. FNMC's other expenses for 1996 increased by 21% ($24
million) over 1995. General corporate expense increased by 9% ($6 million) over
1995 due to increased FNMC corporate expenses (reflecting the growth of FNMC),
and costs related to the OIG investigative subpoenas. Research and development
expenses decreased by 85% ($17 million) in 1996 versus 1995 due primarily to a
reduction in the allocation of these expenses by the Grace Consolidated Group.
Following the Reorganization, FNMC, as part of Fresenius Medical Care, has not
been allocated Grace Consolidated Group corporate expenses, but will incur
certain corporate expenses as part of Fresenius Medical Care. FNMC has
discontinued most of the ongoing research projects that resulted in these
allocations from the Grace consolidated group ($16 million) during 1996, thereby
incurring significantly lower research and development expenses. Interest
expense increased by 135% ($35 million) in 1996 over 1995 mainly due to the
large amount of bank debt incurred to finance the reorganization and the
interest expense associated with FUSA in the fourth quarter ($2 million).
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<PAGE> 59
Income Tax Rate. The effective tax rate was 52% for 1996 as compared with
53% of 1995. The effective income tax rates for 1996 and 1995 were significantly
higher than the combined statutory rates due primarily to nondeductible losses
and asset writedowns in certain foreign countries and the large amount of
non-deductible goodwill incurred as a result of the reorganization.
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.
Dialysis Services. Dialysis Service's net revenues for 1995 increased by
15% ($203 million) over 1994, primarily as a result of a 15% increase in the
number of treatments provided worldwide along with a $39 million increase in
revenues in DSI and a $15 million increase in LifeChem revenues. The treatment
increase was largely due to an increase in the number of dialysis centers (681
and December 31, 1995 as compared to 590 at December 31, 1994). Domestic
dialysis revenues were adversely affected by the decision, effective July 1,
1995, to discontinue the recognition of the incremental revenue that had been
previous recorded relating to certain dual eligible ESRD patients. See "Item 1.
Business--Regulatory and Legal Matters--Reimbursement--U.S." The growth in DSI
was primarily due to three acquisitions consummated in 1995. LifeChem net
revenues increased as a result of increased billable testing volume.
Dialysis Service's operating earnings for 1995 were virtually the same as
1994, primarily as a result of the increase in profits from international
dialysis operations and from DSI, due to acquisitions consummated in 1995. These
increases were entirely offset by a 6% decline in domestic dialysis profits due
to the aforementioned change in revenue recognition for certain dual eligible
ESRD patients and a 10% decline in LifeChem profits due to a repayment to the
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<PAGE> 60
government of $4.9 million in overpayments received from Medicare during the
period 1989 through 1993 and certain other related charges.
Dialysis Products. Dialysis Products' net revenues for 1995 increased
by 6% ($17 million) as compared to 1994, 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.
Dialysis Products operating loss improved by $23 million as compared to
1994, due primarily to the increased net revenues at 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. In
addition, 1994 operating earnings 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
($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). 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. See "Item 3 -- Legal
Proceedings -- FDA Matters."
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 Home Nutritional Services, Inc., an infusion therapy
company, and growth in the respiratory therapy and home health care business.
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<PAGE> 61
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), cost related to the OIG investigative subpoenas and foreign
exchange translation adjustments. 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. 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 product manufacturing operation. The major portion of these
losses for 1994 relates to the write-off of goodwill, as well as operating
losses of the German renal products manufacturing and distribution operation.
LIQUIDITY AND CAPITAL RESOURCES
FNMC made acquisitions totaling $95 million, $252 million, and $247
million in 1996, 1995 and 1994, respectively. FNMC made capital expenditures
for internal expansion, improvements, new furnishings and equipment of $139
million, $103 million and $84 million in
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<PAGE> 62
1996, 1995 and 1994, respectively. The Company intends to capitalize on the
continuing shift in the U.S. from physician-owned and hospital - based dialysis
clinics to multi-center providers by acquiring existing dialysis centers and the
establishment of new or expanded centers and, accordingly, will require
significant capital resources to pursue its growth strategy in the dialysis
marketplace. FNMC may also make other strategic acquisitions in the future.
FNMC also requires capital resources for working capital purposes. FNMC
used cash to fund increases in accounts receivable of $144 million, $176 million
and $140 million in 1996, 1995 and 1994, 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.
FNMC 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. FNMC generated net cash from operations of $144
million, $129 million and $177 million and 1996, 1995 and 1994, respectively.
FNMC received net cash advances from Grace of $279 million, $107 million and
$177 million for 1996, 1995 and 1994, respectively. In addition, FNMC received
net cash advances from Fresenius AG of $513 million for 1996.
Effective July 1, 1995, FNMC 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 FNMC'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, 1996. FNMC 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
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<PAGE> 63
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, FNMC may be able to rebill such
services to third-party payors and, as a result, FNMC's future results of
operations and financial position would be favorably affected by the incremental
revenue that FNMC would recognize.
NMC entered into a $2.5 billion Credit Agreement on September 27, 1996 with
a group of financial institutions. The Credit Agreement was used to fund a cash
dividend to Grace Chemicals of approximately $2.1 billion, finance existing
letters of credit and for general corporate purposes. In November 1996,
Fresenius Medical Care implemented two financings which raised a total of $731
million, the proceeds of which were invested in FNMC through a $249 million
equity infusion and a total of $482 million of loans to FNMC. The funds were
used to repay certain borrowings under the Credit Agreement. Also in November
1996, Fresenius Medical Care became a guarantor under the NMC Credit Agreement.
It is expected that NMC will have significant indebtedness under the Credit
Agreement. The Credit Agreement will be utilized to fund future capital
requirements and acquisitions and, to the extent necessary, general corporate
requirements, including future letters of credit, and any claims on the Company
which may result from adverse settlements with the government of the OIG or
other investigations.
FNMC is party to a $200 million receivables financing arrangement. At
December 31, 1996, $148 million was outstanding under this agreement.
Beginning in 1995, FNMC financed working capital requirements for certain
overseas operations by means of borrowings denominated in currencies other than
the operational currency. FNMC hedged its exposure to the foreign exchange risk
associated with these borrowings through the use of forward purchase contracts,
whereby FNMC contracted with the
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<PAGE> 64
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
amounted to approximately $48. FNMC estimates that these transactions had a
favorable impact on FNMC's net interest expense for the year ended December 31,
1996 of $0.3 million. Forward purchases of foreign currency are used solely to
manage exposure to fluctuations in foreign currency exchange rates. These
borrowings were repaid prior to the Reorganization.
The liquidity of FNMC is contingent upon a number of factors, principally
FNMC's future operating results and the contingencies referred to below. FNMC
believes that its current levels of liquidity, including availability under the
NMC Credit Agreement, are sufficient to meet its foreseeable needs. If existing
sources of funds are not sufficient to provide liquidity, FNMC may need to sell
assets or obtain debt or equity financing from additional external sources.
There can be no assurance that FNMC will be able to do so on satisfactory
terms, if at all.
IMPACT OF INFLATION
A substantial portion of FNMC'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 FNMC's business and results of
operations, possibly materially.
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<PAGE> 65
CONTINGENCIES
FNMC 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 Item 1.
Business -- Regulatory and Legal Matters -- Reimbursement -- U.S." and "Item 3.
Legal Proceedings." An adverse outcome in any of these matters, beyond the
reserves which have established, could have a material adverse effect on FNMC's
business, financial condition and results of operations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is indexed in Item 14 of
this Report and contained on the pages following the signature page hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the Company's Executive Officers is set forth in
Item 1 under the heading of the Registrant "Executive Officers." In accordance
with General Instruction G.(3) to Form 10-K, the remainder of the information
required by Part III is incorporated by reference to the Company's definitive
information statement to be filed by April 30, 1997.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
The following financial statements are filed with this report:
Report of Independent Auditors.
Report of Independent Accountants.
Consolidated Statements of Earnings for the Three Months Ended
December 31, 1996 (Successor) and for the Nine Months Ended
September 30, 1996 and the Years ended December 31, 1995 and
1994 (Predecessor).
Consolidated Balance Sheets as of December 31, 1996 (Successor) and
1995 (Predecessor).
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1996 (Successor) and for the Nine Months Ended
September 30, 1996 and the Years Ended December 31, 1995 and 1994
(Predecessor).
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
The Company is a majority-owned subsidiary of Fresenius Medical Care AG.
The operating results and other financial information of the Company included in
this report are not necessarily indicative of the operating results and
financial condition of Fresenius Medical Care AG at the dates or for the periods
presented herein. Users of the Company's financial statements wishing to obtain
financial and other information regarding Fresenius Medical Care AG should
consult the Annual Report on Form 20-F of Fresenius Medical Care AG, which is
expected to be filed with the Securities and Exchange Commission and the New
York Stock Exchange on or about April 7, 1997.
(b) Reports on Form 8-K.
During the fourth quarter of 1996, the Company filed two reports on Form
8-K. On October 15, 1996, the Company filed a Form 8-K reporting, under the
captions "Changes in Control of the Registrant" and "Other Material Events," the
completion of the Reorganization, the distribution of the shares of New Grace,
the distribution of the Company's Class D Preferred Stock, the execution of the
NMC Credit Agreement and the termination of the listing of the Company's common
stock on the New York Stock Exchange. On December 16, 1996, the Company filed a
Form 8-K reporting, under the caption "Other Current Information," the
refinancing of approximately $731 million of the indebtedness outstanding under
the NMC Credit Agreement with the proceeds of two securities offerings by
Fresenius Medical Care and the execution of an amendment to the NMC Credit
Agreement.
(c) Exhibits.
EXHIBITS. The following exhibits are filed or incorporated by reference as
required by Item 601 of Regulation S-K.
Exhibit No. Description
2.1 Agreement and Plan of Reorganization dated as of February 4,
1996 between W. R. Grace & Co. and Fresenius AG (incorporated
herein by reference to Appendix A to the Joint Proxy
Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace &
Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with
the Commission on August 5, 1996).
2.2 Distribution Agreement by and among W. R. Grace & Co., W. R.
Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996
(incorporated herein by reference to Exhibit A to Appendix A to
the Joint Proxy Statement-Prospectus of Fresenius Medical Care
AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2,
1996 and filed with the Commission on August 5, 1996).
2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma
GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996
(incorporated herein by reference to Exhibit E to Appendix A to
the Joint Proxy-Statement Prospectus of Fresenius Medical Care
AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2,
1996 and filed with the Commission on August 5, 1996).
3.1 Certificate of Incorporation of W. R. Grace & Co.-New York under
Section 402 of the New York Business Corporation Law dated March
23, 1988 (incorporated herein by reference to the Form 8-K of
Registrant filed on May 9, 1988).
3.2 Certificate of Amendment of the Certificate of Incorporation of
W. R. Grace & Co.-New York under Section 805 of the New York
Business Corporation Law dated May 25, 1988 (changing the name
to W. R. Grace & Co., incorporated herein by reference to the
Form 8-K of Registrant filed on May 9, 1988).
3.3 Certificate of Amendment of the Certificate of Incorporation of
W. R. Grace & Co. under Section 805 of the New York Business
Corporation Law dated September 27, 1996 (incorporated herein by
reference to the Form 8-K of Registrant filed with the
Commission on October 15, 1996).
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3.4 Certificate of Amendment of the Certificate of Incorporation of
W. R. Grace & Co. under Section 805 of the New York Business
Corporation Law dated September 27, 1996 (changing the name to
Fresenius National Medical Care Holdings, Inc., incorporated
herein by reference to the Form 8-K of Registrant filed with the
Commission on October 15, 1996).
3.5 Amended and Restated By-laws of Fresenius National Medical Care
Holdings, Inc., as amended (incorporated herein by reference to
the Form 8-K of Registrant filed with the Commission on October
15, 1996).
4.1 Credit Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, Nationsbank, N.A., as paying agent
and the Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner
Bank AG and Nationsbank, N.A., as Managing Agents (incorporated
herein by reference to the Form 6-K of Fresenius Medical Care AG
filed with the Commission on October 15, 1996).
4.2 Amendment dated as of November 26, 1996 (amendment to the Credit
Agreement dated as of September 27, 1996, incorporated herein by
reference to the Form 8-K of Registrant filed with the
Commission on December 16, 1996).
4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the
Credit Agreement dated as of September 27, 1996, filed
herewith).
10.1 Senior Subordinated Indenture dated November 27, 1996, among
Fresenius Medical Care AG, Fleet National Bank as Trustee and
the Subsidiary Guarantors named therein (filed herewith).
10.2 Employee Benefits and Compensation Agreement dated September 27,
1996 by and among W. R. Grace & Co., National Medical Care,
Inc., and W. R. Grace & Co.-- Conn. (incorporated herein by
reference to the Registration Statement on Form F-1 of Fresenius
Medical Care AG, as amended (Registration No. 333-05922), dated
November 22, 1996 and the exhibits thereto).
10.3 Purchase Agreement, effective January 1, 1995, between Baxter
Health Care Corporation and National Medical Care, Inc.,
including the addendum thereto (incorporated by reference to the
Form SE of Fresenius Medical Care dated July 29, 1996 and the
exhibits thereto)1
10.4 Agreement, dated November 25, 1992 between Bergen Brunswig Drug
Company and National Medical Care, Inc., including the addendum
thereto (incorporated by reference to the Form SE of Fresenius
Medical Care dated July 29, 1996 and the exhibits thereto) 1
10.5 Product Purchase Agreement, effective January 1, 1996, between
Amgen, Inc. and National Medical Care, Inc. (incorporated by
reference to the Form SE of Fresenius Medical Care dated July
29, 1996 and the exhibits thereto)1
10.6 Primary Guarantee dated July 31, 1996 (incorporated by reference
to the Registrant's Registration Statement on Form S-4
(Registration No. 333-09497) dated August 2, 1996 and the
exhibits thereto).
10.7 Secondary Guarantee dated July 31, 1996 (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(Registration No. 333-09497) dated August 2, 1996 and the
exhibits thereto).
11.1 Statement re Computation of Per Share Earnings
- - -----------------
1 ny_ps3
Portions of this Exhibit have been granted confidential treatment by
the Commission.
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21.1 Subsidiary List
27.1 Financial Data Schedule
(d) Financial Statement Schedules.
Schedule II - Valuation and Qualifiying Accounts
69
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1997 FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC.
By: /s/ Ben J. Lipps
----------------------------------------
Ben J. Lipps, President
(Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Director and Chairman of the Board
- - -------------------------------
Gerd Krick
/s/ Ben J. Lipps President (Chief Executive Officer) March 31, 1997
- - ------------------------------- and Director
Ben J. Lipps
/s/ Mathias Klingler Director March 31, 1997
- - -------------------------------
Mathias Klingler
/s/ Geoffrey W. Swett Director March 31, 1997
- - -------------------------------
Geoffrey W. Swett
/s/ William F. Grieco Director March 31, 1997
- - ------------------------------
William F. Grieco
/s/ Udo Werle Treasurer (Chief Financial March 31, 1997
- - ------------------------------- Officer) and Director
Udo Werle
/s/ Robert W. Armstrong, III Principal Accounting Officer March 31, 1997
- - -------------------------------
Robert W. Armstrong, III
</TABLE>
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Fresenius National Medical Care Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Fresenius
National Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of
December 31, 1996 and the related consolidated statements of earnings, changes
in equity and cash flows for the period January 1, 1996 to September 30, 1996,
the predecessor period, and for the period October 1, 1996 to December 31, 1996,
the successor period. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 consolidated financial statements. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying predecessor consolidated financial statements were
prepared on the basis of presentation described 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 consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1996 and the consolidated results of their operations
and their cash flows for the period October 1, 1996 to December 31, 1996, the
successor period, in conformity with generally accepted accounting principles,
and for the period January 1, 1996 to September 30, 1996, the predecessor period
pursuant to the basis of presentation in Note 1, in conformity with generally
accepted accounting principles.
As more fully described in Note 1 to the consolidated financial
statements, the Company was acquired as of September 30, 1996 in a business
combination accounted for as a purchase. As a result of the acquisition, the
consolidated financial statements for the successor period are presented on a
different basis of accounting than that of the predecessor period, and therefore
are not directly comparable.
KPMG Peat Marwick LLP
March 7, 1997
Boston, MA 02110
F-1
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
Fresenius National Medical Care Holdings, Inc.
We have audited the accompanying consolidated balance sheet of
Fresenius National Medical Care Holdings, Inc. (formerly W.R. Grace & Co. and
its subsidiary (the "Company")) as of December 31, 1995, and the related
consolidated statements of earnings and cash flows for each of the two years in
the 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 the 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying 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 consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 1995, and the results of its operations and its cash flows
for each of the two 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. We have not audited the consolidated financial
statements of Fresenius National Medical Care Holdings, Inc. for any period
subsequent to December 31, 1995.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 29, 1996
F-2
<PAGE> 73
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ -----------------------------------------------
THREE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Health care services $ 515,697 $1,495,451 $1,884,748 $1,681,039
Medical supplies 114,869 119,209 147,990 137,165
---------- ---------- ---------- ----------
630,566 1,614,660 2,032,738 1,818,204
---------- ---------- ---------- ----------
EXPENSES
Cost of health care services 320,703 888,441 1,067,906 915,887
Cost of medical supplies 72,923 80,545 108,187 110,932
General and administrative expenses 105,167 319,466 360,960 329,795
Provision for doubtful accounts 12,819 80,475 88,858 73,052
Depreciation and amortization 57,704 93,097 113,176 95,882
Research and development 1,083 1,906 3,957 2,299
Allocation of Grace Chemicals expenses -- 5,322 29,724 32,604
Interest expense, net, and related
financing costs 45,206 16,325 25,534 15,873
Reduction of carrying amounts of assets to
estimated fair values and restructuring costs -- -- 28,923 27,441
---------- ---------- ---------- ----------
615,605 1,485,577 1,827,225 1,603,765
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 14,961 129,083 205,513 214,439
PROVISION FOR INCOME TAXES 8,915 66,202 108,616 112,222
---------- ---------- ---------- ----------
NET EARNINGS $ 6,046 $ 62,881 $ 96,897 $ 102,217
========== ========== ========== ==========
Earnings per share $ 0.07 $ 0.66 $ 1.01 $ 1.08
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 74
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------- -----------
DECEMBER 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 50,422 $ 33,530
Accounts receivable, less allowances
of $153,939 and $119,914 516,083 406,682
Inventories 153,480 72,491
Deferred income taxes 146,751 81,192
Other current assets 86,907 51,835
----------- -----------
Total Current Assets 953,643 645,730
----------- -----------
Properties and equipment, net 525,988 377,328
----------- -----------
Other Assets:
Excess of cost over the fair value of net
assets acquired and other intangible assets,
net of accumulated amortization of
$37,933 and $247,644 3,057,957 954,811
Other assets and deferred charges 58,491 20,275
----------- -----------
Total Other Assets 3,116,448 975,086
----------- -----------
Total Assets $ 4,596,079 $ 1,998,144
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and
capitalized lease obligations $ 56,270 $ 183,488
Short - term borrowing from affiliates 12,193 --
Accounts payable 131,314 104,586
Accrued liabilities 421,240 220,771
Net payable to affiliates 32,590 --
Accrued income taxes 18,530 12,555
----------- -----------
Total Current Liabilities 672,137 521,400
Long-term debt 1,420,959 27,903
Non-current borrowing from affiliates 504,693 --
Capitalized lease obligations 17,246 7,516
Deferred income taxes 179,290 48,109
Other liabilities 34,015 30,441
----------- -----------
Total Liabilities 2,828,340 635,369
----------- -----------
Commitments and Contingencies (Note 15)
Equity:
Equity 1,768,574 1,365,901
Cumulative translation adjustment (835) (3,126)
----------- -----------
Total Equity 1,767,739 1,362,775
----------- -----------
Total Liabilities and Equity $ 4,596,079 $ 1,998,144
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 75
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ -----------------------------------------------
THREE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
Cash Flows Provided by Operating Activities:
Net earnings $ 6,046 $ 62,881 $ 96,897 $ 102,217
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 57,704 93,097 113,176 95,882
Provision for doubtful accounts 12,819 80,475 88,858 73,052
Provision for (benefit of) deferred income taxes 5,700 (8,268) (11,028) (9,575)
Loss on disposal of properties and equipment 13,414 5,816 5,295 4,317
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 (60,873) (82,981) (176,444) (139,585)
Decrease (increase) in inventories (6,504) 2,570 11,358 (13,637)
Decrease (increase) in other current assets (7,937) (20,569) 3,309 (5,951)
Increase (decrease) in accounts payable (5,887) 12,454 849 7,771
Increase (decrease) in accrued income taxes (945) 11,013 (23,533) (3,912)
Increase (decrease) in accrued liabilities 20,053 (17,282) (8,798) 56,099
Increase (decrease) in other long-term liabilities (7,141) 5,320 12,709 6,693
Decrease (increase) in other assets and deferred charges (32,842) 987 1,636 (22,469)
Net changes due to/from affiliates 5,394 -- -- --
Other, net (3,800) 2,812 (2,808) (1,242)
--------- ----------- --------- ---------
Net cash provided by/(used in) operating activities (4,799) 148,325 129,479 177,101
--------- ----------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures (46,271) (92,853) (102,894) (84,498)
Payments for acquisitions, net of cash acquired (6,287) (89,090) (252,158) (246,742)
Other, net -- -- -- 559
--------- ----------- --------- ---------
Net cash used in investing activities (52,558) (181,943) (355,052) (330,681)
--------- ----------- --------- ---------
Cash Flows from Financing Activities:
Advances from Grace Chemicals, net (1,130) 279,819 106,990 176,849
Increase in borrowings from affiliates 513,448 -- -- --
Cash dividends paid (8,930) (2,114,396) -- --
Contributed capital from Fresenius AG 249,005 -- -- --
Proceeds on issuance of debt 90,334 2,390,607 382,783 33,407
Payments on debt and capitalized leases (951,150) (338,793) (269,683) (36,392)
Other (3,589) -- -- --
--------- ----------- --------- ---------
Net cash provided by/ (used in) financing activities (112,012) 217,237 220,090 173,864
--------- ----------- --------- ---------
Effects of changes in foreign exchange rates (711) 3,353 (745) (3,080)
--------- ----------- --------- ---------
(Decrease) increase in cash and cash equivalents (170,080) 186,972 (6,228) 17,204
Cash and cash equivalents at beginning of period 220,502 33,530 39,758 22,554
--------- ----------- --------- ---------
Cash and cash equivalents at end of period $ 50,422 $ 220,502 $ 33,530 $ 39,758
========= =========== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 27,306 $ 21,328 $ 26,787 $ 12,750
Income taxes 169 23,293 28,637 18,814
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 76
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCKS COMMON STOCK
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- -------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 1993 42,226 $ 25,336 10,268,701 $ 103
Net Income -- -- -- --
Cash Dividends -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- --
Redemption of preferred stock (42,226) (25,336) -- --
Increases to advances from Grace Chemicals -- -- -- --
---------- -------- ---------- -------
BALANCE, DECEMBER 1994 -- -- 10,268,701 103
Net Income -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- --
Increases to advances from Grace Chemicals -- -- -- --
Other adjustments -- -- -- --
---------- -------- ---------- -------
BALANCE, DECEMBER 1995 -- -- 10,268,701 103
Net Income for 9 months - 1996 -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- --
Cash dividends to Grace Chemicals for Reorganization -- -- -- --
Increases to advances from Grace Chemicals for 9 mos. 1996 -- -- -- --
---------- -------- ---------- -------
BALANCE, SEPTEMBER 30, 1996 (PREDECESSOR) -- -- 10,268,701 103
Excess of purchase price over book value -- -- -- --
Adjustment to establish successor basis for Reorganization 89,137,327 16,318 79,731,299 89,897
---------- -------- ---------- -------
BALANCE, OCTOBER 1, 1996 (SUCCESSOR) 89,137,327 16,318 90,000,000 90,000
Cash dividends to Grace Chemicals for Reorganization -- -- -- --
Net income for three months ended 12/31/96 -- -- -- --
Cash dividends on preferred stocks -- -- -- --
Contributed capital from Fresenius USA at 10/1/96 -- -- -- --
Contributed capital from Fresenius Medical Care, AG -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- --
---------- -------- ---------- -------
BALANCE, DECEMBER 31, 1996 (SUCCESSOR) 89,137,327 $ 16,318 90,000,000 $90,000
========== ======== ========== =======
<CAPTION>
CAPITAL IN RETAINED CUMULATIVE
EXCESS OF EARNINGS TRANSLATION ADVANCES FROM
PAR VALUE (DEFICIT) ADJUSTMENTS GRACE CHEMICALS
----------- ------- ----------- ---------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 1993 $ 15,560 $ 315,274 $(2,956) $ 526,675
Net Income -- 102,217 -- --
Cash Dividends -- (3,039) -- --
Cumulative foreign currency translation adjustments -- -- 228 --
Redemption of preferred stock -- -- -- --
Increases to advances from Grace Chemicals -- -- -- 205,224
----------- ----------- ------- -----------
BALANCE, DECEMBER 1994 15,560 414,452 (2,728) 731,899
Net Income -- 96,897 -- --
Cumulative foreign currency translation adjustments -- -- (398) --
Increases to advances from Grace Chemicals -- -- -- 106,990
Other adjustments -- 5,563 -- (5,563)
----------- ----------- ------- -----------
BALANCE, DECEMBER 1995 15,560 516,912 (3,126) 833,326
Net Income for 9 months - 1996 -- 62,881 -- --
Cumulative foreign currency translation adjustments -- -- (2,653) --
Cash dividends to Grace Chemicals for Reorganization -- (2,114,396) -- --
Increases to advances from Grace Chemicals for 9 mos. 1996 -- -- -- 199,905
----------- ----------- ------- -----------
BALANCE, SEPTEMBER 30, 1996 (PREDECESSOR) 15,560 (1,534,603) (5,779) 1,033,231
Excess of purchase price over book value 1,696,698 -- -- --
Adjustment to establish successor basis for Reorganization (613,366) 1,534,603 5,779 (1,033,231)
----------- ----------- ------- -----------
BALANCE, OCTOBER 1, 1996 (SUCCESSOR) 1,098,892 0 0 0
Cash dividends to Grace Chemicals for Reorganization (8,800) -- -- --
Net income for three months ended 12/31/96 -- 6,046 -- --
Cash dividends on preferred stocks -- (130) -- --
Contributed capital from Fresenius USA at 10/1/96 384,248 (67,005) (34) --
Contributed capital from Fresenius Medical Care, AG 249,005 -- -- --
Cumulative foreign currency translation adjustments -- -- (801) --
----------- ----------- ------- -----------
BALANCE, DECEMBER 31, 1996 (SUCCESSOR) $ 1,723,345 $ (61,089) $ (835) $ 0
=========== =========== ======= ===========
<CAPTION>
TOTAL
EQUITY
------
<S> <C>
BALANCE, DECEMBER 1993 $ 879,992
Net Income 102,217
Cash Dividends (3,039)
Cumulative foreign currency translation adjustments 228
Redemption of preferred stock (25,336)
Increases to advances from Grace Chemicals 205,224
-----------
BALANCE, DECEMBER 1994 1,159,286
Net Income 96,897
Cumulative foreign currency translation adjustments (398)
Increases to advances from Grace Chemicals 106,990
Other adjustments 0
-----------
BALANCE, DECEMBER 1995 1,362,775
Net Income for 9 months - 1996 62,881
Cumulative foreign currency translation adjustments (2,653)
Cash dividends to Grace Chemicals for Reorganization (2,114,396)
Increases to advances from Grace Chemicals for 9 mos. 1996 199,905
-----------
BALANCE, SEPTEMBER 30, 1996 (PREDECESSOR) (491,488)
Excess of purchase price over book value 1,696,698
Adjustment to establish successor basis for Reorganization 0
-----------
BALANCE, OCTOBER 1, 1996 (SUCCESSOR) 1,205,210
Cash dividends to Grace Chemicals for Reorganization (8,800)
Net income for three months ended 12/31/96 6,046
Cash dividends on preferred stocks (130)
Contributed capital from Fresenius USA at 10/1/96 317,209
Contributed capital from Fresenius Medical Care, AG 249,005
Cumulative foreign currency translation adjustments (801)
-----------
BALANCE, DECEMBER 31, 1996 (SUCCESSOR) $ 1,767,739
===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 77
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY, REORGANIZATION AND BASIS OF PRESENTATION
THE COMPANY
Fresenius National Medical Care Holdings, Inc., ("FNMC"), formerly known
as W. R. Grace & Co. ("Grace New York"), together with its wholly owned
subsidiaries, National Medical Care, Inc. and its subsidiaries ("NMC") and
Fresenius USA, Inc. and its subsidiaries ("FUSA") and together with FNMC, (the
"Company") was formed as a result of a series of transactions pursuant to the
Agreement and Plan of Reorganization dated as of February 4, 1996 by and between
Grace New York and Fresenius AG (the "Reorganization") which is more fully
described hereunder.
The Company is primarily engaged in (i) providing kidney dialysis
services, (ii) manufacturing and distributing products and equipment for
dialysis treatment and providing clinical laboratory testing and other medical
services, and (iii) providing home infusion therapy, home respiratory and home
health services.
THE REORGANIZATION
The Reorganization, which was effective September 30, 1996, resulted from
the culmination of the following transactions: (1) NMC, which was a subsidiary
of W. R. Grace & Co. -- Conn. ("Grace Chemicals"), a wholly-owned subsidiary of
Grace New York, borrowed $2.3 billion and paid a cash dividend of approximately
$2.1 billion to Grace Chemicals; (2) the stock of NMC was transferred to Grace
New York, so that NMC and Grace Chemicals became sibling subsidiaries of Grace
New York; (3) the stock of Grace Chemicals was transferred to a newly formed
Delaware subsidiary of Grace New York ("New Grace") and the shares of New Grace
were spun-off to the Grace New York shareholders in a pro rata distribution; (4)
Grace New York was recapitalized such that each Grace New York shareholder
received one share of Class D Preferred Stock of Grace New York (the "Class D
Preferred Stock") for each share of Grace New York common stock held; and (5)
Grace New York, with NMC as its sole business, merged with a wholly-owned
subsidiary of Fresenius Medical Care AG ("FMC"), and Fresenius AG's worldwide
dialysis business ('FWD") was contributed as separate subsidiaries of FMC with
the result that 44.8% of the ordinary shares of FMC were exchanged for the
common stock held by Grace New York common shareholders in the merger
transaction and the balance of the ordinary shares of FMC were received by
Fresenius AG and the shareholders of FUSA, in consideration of the contribution
of FWD to FMC. All of the Grace New York (now "FNMC") common stock is held by
FMC, while the Class D Preferred Stock (which entitles its shareholders to a
contingent dividend based on the consolidated performance of FMC in the years
1997-2001) and other previously issued classes of Grace New York preferred
stock remain outstanding.
Effective October 1, 1996, FMC contributed all of the assets and
liabilities of FUSA to FNMC. The contribution of FUSA to FNMC by FMC was
accounted for on the cost basis since FUSA was a subsidiary under control of a
common parent. These consolidated financial statements include the results of
FUSA's operations and cash flows since the inception of the successor basis,
October 1, 1996,through December 31, 1996. The statement of cash flows for the
three months ended December 31, 1996 (successor basis) excludes the effect of
the contribution of FUSA's assets and liabilities, except for the cash balance
of $1,838 at October 1, 1996, since the contribution was a non-cash activity.
F-7
<PAGE> 78
BASIS OF PRESENTATION
Basis of Consolidation - Predecessor Basis
The consolidated financial statements have been prepared as if the Company
had operated as an independent, stand alone entity for all periods presented.
Such financial statements have been prepared using the historical basis of
accounting prior to the Reorganization ("Predecessor") and include all of the
assets, liabilities, revenues, expenses and related taxes on income of the Grace
New York health care business operated by NMC (the "NMC Business") previously
included in the consolidated financial statements of Grace New York and its
subsidiaries prior to the Reorganization (the "Grace Consolidated Group").
Consequently, these consolidated financial statements include balances for
goodwill and other assets and liabilities related to the NMC Business that were
previously included in the financial statements of the Grace Consolidated Group,
except that there is no allocation to the NMC Business of Grace Chemicals'
borrowings and related interest expense. These consolidated financial statements
reflect only the borrowings and interest expense of NMC prior to the
Reorganization and interest expense of the Company after the Reorganization. In
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
55 ("SAB 55"), the financial statements have also been adjusted to include
certain expenses incurred by Grace Chemicals on the NMC Business's behalf prior
to the Reorganization.
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 presented in the consolidated
statement of changes in equity. These consolidated financial statements include
equity balances related only to NMC for the periods ended December 31, 1995.
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.
These consolidated financial statements do not necessarily indicate the
financial position and results of operations that would have occurred if the NMC
Business were a stand-alone entity on the dates, and for the periods, indicated.
Accounting for the Reorganization - Successor Basis
The issuance of FMC ordinary shares for all of the common stock of NMC has
been recorded as an acquisition in accordance with the purchase method of
accounting. Accordingly, purchase accounting adjustments recorded by FMC have
been "pushed down" to NMC, thus establishing a new basis of accounting at NMC
("Successor"). The purchase price of the acquisition was determined as the
average of the mid-points of the ranges of valuation of NMC and FMC,
respectively, as assigned by independent financial advisors to Fresenius AG and
was approximately $1,152,000. The valuation has been increased for direct costs
incurred to consummate the transaction. The excess of the purchase price over
the cost of the net identifiable assets acquired at September 30, 1996 of
$1,696,698 has been allocated to the fair value of the assets acquired and
liabilities assumed with the remaining portion recorded as goodwill.
F-8
<PAGE> 79
The Agreement and Plan for Reorganization also provides for the payment of
additional purchase price to the holders of the FNMC Class D Preferred Stock in
the form of a dividend, contingent upon the attainment of certain specific
consolidated operating results by FMC. Such future dividends, if any, will be
recorded as an increase in goodwill.
In order to properly allocate purchase price to assets acquired, the
Company obtained an independent appraisal to fair value all assets of NMC.
Accordingly, the carrying values of specifically identified intangible assets
and certain tangible assets were adjusted upward by $186,030 and $57,768,
respectively, to approximate their fair values.
The Company has also recorded adjustments to increase liabilities assumed
by approximately $123,000 for preacquisition contingencies primarily related to
legal settlements and the anticipated costs incurred in the defense of
litigation. These adjustments resulted from discussions with the government in
March 1997. The Company has provided an estimate of legal costs at the low end
of an expected range, but the ultimate costs could be significantly higher. The
Company is in discussions with the government regarding the matter discussed in
Note 15. Any difference between any final settlement and the Company's estimate
would be adjusted to goodwill, if determined within the allocation period, or
charged to income if determined thereafter. In addition, the Company has accrued
approximately $50,000 for certain costs related to the closing of certain renal
products manufacturing and distribution operations as well as the closing of
certain clinics of the Homecare Division. These restructuring costs primarily
relate to severance payments and lease commitments. There were no material
charges applied to the reserves for preacquisition contingencies or
restructuring costs for the three months ended December 31, 1996.
The statements of cash flows for the three months ended December 31, 1996
("Successor") and the nine months ended September 30, 1996 ("Predecessor")
exclude the push down of the excess of purchase price over cost as it is a
non-cash activity.
All intercompany transactions and balances have been eliminated in
consolidation.
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.
F-9
<PAGE> 80
Derivative Financial Instruments
Forward currency contracts -- Gains and losses on forward currency
contracts that are designated and effective as hedges of existing assets,
liabilities (including borrowings) and firm commitments are deferred and
recorded to net income in the period in which the related transaction is
consummated. 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 of 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.
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/shipped 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 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
On a successor basis, the Company has adopted the following useful lives
and methods to amortize intangible assets: trade name, acute care agreements and
goodwill--40 years on a straight-line basis; patient relationships and other
intangible assets--over the estimated period to be benefited, generally from 5
to 6 years.
F-10
<PAGE> 81
On a predecessor basis, the Company had 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.
Other Assets
In 1995, FUSA completed construction of a dialyzer plant addition to its
manufacturing facility in Ogden, Utah. Included in other assets at December 31,
1996 are $6,104 (net of accumulated amortization of $2,054) of validation costs
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 from
commencement of manufacturing.
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.
On a successor basis, net exchange (gains)/losses resulting from the
translation of the Irish and Mexican manufacturing plant financial statement
amounted to $88 for the three months ended December 31, 1996. On a predecessor
basis, similar exchange (gains)/losses amounted to ($34), $595, and $234 for the
nine months ended September 30, 1996, and years ended 1995, and 1994
respectively. All amounts are included in general and administrative expenses.
F-11
<PAGE> 82
Income Taxes
Income tax expense and certain other tax-related information included in
these consolidated financial statements have been calculated as if the Company
were a stand-alone taxpayer.
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.
Research and Development
Research and development costs are expensed as incurred.
Earnings per Share
Primary earnings per share is computed on the basis of the weighted
average number of common shares outstanding.
NOTE 3. ACQUISITIONS
The Company acquired certain health care facilities for a total
consideration of $5,847 for the three months ended December 31, 1996 on a
successor basis and $91,737 for the nine months ended September 30, 1996, and
$252,753 in 1995, and $248,123 in 1994 on a predecessor basis. 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 tangible net assets
acquired was $4,575 for the three months ended December 31, 1996 on a successor
basis and $81,189 for the nine months ended September 30, 1996, and $215,837 in
1995, and $210,845 in 1994 on a predecessor basis.
Had the acquisitions that occurred during the three months ended December
31, 1996 been consummated on October 1, 1996, unaudited proforma net revenues
for the three months ended December 31, 1996 would have been $631,568 on a
successor basis. On a predecessor basis had the acquisitions that occurred
during the nine months ended September 30, 1996 been consummated on January 1,
1995 unaudited proforma net revenues would have been $1,628,774 for the nine
months ended September 30, 1996, and $1,514,346 for the year ended December 31,
1995. Unaudited pro forma net earnings would have been $7,092 for the three
months ended December 31, 1996 on a successor basis and $60,386 for the nine
months ended September 30, 1996, and $69,024 for the year ended 1995 on a
predecessor basis.
On a predecessor basis, 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.
Subsequent to year end 1996 the Company entered into an agreement to
acquire the assets of Neomedica, Inc. ("Neomedica") at a cost of approximately
$87,000. Neomedica had net revenues of $43,408 and net income of $5,339 for the
year ended September 30, 1996.
F-12
<PAGE> 83
NOTE 4. OTHER BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------
DECEMBER 31,
----------------------
1996 1995
--------- --------
<S> <C> <C>
Inventories
Raw materials $ 41,659 $ 9,023
Manufactured goods in process 11,837 3,035
Manufactured and purchased inventory available for sale 64,156 32,980
--------- --------
117,652 45,038
Health care supplies 35,828 27,453
--------- --------
Total $ 153,480 $ 72,491
========= ========
</TABLE>
Under the terms of certain unconditional purchase commitments, the Company is
obligated to purchase raw materials during 1997 amounting to $75,021.
<TABLE>
<S> <C> <C>
Other Current Assets
Miscellaneous accounts receivable $ 56,215 $ 20,984
Deposits and prepaid expenses 30,692 30,851
---------- --------
Total $ 86,907 $ 51,835
========== ========
</TABLE>
<TABLE>
<S> <C> <C>
Excess of Cost Over the Fair Value of Net Assets Acquired and
Other Intangible Assets
Goodwill, less accumulated amortization of $18,667(successor)
and $54,236 (predecessor) $2,523,202 $597,486
Patient relationships, less accumulated amortization of $5,088
(successor) and $106,169 (predecessor) 117,616 122,863
Other intangible assets, less accumulated amortization of $14,178
(successor) and $87,239 (predecessor) 417,139 234,462
---------- --------
Total $3,057,957 $954,811
========== ========
Accrued Liabilities
Accrued salaries and wages $ 51,817 $ 31,970
Accrued physician compensation 16,358 22,460
Accounts receivable credit balances 39,334 37,084
Accrued operating expenses 36,206 38,378
Accrued insurance 60,737 53,124
Accrued bonus and incentive compensation 11,868 11,391
Accrued interest 30,001 13,346
Accrued legal and compliance costs 115,651 1,335
Accrued restructuring 39,413 0
Other 19,855 11,683
---------- --------
Total $ 421,240 $220,771
========== ========
</TABLE>
Accounts receivable credit balances principally reflect overpayments from
third party payors in the process of repayment.
F-13
<PAGE> 84
NOTE 5. SALE OF ACCOUNTS RECEIVABLE
During 1991, NMC entered into a non-recourse agreement to sell up to
$180,000 of an undivided interest in a designated pool of accounts receivable.
In September 1996, the agreement was amended to increase the level of undivided
interest which could be sold up to $200,000. At December 31, 1996 and 1995,
$148,000 and $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 to outside parties consists of:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------- -----------
DECEMBER 31,
-------------------------
1996 1995
---------- --------
<S> <C> <C>
Credit Agreement $1,411,000 $ --
Third-party debt, primarily bank borrowings at variable
interest rates (3% -14%) with various maturities 57,101 207,004
---------- --------
1,468,101 207,004
Less amounts classified as current 47,142 179,101
---------- --------
$1,420,959 $ 27,903
========== ========
</TABLE>
Immediately prior to the Reorganization, NMC entered into a credit
agreement with a group of banks (collectively, the "Lenders"), pursuant to which
the Lenders made available to NMC and certain specified subsidiaries and
affiliates an aggregate of $2,500,000 through three credit facilities
(collectively, the "NMC Credit Facility"); (i) a revolving credit facility of up
to $1,000,000 for up to seven years (of which up to $250,000 is available for
letters of credit, up to $450,000 is available for borrowings in certain
non-U.S. currencies, up to $30,000 is available as swing lines in U.S. dollars
and up to $20,000 is available as swing lines in certain non-U.S. currencies)
("Facility 1"); (ii) a term loan facility of $1,000,000 for up to seven years
("Facility 2"); and (iii) a term loan facility of $500,000 for up to two years
("Facility 3").
Loans under the NMC Credit Facility bear interest at one of the following
rates, at either (i) LIBOR plus an applicable margin or (ii) a base rate equal
to the sum of (1) the higher from time to time of (A) the prime rate of
NationsBank, N.A. or (B) the federal funds rate plus 0.50% and (2) an applicable
margin. A fee is payable to the Lenders equal to a percentage per annum
(initially 0.375%) of the portion of the NMC Credit Facility not used.
No scheduled principal payments are due under the NMC Credit Facility for
the first 24 months of its term. Thereafter, principal payments of $500 million
on Facility 3 are due at the end of the second year; principal payments are due
in equal quarterly installments aggregating $180,000 in the fourth year;
$200,000 in the fifth year; $200,000 in the sixth year; $200,000 in the seventh
year, together with an additional payment of $220,000 at the end of the seventh
year. In addition to the foregoing scheduled 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
subordinated debt and equity securities. All payments outstanding
F-14
<PAGE> 85
under Facility 1 are due and payable at the end of the seventh year. Prepayments
are permitted at any time without penalty, except in certain defined periods.
The NMC Credit Agreement contains customary affirmative and negative covenants
with respect to the Company, NMC and its subsidiaries.
In November, 1996 Facility 3 was fully repaid by the Company, primarily
using borrowings from affiliates. At December 31, 1996 the Company had available
to it $372 million of additional borrowing capacity under the NMC Credit
Facility.
The Credit Agreement contains certain affirmative and negative covenants
customary for this type of agreement and was partially guaranteed at inception
by Grace Chemicals. The guarantee of Grace Chemicals was released in November
1996 upon the receipt of an unconditional joint and several guarantee by FMC and
certain material subsidiaries of FMC of the Credit Agreement.
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.
In consideration of 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.
Non current borrowings from affiliates consists of:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Fresenius Medical Care AG non-current borrowings primarily at a
fixed interest rate of 9.25%. $359,995
Fresenius Medical Care AG deutsche mark denominated at variable
interest rates approximating 5%. 153,424
Other 3,467
--------
516,886
Less amounts classified as current 12,193
--------
$504,693
========
</TABLE>
Scheduled maturities of long-term debt and non-current borrowings from
affiliates are as follows:
<TABLE>
<S> <C>
1997 $ 59,335
1998 162,799
1999 45,247
2000 185,000
2001 200,000
2002 and beyond 1,332,606
----------
Total $1,984,987
==========
</TABLE>
F-15
<PAGE> 86
NOTE 7. INCOME TAXES
Earnings (losses) before income taxes are as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ----------------------------------------------
THREE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
Domestic $12,945 $ 154,878 $ 237,225 $ 247,488
Foreign 2,016 (25,795) (31,712) (33,049)
------- --------- --------- ---------
Total $14,961 $ 129,083 $ 205,513 $ 214,439
======= ========= ========= =========
</TABLE>
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ----------------------------------------------
THREE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current tax (benefit) expense
Federal $ 2,960 $ 56,100 $ 91,012 $ 90,557
State 861 15,183 23,271 26,526
Foreign (606) 3,187 5,361 4,714
------- -------- --------- ---------
Total current 3,215 74,470 119,644 121,797
Deferred tax (benefit) expense
Federal 4,959 (7,235) (9,287) (4,867)
State 741 (1,033) (3,271) (4,725)
Foreign -- -- 1,530 17
------- -------- --------- ---------
Total deferred 5,700 (8,268) (11,028) (9,575)
------- -------- --------- ---------
Total provision $ 8,915 $ 66,202 $ 108,616 $ 112,222
======= ======== ========= =========
</TABLE>
F-16
<PAGE> 87
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------
DECEMBER 31,
1996 1995
--------- ---------
<S> <C> <C>
Allowance for doubtful accounts $ (36,464) $ (35,365)
Insurance liability (7,524) (15,220)
Legal liability (46,212) --
Restructuring reserves (5,614) --
Deferred and incentive compensation (22,937) (17,072)
Pension and benefit accruals (13,107) (4,061)
Accrued interest (2,838) (4,792)
Inventory reserves (3,403) (7,600)
General reserves (17,390) (1,006)
Other temporary differences (5,421) --
Loss carryforwards (31,723) (19,500)
--------- ---------
Gross deferred tax assets (192,633) (104,616)
Deferred tax assets valuation allowance 29,733 19,500
--------- ---------
Deferred tax assets (162,900) (85,116)
--------- ---------
Depreciation and amortization 195,439 50,830
Other temporary differences -- 1,203
--------- ---------
Gross deferred tax liabilities 195,439 52,033
--------- ---------
Net deferred tax liabilities (assets) $ 32,539 $ (33,083)
========= =========
</TABLE>
The provision for income taxes for the three months ended December 31,
1996 and for the periods prior to the Reorganization of the Company as described
in Note 1 differed 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>
SUCCESSOR PREDECESSOR
------------ --------------------------------------------
THREE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0% 35.0%
State income taxes, net of Federal tax benefit 7.0 7.1 6.3 6.6
Amortization of goodwill 28.2 0.9 2.0 3.3
Foreign goodwill impairment -- -- -- 4.5
Foreign losses and taxes (3.0) 7.7 2.4 0.6
Change in valuation allowance (4.3) 0.0 6.3 2.0
Other (3.3) 0.6 0.9 0.3
---- ---- ---- ----
Effective tax rate 59.6% 51.3% 52.9% 52.3%
==== ==== ==== ====
</TABLE>
The net changes in the valuation allowance for deferred tax assets were
$10,233, $0, $13,033, and $4,257, for the three months ended December 31, 1996,
the nine months ended September 30, 1996, and the twelve months ended December
31, 1995, and 1994 respectively. These increases relate to loss carryforwards of
certain foreign subsidiaries, and for the three month period ended December 31,
1996, U.S. loss carryforwards of FUSA for which related deferred tax benefits
are not expected to be utilized.
F-17
<PAGE> 88
At December 31, 1996, there were approximately $70,372 of foreign net
operating losses, the majority of which are not subject to an expiration period.
There was also a net operating loss carryforward of approximately $42,098 in the
U.S. attributable to FUSA. These net operating losses expire in varying amounts
beginning in 1997 through 2010. The ability of the Company to use the
carryforwards to offset taxes on its future income is also subject to Internal
Revenue Code Section 382 and consolidated return loss limitations.
Provision has not been made for additional federal, state, or foreign
taxes on $9,765 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 $3,872 of additional foreign
withholding and federal income taxes.
NOTE 8. PROPERTIES AND EQUIPMENT
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------
DECEMBER 31,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and improvements $ 6,640 $ 8,167
Buildings 54,784 28,033
Capitalized lease property 18,776 13,098
Leasehold improvements 128,449 161,282
Equipment and furniture 363,581 389,626
Construction in progress 14,859 15,743
--------- ---------
587,089 615,949
Accumulated depreciation and amortization (61,101) (238,621)
--------- ---------
Properties and equipment, net $ 525,988 $ 377,328
========= =========
</TABLE>
Depreciation and amortization expense relating to properties and equipment
amounted to $27,621 for the three months ended December 31, 1996 on a successor
basis, and $53,509, $62,686 and $53,011 for the nine months ended September 30,
1996, and years ended 1995, and 1994 respectively, on a predecessor basis.
Included in property, plant and equipment as of December 31, 1996, was
$12,770 of peritoneal dialysis cycler machines which the Company leases to
customers with end-stage renal disease on a month-to-month basis and $2,911
of hemodialysis machines which the Company leases to physicians under
operating leases. Rental income for the peritoneal dialysis cycler machines was
$467, for the three months ended December 31, 1996. Identification of the rental
income from the Company's leasing of hemodialysis 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.
Leases
In March 1995, FUSA entered into a sale and leaseback arrangement with a
bank which covers the sale by FUSA of approximately $19,000 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 13). In December 1995, an additional $8,000
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 payments under noncancelable leases (principally for
clinics and offices) as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES TOTAL
------ ------ -----
<S> <C> <C> <C>
1997 $ 45,138 $11,462 $ 56,600
1998 37,960 9,657 47,617
1999 30,420 6,692 37,112
2000 23,470 1,875 25,345
2001 17,610 328 17,938
2002 and beyond 41,235 1,083 42,318
-------- ------- --------
Total minimum payments $195,833 $31,097 $226,930
======== ========
Less interest and operating costs 4,722
-------
Present value of minimum lease payments
($9,128 payable in 1997). $26,375
=======
</TABLE>
F-18
<PAGE> 89
Rental expense for operating leases was $25,678 for the three months ended
December 31, 1996 on a successor basis and $66,864, for nine months ended
September 30, 1996, $80,356 in 1995 and $56,712 in 1994, on a predecessor basis.
Amortization of properties under capital leases amounted to $465 for the three
months ended December 31, 1996 on a successor basis and $629, $2,872, and $1,005
for the nine months ended September 30, 1996, and the years ended 1995 and 1994,
respectively, on a predecessor basis.
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.
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 for the year ended December 31, 1995 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 for the year ended December 31,
1995 and were primarily in respect of statutory and voluntary termination
payments associated with the termination of 17 employees. The Company has
decided to terminate all operations in Ireland. The last day of production was
February 14, 1997 and the facility is in the process of being closed.
Through December 31, 1996, the Company has recorded payments and other
charges against its restructuring reserves totaling $7,913.
NOTE 10. EMPLOYEE INCENTIVES
Long Term Incentive Programs
On a predecessor basis, Grace New York had established long-term incentive
programs under which certain key executives of NMC were 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
F-19
<PAGE> 90
shareholder return on the Company's common stock over three-year periods.
Provisions for the incentive pools were made annually and awards are paid to
participants at the end of each three-year period. These programs were
terminated as of the effective date of the Reorganization and payments under
these programs will be made in 1997 and 1998. The earnings for nine months 1996,
and twelve months 1995 and 1994 included charges of $6,584, $13,000, and $3,500
respectively for costs associated with these programs.
NMC also had, on a predecessor basis, an additional long-term incentive
program for key executives which was terminated as of the effective date of the
Reorganization. Under the terms of the program, payments were to 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 the nine months ended September 30, 1996, and the twelve months
ended December 31, 1995 and 1994 included (credits)/charges of ($1,500), $2,914
and $3,266 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 $385, $2,931 and $5,890
for the nine months ended September 30, 1996, and twelve months ended December
31, 1995 and 1994, respectively.
NOTE 11. DEFINED BENEFIT PLANS
Defined Benefit Pension Plans
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>
SUCCESSOR PREDECESSOR
------------ -----------------------------------------------
THREE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31
1996 1996 1995 1994
------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Service cost--benefits earned during
the period $ 1,678 $ 5,035 $ 3,649 $ 5,495
Interest cost on projected benefit
obligation 1,021 3,063 2,891 2,829
Actual return on plan assets (1,103) (3,309) (3,721) (3,873)
Net amortization and deferral -- (194) (557) (557)
------- ------- ------- -------
Net pension expense $ 1,596 $ 4,595 $ 2,262 $ 3,894
======= ======= ======= =======
</TABLE>
F-20
<PAGE> 91
The funded status of NMC's plan is as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------
DECEMBER 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 42,126 $ 32,800
Nonvested benefit obligation 4,809 3,540
-------- --------
Accumulated benefit obligation $ 46,935 $ 36,340
======== ========
Projected benefit obligation $(63,260) $(49,271)
Plan assets at fair value 54,218 43,760
-------- --------
Projected benefit obligation in excess of plan assets (9,042) (5,511)
Unrecognized prior service cost -- (224)
Unrecognized net (gain) loss (6,244) 6,656
Unamortized net transition asset -- (3,071)
-------- --------
Accrued pension cost $(15,286) $ (2,150)
======== ========
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 7.50% in 1996 and 7.25% in 1995, and an assumed long-term average rate
of compensation increase of 5% in 1996 and 1995. The assumed long-term rate of
return on plan assets was 9.0% and 1996 and 1995.
NMC also sponsors a supplemental executive retirement plan to provide
certain key executives with benefits in excess of normal pension benefits. The
projected benefit obligation was $2.4 million at December 31, 1996. Pension
expense for this plan, for the three months ended December 31, 1996 was $106 on
a successor basis, and $319 for the nine months ended September 30, 1996, on a
predecessor basis.
NMC does not provide any postretirement benefits to its employees other
than those provided under its pension plan and supplemental executive retirement
plan.
Defined Contribution Plans
NMC's employees are eligible to join NMC's 401 (k) Savings Plan once they
have achieved a minimum of one year of service and if they have more than 900
hours of service before their one year anniversary date. Under the provisions of
the 401 (k) plan, employees are allowed to contribute up to 16% of their
salaries. NMC contributes 50% of their savings up to 4% of saved pay. NMC's
total contributions for the three months ended December 31, 1996 and nine months
ended September 30, 1996 amounted to $1,204 and $3,428, respectively.
FUSA employees are eligible to join FUSA's 401 (k) Savings Plan once they
have achieved a minimum of one year of service, 1000 hours of service and
attained the age of 18. Under the provisions of FUSA's 401 (k) Savings Plan,
FUSA contributes 2% of eligible employee base salary to the FUSA 401 (k) Plan.
FUSA's obligation to the FUSA 401 (k) Savings Plan was approximately $217 for
the three months ended December 31, 1996.
F-21
<PAGE> 92
NOTE 12. EQUITY
Preferred Stock-Successor Basis
At December 31, 1996, the components of FNMC's preferred stocks as presented in
the Consolidated Balance Sheet and the Consolidated Statement of Changes in
Equity are as follows:
Preferred Stocks, $100 par value
<TABLE>
<S> <C>
- 6% Cumulative (1); 40,000 shares authorized; 36,460 outstanding $3,646
- 8% Cumulative Class A (2); 50,000 shares authorized; 16,176 outstanding 1,618
- 8% Noncumulative Class B (2); 40,000 shares authorized; 21,483 outstanding 2,148
------
$7,412
------
</TABLE>
Preferred Stocks, $.10 par value
<TABLE>
<S> <C>
- Noncumulative Class D;' 100,000,000 shares authorized; 89,061,590 outstanding 8,906
-------
Total Preferred $16,318
=======
</TABLE>
(1) 160 votes per share
(2) 16 votes per share
Stock Options - Predecessor Basis
On a predecessor basis, stock options were granted under the stock
incentive plans of companies within the Grace Consolidated Group. At September
30, 1996, options for 6,740,450 shares were outstanding with an average exercise
price of $30.12 (of which 4,726,562 were exercisable) and 7,000,000 shares were
available for additional grants. As of the date of the Reorganization, all
outstanding Grace New York stock options were, in the case of NMC employees,
converted to FMC stock options and, for non-NMC personnel, converted into Grace
Chemical stock options. Accordingly, there are no outstanding stock options on
FNMC common stock.
NOTE 13. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
At December 31, 1996 and 1995, 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, the fair value
of long-term debt which approximated carrying value was determined based on
expected future cash flows, discounted at market interest rates. At December 31,
1996 the fair value of long term debt approximated its carrying value due to the
short period the debt had been outstanding.
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
F-22
<PAGE> 93
which the loan is denominated and sells 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 equaled fair value based on exchange rates at December
31, 1995 and 1994 was a liability of $1,078 and $127, respectively.
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, 1996, the Company had purchased
foreign exchange contracts for the sale of currencies for Deutsche Marks of
$48,400. In total, the fair value of the Company's foreign exchange contracts is
less than $1 million.
Interest Rate Swap Agreements
At December 31, 1996, FUSA had interest rate swap agreements outstanding
with a commercial bank for notional amounts of $17,400 and $7,634. The
agreements effectively change FUSA's interest rate exposure on its operating
lease payments to a fixed rate of 8.02%. The interest rate swap agreements
outstanding as of December 31, 1996 expire in March 1999. While neither the
Company nor FUSA anticipates nonperformance by counterparties, FUSA is exposed
to credit loss in the event of non-performance by the other parties to the
interest 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.
Credit Risk
The Company is exposed to credit risk to the extent of potential
nonperformance by counterparties on financial instruments. As of December 31,
1996, 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 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
PREDECESSOR BASIS
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<PAGE> 94
Cash
NMC utilized Grace Chemicals' centralized cash management services prior
to the Reorganization. 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 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 $5,322, $13,782 and $10,853 for the nine months ended September
30, 1996 and for the years ended December 31, 1995 and 1994, respectively.
Domestic research and development expenses of Grace Chemicals related to
NMC's business and allocated to NMC in accordance with SAB 55 totaled $0,
$15,942 and $21,751 for the nine months ended September 30, 1996, and for the
years ended December 31, 1995 and 1994, respectively.
Management believes that the basis used for allocating corporate services
was reasonable and that the terms of these transactions would not materially
differ from those that would result from transactions among unrelated parties.
Grace Chemicals 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 were 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 $13,314,
$34,781 and $41,871 for the nine months ended September 30, 1996, and for the
years ended December 31, 1995 and 1994, 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.
SUCCESSOR BASIS
Financial Support
Prior to the Reorganization, Fresenius AG provided substantial financial
support to FUSA, a majority owned entity included within FWD. This support
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.
Note Payable to Fresenius North America
In 1991, FUSA used the $11,900 proceeds from the exercise of stock options
by Fresenius AG to reduce its original indebtedness to Fresenius North America,
Inc. ("FNA"), a wholly owned subsidiary of
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<PAGE> 95
Fresenius AG, from $19,774 to $7,874. During 1992, FUSA issued additional shares
of common stock to Fresenius AG for $7,600, the proceeds of which were used to
further reduce FUSA's note payable to FNA. The balance outstanding on the note
payable to FNA was $274 at December 31, 1996.
Other
FUSA provides various administrative services and advances to Fresenius
Pharma U.S.A., Inc. ("Fresenius Pharma"), another wholly-owned subsidiary of
Fresenius.
Pursuant to a series of agreements with Seratonics, Inc. ("Seratonics")
and Andersen Group, Inc. entered into in 1985 and extended an amended in 1995.
FUSA manages, and acts as sole distributor for the dialyzer reuse business of
Seratonics. These arrangements required FUSA to make minimum net payments of
$100 per year to Seratonics through February 1995, and starting in March 1995
required 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 1994 FUSA, as distributor, purchased dialyzer reuse
systems and supplies from Seratonics for an aggregate purchase price of
approximately $1,600. The results of operations and the assets and liabilities
of the Seratonics' 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 Seratonics. A former director of FUSA
is the President of Andersen Group, Inc. which owns a majority of the
outstanding capital stock of Seratonics. A portion of the salary of the
President and Chief Executive Officer of FUSA is paid each year by Seratonics.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Contingent Non-NMC Liabilities of Grace New York (Now Known as Fresenius
National Medical Care Holdings, Inc.)
In connection with the Reorganization, Grace Chemicals has agreed to
indemnify Grace New York and NMC against all liabilities of Grace New York,
whether relating to events occurring before or after the Reorganization, other
than liabilities arising from or relating to NMC operations. After the
Reorganization, Grace New York will remain contingently liable for certain
liabilities with respect to pre-Reorganization matters that are not related to
NMC operations. Grace New York believes that in view of the nature of the
non-NMC liabilities and the expected impact of the Reorganization on Grace
Chemicals' financial position, the risk of significant loss from non-NMC
liabilities is remote.
Were events to violate the tax free nature of the Reorganization, the
resulting tax liability would be the obligation of FNMC. Subject to
representations by Grace Chemicals, FNMC and Fresenius AG, Grace Chemicals has
agreed to indemnify FNMC for such a tax liability. Were FNMC not able to
collect on the indemnity, the tax liability would have a material adverse
effect on the financial position of FNMC and the results of its operations.
OIG Investigative Subpoenas
In October 1995, NMC received five investigative subpoenas from the Office
of Inspector General of the U.S. Department of Health and Human Services (the
"OIG"). The subpoenas were issued in connection with an investigation being
conducted by the OIG, the U.S. Attorney for the District of Massachusetts and
others concerning possible violations of federal laws, including the
Anti-kickback Statute and the False Claims
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<PAGE> 96
Act. The subpoenas call for extensive document production relating to various
aspects of NMC's business. A sixth subpoena, clarifying the scope of one
originally served, was received in May 1996.
The five subpoenas cover the following areas: (a) NMC's corporate
management, personnel and employees, organizational structure, financial
information and internal communications; (b) NMC's dialysis services business,
principally medical director contracts and compensation; (c) NMC's treatment of
credit balances resulting from overpayments received under the Medicare end
stage renal disease (ESRD) program, NMC's billing for home dialysis services and
payment of supplemental medical insurance premiums on behalf of indigent
patients; (d) NMC's LifeChem laboratory business ("LifeChem"), including
documents relating to testing procedures, marketing, customers, competition and
certain overpayments totaling approximately $4.9 million that were received by
LifeChem from the Medicare program with respect to laboratory services rendered
between 1989 and 1993; and (e) NMC's Homecare Division and, in particular,
information concerning the intradialytic parenteral nutrition ("IDPN") business
described below, including billing practices related to various services,
equipment and supplies and payments made by third parties as compensation for
administering IDPN therapy.
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.
FMC and NMC have provided the United States government with a joint and
several guarantee of payment of the obligations, if any, arising out of the
investigation by the OIG. In support of this guarantee, NMC has delivered to
the government an irrevocable standby letter of credit in the amount of $150
million.
DIAGNOSTICS SUBPOENA
On October 31, 1996, Biotrax International Inc. ("Biotrax") and NMC
Diagnostic Services, Inc. ("DSI"), both of which are subsidiaries of FNMC,
received an investigatory subpoena from the OIG. The subpoena calls for the
production of extensive documents an was issued in connection with an
investigation being conducted by the OIG in conjunction with the U.S. Attorney
for the Eastern District of Pennsylvania concerning the possible submission of
false or improper claims to, and their payment by, the Medicare program. The
subpoena calls for the production of documents by December 30, 1996 on corporate
organization, business plans, document retention, personnel files, sales and
marketing and Medicare billing issues relating to certain procedures offered by
the prior owner of the Biotrax business before its assets were acquired by NMC
in March 1994 and by DSI following the acquisition. The Company has reviewed the
subpoena with its legal counsel and has begun to make extensive document
production in response to the subpoena. The outcome of this investigation, its
duration, and its effect, if any, on NMC cannot be predicted at this time. If,
however, the results of this investigation are adverse to the Company, the
Company could face the same types of potential consequences of the OIG
investigation.
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<PAGE> 97
QUI TAM ACTIONS
South Florida
The Company and NMC have become aware that a qui tam action has been filed
in the United States District Court for the Southern District of Florida,
Southern Division (the "South Florida Action"). The original complaint in the
South Florida Action was filed under seal in 1996. The Relator filed an Amended
Complaint under seal on July 8, 1996. The seal with respect to the Amended
Complaint was partially lifted pursuant to court order to permit the government
to provide FNMC and NMC with a copy of the Amended Complaint. The Company and
NMC received copies of the Amended Complaint on July 10, 1996. Pursuant to a
court order dated July 26, 1996, the seal was further modified to permit the
Company to provide copies of the Amended Complaint to Fresenius AG, lenders
involved in the NMC credit facility and their respective counsel and to permit
the Company and NMC to describe the allegations of the Amended Complaint in
their securities filings with respect to the Reorganization.
The Amended Complaint alleges, among other things, that the Company, Grace
Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO. The Amended
Complaint alleges that as a result of this allegedly wrongful conduct, the
United States suffered actual damages in excess of $200 million and alleges that
the defendants are liable to the United States for three times the amount of the
alleged damages plus fines of up to $10,000 per false claim. The Amended
Complaint also seeks the imposition of a constructive trust on the proceeds of
the NMC dividend to Grace Chemicals for the benefit of the United States on the
ground that the Reorganization constitutes a fraudulent conveyance that will
render NMC unable to satisfy the claims asserted in the Amended Complaint.
Tampa
The Company and NMC have become aware that a qui tam action has been filed
in the United States District Court for the Middle District of Florida, Tampa
Division (the "Tampa Action"). The original complaint in the Tampa Action was
filed under seal in 1995. The seal with respect to the complaint was partially
lifted pursuant to court order to permit the government to provide the Company
and NMC with a copy of the complaint. Pursuant to a court order dated November
7, 1996, the seal was further modified to permit the Company and NMC to disclose
the complaint to the underwriters involved in two public securities offerings by
FMC (the "Offerings") and their counsel, to Fresenius AG, and to lending
institutions to whom NMC has contractual obligations, their successors and
assigns and their respective counsel and to disclose allegations in the
complaint in FMC's filings under the Securities Act of 1933, as amended, with
respect to the Offerings and in FMC's and FNMCH's periodic filings under the
Securities Exchange Act of 1934, as amended.
The complaint in the Tampa Action alleges, among other things, that the
Company, NMC and certain NMC subsidiaries violated the False Claims Act in
connection with the retention of overpayments made under the Medicare program,
the alleged submission of claims in violation of applicable cost caps and the
payment of supplemental Medicare insurance premiums as an inducement to patients
to obtain dialysis products and services from NMC. The complaint alleges that as
a result of this allegedly wrongful conduct, the United States suffered damages
in excess of $10 million including applicable fines, and alleges that the
defendants are liable to the United States for three times the amount of the
alleged damages plus fines of up to $10,000 per false claim.
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<PAGE> 98
Pennsylvania
The Company, FNMCH and NMC have become aware that a qui tam action has
been filed in the United States District Court for the Eastern District of
Pennsylvania (the "Pennsylvania Action"). The original complaint in the
Pennsylvania Action was filed under seal in February of 1996. The seal with
respect to the complaint was partially lifted pursuant to court order to permit
the government to provide NMC with a copy of the complaint. Pursuant to a court
order dated November 15, 1996, the seal was further modified to permit the
Company and NMC to disclose the complaint to the underwriters involved in the
Offerings and their counsel, to Fresenius AG, and to lending institutions to
whom NMC has contractual obligations, their successors and assigns and their
respective counsel and to disclose allegations in the complaint in the Company's
filings under the Securities Act with respect to the Offerings and in the
Company's and FNMCH's periodic filings under the Exchange Act.
The complaint in the Pennsylvania Action alleges, among other things, that
a pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC
violated the False Claims Act in connection with the submission of claims to the
Medicare program for a non-sterile intravenous drug and for intravenous drugs
which were allegedly billed in excess of permissible Medicare reimbursement
rates. The complaint also claims that the defendants violated the Medicare and
Medicaid anti-kickback statutes in connection with the receipt of discounts an
other in kind payments as alleged inducements to purchase intravenous drugs. The
complaint is focused on the business relationship between the pharmaceutical
manufacturer and several providers, one of which is NMC. The complaint claims
that as a result of the allegedly wrongful conduct, the United States suffered
damages and that the defendants are liable to the United States for three times
the amount of the alleged damages plus civil penalties of up to $10,000 per
false claim. An adverse result in the Pennsylvania Action or an adverse result
in any other qui tam action could have a material adverse affect on the
Company's business, financial condition or results of operations.
Omnibus Budget Reconciliation Act of 1993
The Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") affected the
payment of benefits under Medicare and employer health plans for certain
eligible ESRD patients. In July 1994, the Health Care Financing Administration
("HCFA") issued an instruction to Medicare claims processors to the effect that
Medicare benefits for the patients affected by OBRA 93 would be subject to a new
18- month "coordination of benefits" period. This instruction had a positive
impact on NMC's dialysis revenues because, during the 18-month coordination of
benefits period, the patient's employer health plan was responsible for payment,
which was generally at a rate higher than that provided under Medicare.
In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. Under the new instruction,
no 18-month coordination of benefits period would arise and Medicare would
remain the primary payor for the patients affected byOBRA93. HCFA further
proposed that its new instruction be effective retroactive to August 1993, the
effective date of OBRA 93. Consequently, FNMC may be required to refund payments
received from employer health plans for services provided after August 1993
under HCFA's original instruction and to re-bill Medicare for the same services,
which would result in a cumulative reduction of net revenues to NMC totaling
approximately $120,000 as of December 31, 1996. 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
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<PAGE> 99
60-day comment period would be required before the rule could become effective.
Therefore, NMC believes that it would be allowed to recognize the higher
reimbursement rate on dual eligible ESRD patients for 60 days subsequent to the
HCFA instruction letter, or approximately through July 1, 1995. Effective July
1, 1995, NMC ceased to recognize the incremental revenue realized under the
original instruction, which has resulted in a material reduction in NMC's
operating earnings in comparison to prior periods in which NMC recognized such
incremental revenue. However, NMC continued to bill the employer health plans as
primary payors through December 31, 1995, at which time NMC commenced billing
Medicare for the patients affected by OBRA 93.
In May 1995, NMC filed suit in the U.S. District Court for the District of
Columbia seeking a declaratory judgment with respect to HCFA's instructions
relating to OBRA 93. In June 1995, the court granted NMC's motion for a
preliminary injunction to preclude HCFA from retroactively enforcing its new
instruction. The litigation is continuing with respect to NMC's request to
permanently enjoin HCFA's new instruction, both retroactively and prospectively.
While there can be no assurance that a permanent injunction will be issued, NMC
believes that it will ultimately prevail in its claim that the retroactive
reversal by HCFA of its original instruction relating to OBRA 93 was
impermissible under applicable law. If HCFA's revised instruction is upheld and
applied retroactively, NMC's business, financial position and results of
operations would be materially adversely affected.
Intradialytic Parenteral Nutrition
NMC administers IDPN therapy to chronic dialysis patients who suffer from
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.
Although NMC management believes 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. Such claims represent substantial accounts receivable of NMC,
amounting to approximately $140 million (net of a reserve of $41,000) and
$93,000 (net of a reserve of $21,000) as of December 31, 1996 and 1995,
respectively, and currently increasing at the rate of approximately $3,000 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 became effective for
services billed on and after July 1, 1996. While the new policy permits
continued coverage of IDPN and other PEN therapies, and while the potential
impact of the new policy is subject to further analysis, NMC believes that the
new policy has made it substantially more difficult to qualify patients for
future coverage by, among other things, requiring certain patients to undergo
onerous and/or invasive tests in order to qualify for coverage. NMC, together
with other interested parties, is seeking to
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<PAGE> 100
effect certain changes in the new policy and NMC has made changes to its patient
qualification procedures in order to comply with the policy. However, if NMC is
unable to achieve changes in the new policy, if physicians and patients fail to
accept the new qualification procedures and/or if patients fail to qualify under
such procedures, the policy could significantly reduce the number of patients
eligible for Medicare coverage of IDPN and other PEN therapies, which would have
a material adverse effect on NMC's financial position and its results of
operations.
Other Legal Proceedings
NMC has received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, NMC's efforts to
persuade the U.S. Food and Drug Administration to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland facility, whether NMC sold
defective products, the manner in which NMC handled customer complaints and the
development of a new dialyzer product line. Grace has also received two
subpoenas relating to this investigation. In February 1996, the U.S. Attorney
for the District of New Jersey notified NMC that it is a target of the New
Jersey grand jury investigation, insofar as it relates to possible violations of
federal criminal law in connection with efforts to affect the January 1991
import hold referred to above; the material element of the import hold was
lifted in 1992. In June 1996, NMC received a letter from the U.S. Attorney for
the District of New Jersey indicating that the U.S. Attorney had declined to
prosecute NMC with respect to a submission related to NMC's effort to lift the
import ban. The letter added that NMC remains a subject of a federal grand
jury's investigation into other matters. NMC also received a subpoena in June
1996 requesting certain documents in connection NMC's imports of the FoCus
[Registered Trademark] dialyzer from January 1991 to November 1995. The outcome
of these investigations and their impact, if any, on NMC's business, financial
condition and results of operations cannot be predicted at this time. However,
the Company believes that neither the Company nor any of its employees committed
any violations of law. Accordingly, the Company does not believe that the
results of these investigations will have a material adverse effect on the
Company's financial position and results of operations.
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 for group health, workers
compensation, medical malpractice, auto and general liability. Provisions for
losses expected under these programs are recorded currently based upon 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.
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NOTE 17. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS
The table below provides information for the three months ended December
31, 1996 on a successor basis and the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994 on a predecessor basis pertaining to
the Company's operations by geographic area.
<TABLE>
<CAPTION>
UNITED
STATES EUROPE OTHER TOTAL
------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues
Three Months Ended 12/31/96 $ 584,121 $ 35,257 $11,188 $ 630,566
Nine Months Ended 9/30/96 1,480,500 103,576 30,584 1,614,660
1995 1,868,882 125,153 38,703 2,032,738
1994 1,724,508 79,569 14,127 1,818,204
Earnings before income taxes
Three Months Ended 12/31/96 12,945 2,408 (392) 14,961
Nine Months Ended 9/30/96 154,878 (19,338) (6,457) 129,083
1995 234,860 (32,415) 3,068 205,513
1994 247,361 (36,654) 3,732 214,439
Assets Successor 1996 4,286,867 211,760 97,452 4,596,079
Predecessor 1995 1,675,667 242,393 80,084 1,998,144
Predecessor 1994 1,440,866 178,749 24,199 1,643,814
</TABLE>
The table below provides information for the three months ended December
31, 1996 on a successor basis and the nine months ended September 30, 1996
and the years ended December 31, 1995 and 1994 on a predecessor basis 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
Three Months Ended 12/31/96 $ 524,328 $175,275 $ 69,037 $ 630,566
Nine Months Ended 9/30/96 1,523,458 240,175 148,973 1,614,660
1995 1,884,748 300,001 152,011 2,032,738
1994 1,681,039 279,474 142,309 1,818,204
Earnings before income taxes
Three Months Ended 12/31/96 6,098 8,863 -- 14,961
Nine Months Ended 9/30/96 99,648 29,435 -- 129,083
1995 223,094 (17,581) -- 205,513
1994 254,772 (40,333) -- 214,439
Assets Successor 1996 3,952,282 643,797 -- 4,596,079
Predecessor 1995 1,855,907 142,237 1,998,144
Predecessor 1994 1,484,753 159,061 1,643,814
Capital expenditures
Three Months Ended 12/31/96 42,345 3,926 -- 46,271
Nine Months Ended 9/30/96 90,655 2,198 -- 92,853
1995 99,905 2,989 -- 102,894
1994 78,538 5,960 84,498
Depreciation and amortization of
properties and equipment
Three Months Ended 12/31/96 21,594 6,027 -- 27,621
Nine Months Ended 9/30/96 50,824 2,685 -- 53,509
1995 57,783 4,903 -- 62,686
1994 47,769 5,242 -- 53,011
</TABLE>
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<PAGE> 102
NOTE 18. QUARTERLY SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------ ---------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
1996
<S> <C> <C> <C> <C>
Net revenues $528,291 $552,119 $534,250 $630,566
Cost of health care services
and medical supplies 315,433 322,853 330,700 393,626
Operating expenses 156,264 159,057 184,945 176,773
Interest expense, net 7,004 7,459 1,862 45,206
-------- -------- -------- --------
Total expenses 478,701 489,369 517,507 615,605
-------- -------- -------- --------
Earnings before Income Taxes 49,590 62,750 16,743 14,961
Provision for Income Taxes 23,145 28,832 14,225 8,915
-------- -------- -------- --------
Net earnings $ 26,445 $ 33,918 $ 2,518 $ 6,046
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1995 PREDECESSOR
-----------------------------------------
<S> <C> <C> <C> <C>
Net revenues $478,058 $508,545 $505,225 $540,910
Cost of health care services
and medical supplies 276,601 287,170 294,950 317,372
Operating expenses 147,884 147,226 166,967 163,521
Interest expense, net 5,750 5,791 5,388 8,605
-------- -------- -------- --------
Total expenses 430,235 440,187 467,305 489,498
-------- -------- -------- --------
Earnings before Income Taxes 47,823 68,358 37,920 51,412
Provision for Income Taxes 21,807 31,253 17,210 38,346
-------- -------- -------- --------
Net earnings $ 26,016 $ 37,105 $ 20,710 $ 13,066
======== ======== ======== ========
</TABLE>
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<PAGE> 103
To the Board of Directors and Stockholders of
Fresenius National Medical Care Holdings, Inc.
Under the date of March 7, 1997, we reported on the consolidated balance
sheet of Fresenius National Medical Care Holdings, Inc. and its subsidiaries
(the "Company") as of December 31, 1996 and the related consolidated statements
of earnings, changes in equity and cash flows for the period January 1, 1996 to
September 30, 1996, the predecessor period, and for the period October 1, 1996
to December 31, 1996, the successor period, as included in the annual report on
Form 10-K for the year 1996. In connection with our audit of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules. These consolidated financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statement schedules based on
our audit.
In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set
forth therein.
The audit report on the consolidated financial statements of the Company
referred to above contains an explanatory paragraph that states that the
Company was acquired as of September 30, 1996 in a business combination
accounted for as a purchase. As a result of the acquisition, the consolidated
financial statements for the successor period are presented on a different
basis of accounting than that of the predecessor period, and therefore are not
directly comparable. It is further explained that the predecessor period
consolidated financial statements were prepared on the basis of presentation
described in the notes to the consolidated financial statement and are not
intended to be a complete presentation of the assets, liabilities, revenues and
expenses of the Company.
KPMG PEAT MARWICK LLP
March 7, 1997
Boston, MA 02110
F-33
<PAGE> 104
SCHEDULE II
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSAND)
<TABLE>
<CAPTION>
SUCCESSOR - FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
ADDITIONS (DEDUCTIONS)
----------------------
CHARGED
BALANCE AT (CREDITED) TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES NET(*) PERIOD
----------- ------- -------- ------ ------
<S> <C> <C> <C> <C>
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivables $140,519 $ 12,819 $ 601 $153,939
Valuation allowance for deferred tax assets 19,500 (640) 10,873 29,733
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
ADDITIONS (DEDUCTIONS)
----------------------
CHARGED
BALANCE AT (CREDITED) TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF YEAR EXPENSES NET(*) PERIOD
------- -------- ------ ------
<S> <C> <C> <C> <C>
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivables $119,914 $ 80,475 $(59,870) $140,519
Valuation allowance for deferred tax assets 19,500 0 0 19,500
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR - FOR THE YEAR 1995
ADDITIONS (DEDUCTIONS)
----------------------
CHARGED
BALANCE AT (CREDITED) TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF YEAR EXPENSES NET(*) PERIOD
------- -------- ------ ------
<S> <C> <C> <C> <C>
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivables $ 91,449 $ 88,858 $(60,393) $119,914
Valuation allowance for deferred tax assets 6,467 13,033 0 19,500
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR - FOR THE YEAR 1994
ADDITIONS (DEDUCTIONS)
----------------------
CHARGED
BALANCE AT (CREDITED) TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF YEAR EXPENSES NET(*) PERIOD
------- -------- ------ ------
<S> <C> <C> <C> <C>
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivables $ 39,559 $ 73,052 $(21,162) $ 91,449
Valuation allowance for deferred tax assets 2,210 4,257 0 6,467
</TABLE>
F-34
<PAGE> 105
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
2.1 Agreement and Plan of Reorganization dated as of February 4,
1996 between W. R. Grace & Co. and Fresenius AG (incorporated
herein by reference to Appendix A to the Joint Proxy
Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace &
Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with
the Commission on August 5, 1996).
2.2 Distribution Agreement by and among W. R. Grace & Co., W. R.
Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996
(incorporated herein by reference to Exhibit A to Appendix A to
the Joint Proxy Statement-Prospectus of Fresenius Medical Care
AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2,
1996 and filed with the Commission on August 5, 1996).
2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma
GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996
(incorporated herein by reference to Exhibit E to Appendix A to
the Joint Proxy-Statement Prospectus of Fresenius Medical Care
AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2,
1996 and filed with the Commission on August 5, 1996).
3.1 Certificate of Incorporation of W. R. Grace & Co.-New York under
Section 402 of the New York Business Corporation Law dated March
23, 1988 (incorporated herein by reference to the Form 8-K of
Registrant filed on May 9, 1988).
3.2 Certificate of Amendment of the Certificate of Incorporation of
W. R. Grace & Co.-New York under Section 805 of the New York
Business Corporation Law dated May 25, 1988 (changing the name
to W. R. Grace & Co., incorporated herein by reference to the
Form 8-K of Registrant filed on May 9, 1988).
3.3 Certificate of Amendment of the Certificate of Incorporation of
W. R. Grace & Co. under Section 805 of the New York Business
Corporation Law dated September 27, 1996 (incorporated herein by
reference to the Form 8-K of Registrant filed with the
Commission on October 15, 1996).
<PAGE> 106
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
3.4 Certificate of Amendment of the Certificate of Incorporation of
W. R. Grace & Co. under Section 805 of the New York Business
Corporation Law dated September 27, 1996 (changing the name to
Fresenius National Medical Care Holdings, Inc., incorporated
herein by reference to the Form 8-K of Registrant filed with the
Commission on October 15, 1996).
3.5 Amended and Restated By-laws of Fresenius National Medical Care
Holdings, Inc., as amended (incorporated herein by reference to
the Form 8-K of Registrant filed with the Commission on October
15, 1996).
4.1 Credit Agreement dated as of September 27, 1996 among National
Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
the Lenders named therein, Nationsbank, N.A., as paying agent
and the Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner
Bank AG and Nationsbank, N.A., as Managing Agents (incorporated
herein by reference to the Form 6-K of Fresenius Medical Care AG
filed with the Commission on October 15, 1996).
4.2 Amendment dated as of November 26, 1996 (amendment to the Credit
Agreement dated as of September 27, 1996, incorporated herein by
reference to the Form 8-K of Registrant filed with the
Commission on December 16, 1996).
4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the
Credit Agreement dated as of September 27, 1996, filed
herewith).
10.1 Senior Subordinated Indenture dated November 27, 1996, among
Fresenius Medical Care AG, Fleet National Bank as Trustee and
the Subsidiary Guarantors named therein (filed herewith).
10.2 Employee Benefits and Compensation Agreement dated September 27,
1996 by and among W. R. Grace & Co., National Medical Care,
Inc., and W. R. Grace & Co.-- Conn. (incorporated herein by
reference to the Registration Statement on Form F-1 of Fresenius
Medical Care AG, as amended (Registration No. 333-05922), dated
November 22, 1996 and the exhibits thereto).
10.3 Purchase Agreement, effective January 1, 1995, between Baxter
Health Care Corporation and National Medical Care, Inc.,
including the addendum thereto (incorporated by reference to the
Form SE of Fresenius Medical Care dated July 29, 1996 and the
exhibits thereto)1
10.4 Agreement, dated November 25, 1992 between Bergen Brunswig Drug
Company and National Medical Care, Inc., including the addendum
thereto (incorporated by reference to the Form SE of Fresenius
Medical Care dated July 29, 1996 and the exhibits thereto) 1
10.5 Product Purchase Agreement, effective January 1, 1996, between
Amgen, Inc. and National Medical Care, Inc. (incorporated by
reference to the Form SE of Fresenius Medical Care dated July
29, 1996 and the exhibits thereto)1
10.6 Primary Guarantee dated July 31, 1996 (incorporated by reference
to the Registrant's Registration Statement on Form S-4
(Registration No. 333-09497) dated August 2, 1996 and the
exhibits thereto).
10.7 Secondary Guarantee dated July 31, 1996 (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(Registration No. 333-09497) dated August 2, 1996 and the
exhibits thereto).
11.1 Statement re Computation of Per Share Earnings
21.1 Subsidiary List
27.1 Financial Data Schedule
- - -----------------
1 ny_ps3
Portions of this Exhibit have been granted confidential treatment by
the Commission.
<PAGE> 1
AMENDMENT NO. 2
THIS AMENDMENT NO. 2, dated as of December 12, 1996 (the "Amendment")
relating to the Credit Agreement referenced below, by and among NATIONAL MEDICAL
CARE, INC., a Delaware corporation, certain subsidiaries and affiliates party to
the Credit Agreement and identified on the signature pages hereto, and
NATIONSBANK, N.A., as Paying Agent for and on behalf of the Lenders. Terms used
but not otherwise defined shall have the meanings provided in the Credit
Agreement.
W I T N E S S E T H
WHEREAS, a $2.5 billion credit facility has been extended to National
Medical Care, Inc. and certain subsidiaries and affiliates pursuant to the terms
of that Credit Agreement dated as of September 27, 1996 (as amended and
modified, the "Credit Agreement") among National Medical Care, Inc., the other
Borrowers, Guarantors and the Lenders identified therein, and NationsBank, N.A.,
as Paying Agent;
WHEREAS, the Company has requested certain modifications described herein
which require the consent of the Required Lenders; and
WHEREAS, the Required Lenders have consented to the requested
modifications on the terms and conditions set forth herein and have authorized
the Paying Agent to enter into this Amendment on their behalf to give effect to
this Amendment;
NOW, THEREFORE, IN CONSIDERATION of these premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
A. The Credit Agreement is amended and modified in the following respects:
1. In the proviso of the first sentence following the pricing grids
in the definition of "Applicable Percentage" in Section 1.1, subsection (i)
shall be modified to read as follows:
(i) the initial Applicable Percentages for Loans and
Obligations (other than the Tranche B Term Loan) shall be based on Pricing
Level IX and shall remain in effect until December 12, 1996 (being the
effective date of Amendment No. 2), at which time the Applicable
Percentages shall be as shown above based on the projected Consolidated
Leverage Ratio (the "Projected Ratio") as of December 31, 1996, calculated
as set forth in a Rate Change Officer's Certificate substantially in the
form attached as Schedule 1 to Amendment No. 2 delivered by Holdings to
the Paying Agent; provided, that if the quarterly compliance certificate
for the period ending as of December 31, 1996
<PAGE> 2
and related financial statements and information for such period delivered
pursuant to Sections 7.1(b) and Section 7.2(b) demonstrate that the
Consolidated Leverage Ratio as of such date is higher than the Projected
Ratio, with the effect of increasing the Pricing Level, the Applicable
Percentage shall be automatically adjusted for such period in accordance
with such higher Pricing Level and the Borrower shall promptly pay to the
Paying Agent for the Lenders and the Issuing Lender an amount equal to the
difference between the amount of interest and fees actually paid or
payable during the period such Pricing Level was in effect, and the amount
of interest and fees that would have been paid or payable during such
period had the higher Pricing Level been in effect.
2. The maximum aggregate amount of Guaranteed Obligations of
WRG-Conn. was reduced by $800 million to $150 million upon the occurrence of the
Holdings Group Guaranty Joinder Event on November 15, 1996. The remaining $150
million of the Guaranteed Obligations of WRG-Conn. under the Credit Agreement
shall be deemed released in accordance with the provisions of Section 4.10 upon
the delivery to the Paying Agent of the officer's certificate in the form
attached to this Amendment as Schedule 2 (the "Guaranty Release Officer's
Certificate").
3. In clause (i) of the proviso of Section 2.1(a) the phrase "or in
the case of Designated Borrowers, the amount designated in the Borrower Joinder
Agreement approved by the Required Lenders in accordance with Section 3.16(a)
(the "Designated Borrower Limit")" is amended to read as follows:
"or in the case of Designated Borrowers, the amount designated on
Schedule 2.1(a)-2 or in the Borrower Joinder Agreement approved by the
Required Lenders in accordance with Section 3.16(a) (the "Designated
Borrower Limit")"
and the Designated Borrower Limit for National Medical Care of Taiwan, Inc., a
Delaware corporation, as referenced on Schedule 2.1(a)-2 is modified and reduced
from "$50,000,000" to "$20,000,000".
B. Except as modified hereby, all of the terms and provisions of the
Credit Agreement (and Exhibits and Schedules) remain in full force and effect.
C. The Company agrees to pay all reasonable costs and expenses of the
Paying Agent in connection with the preparation, execution and delivery of this
Amendment, including without limitation the reasonable fees and expenses of
Moore & Van Allen, PLLC.
D. This Amendment may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original and its shall
not be necessary in making proof of this Amendment to produce or account for
more than one such counterpart.
2
<PAGE> 3
E. This Amendment, and the Credit Agreement as amended hereby, shall be
governed by and construed and interpreted in accordance with the laws of the
State of New York.
[Remainder of Page Intentionally Left Blank]
3
<PAGE> 4
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
COMPANY: NATIONAL MEDICAL CARE, INC.,
A Delaware corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
FRESENIUS MEDICAL CARE AG
By /s/ Dr. Gerd Krick
-----------------------------------------
Name: Dr. Gerd Krick
Title: Chairman of the Managing Board
By /s/ Udo Werle
-----------------------------------------
Name: Udo Werle
Title: Member of the Managing Board
The undersigned, being WRG-Conn., joins in the execution of this Amendment
for purposes of acknowledging and consenting to the provisions of Section A(2)
hereof.
W.R. GRACE & CO.-CONN.,
a Connecticut corporation
By /s/ Larry Ellberger
-----------------------------------------
Name: Larry Ellberger
Title: Chief Financial Officer and
Senior Vice President
PAYING AGENT: NATIONSBANK, N.A.,
as Paying Agent for and on behalf of the
Lenders
By /s/ Ashley M. Crabtree
-----------------------------------------
Ashley M. Crabtree
Vice President
4
<PAGE> 5
GUARANTORS: FRESENIUS NATIONAL MEDICAL CARE
HOLDINGS, INC., a New York corporation
formerly known as WRG-NY
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
NATIONAL MEDICAL CARE, INC.,
a Delaware corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
BIO-MEDICAL APPLICATIONS
MANAGEMENT CO. INC., a Delaware
corporation
By /s/ Robert W. Armstrong, III
-----------------------------------------
Name: Robert W. Armstrong, III
Title: Vice President
NMC HOMECARE, INC.,
a Delaware corporation
By /s/ Robert W. Armstrong, III
-----------------------------------------
Name: Robert W. Armstrong, III
Title: Vice President
LIFECHEM, INC.,
a Delaware corporation
By /s/ Robert W. Armstrong, III
-----------------------------------------
Name: Robert W. Armstrong, III
Title: Vice President
FRESENIUS MEDICAL CARE AG,
a German corporation
By /s/ Dr. Gerd Krick /s/ Udo Werle
-----------------------------------------
Name: Dr. Gerd Krick Udo Werle
Title: Members of the Managing Board
5
<PAGE> 6
FRESENIUS USA, INC.,
a Massachusetts corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
FRESENIUS MEDICAL CARE DEUTSCHLAND
GmbH, a German corporation
By /s/ Udo Werle /s/ Dr. Dietmar Blumenhagen
------------------------------------------
Name: Udo Werle Dr. Dietmar Blumenhagen
Title: Authorized Signatories
FRESENIUS MEDICAL CARE GROUPE
FRANCE, a French corporation (formerly known
as Fresenius Groupe France S.A.)
By /s/ Udo Werle
-----------------------------------------
Name: Udo Werle
Title: Authorized Signatory
FRESENIUS SECURITIES, INC.,
a California corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
6
<PAGE> 7
Schedule 1
FORM OF RATE CHANGE OFFICER'S CERTIFICATE
This Certificate is delivered in accordance with the provisions of
subsection (iii) of that definition of "Applicable Percentage" in that Credit
Agreement dated as of September 27, 1996 (as amended, modified and supplemented,
the "Credit Agreement") among NATIONAL MEDICAL CARE, INC., a Delaware
corporation, and certain subsidiaries and affiliates (the "Borrowers"), the
Guarantors identified therein, the Lenders and NationsBank, N.A., as Paying
Agent. Terms used but not otherwise defined herein shall have the meanings
provided in the Credit Agreement.
The undersigned, being a Responsible Officer of FRESENIUS MEDICAL CARE AG,
a German corporation, hereby certifies, in my official capacity and not in my
individual capacity, that to the best of my knowledge and belief:
(a) the historical information accompanying this Certificate is true
and correct in all material respects for the periods covered and the pro
forma information accompanying this Certificate is based on reasonable
assumptions (and there has been no development, situation, change of
circumstance or other condition which would render such assumptions
unreasonable or unrealistic on the whole).
(b) the undersigned has no actual knowledge of any Default or Event
of Default; and
(c) detailed calculations demonstrating the projected Consolidated
Leverage Ratio as of December 31, 1996 accompany this Certificate.
This the __ day of December, 1996.
_____________________________________
Title:
7
<PAGE> 8
CONSENT TO AMENDMENT NO. 2
NationsBank, N.A., as Paying Agent
101 N. Tryon Street, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attn: Carol Lindsay, Agency Services
Re: Credit Agreement dated as of September 27, 1996 (as amended and
modified, the "Credit Agreement") among National Medical Care, Inc.,
the other Borrowers, Guarantors and Lenders identified therein and
NationsBank, N.A., as Paying Agent. Terms used but not otherwise
defined shall have the meanings provided in the Credit Agreement.
Amendment No. 2 dated December 12, 1996 (the "Subject Amendment")
relating to the Credit Agreement
Ladies and Gentlemen:
This should serve to confirm our receipt of, and consent to, the Subject
Amendment. We hereby authorize and direct you, as Paying Agent for the Lenders,
to enter into the Subject Amendment on our behalf in accordance with the terms
of the Credit Agreement upon your receipt of such consent and direction from the
Required Lenders.
Sincerely,
_______________________________________
[Name of Lender]
By:____________________________________
Name:
Title:
<PAGE> 1
------------------------------------------------
FRESENIUS MEDICAL CARE AG
As Issuer
FLEET NATIONAL BANK
As Trustee
THE SUBSIDIARY GUARANTORS NAMED HEREIN
As Guarantors
------------
SENIOR SUBORDINATED INDENTURE
Dated as of November 27, 1996
------------
------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION....... 1
SECTION 1.1. Definitions............................................ 1
SECTION 1.2. Compliance Certificate and Opinions.................... 18
SECTION 1.3. Form of Documents Delivered to Trustee................. 18
SECTION 1.4. Acts of Holders; Record Date........................... 19
SECTION 1.5. Notices, Etc., to Trustee and Company.................. 20
SECTION 1.6. Notice to Holders; Waiver.............................. 20
SECTION 1.7. Conflict with Trust Indenture Act...................... 20
SECTION 1.8. Effect of Headings and Table of Contents............... 21
SECTION 1.9. Successors and Assigns................................. 21
SECTION 1.10. Separability Clause.................................... 21
SECTION 1.11. Benefits of Indenture.................................. 21
SECTION 1.12. Governing Law.......................................... 21
SECTION 1.13. Non-Business Days...................................... 21
SECTION 1.14. Duplicate Originals.................................... 22
ARTICLE II. SECURITY AND SUBSIDIARY GUARANTY FORMS....................... 22
SECTION 2.1. Forms Generally........................................ 22
SECTION 2.2. Form of Face of Security............................... 22
SECTION 2.3. Form of Reverse of Security............................ 24
SECTION 2.4. Additional Provisions Required in Global Security...... 27
SECTION 2.5. Form of Trustee's Certificate of Authentication........ 28
SECTION 2.6. Form of Subsidiary Guaranty............................ 28
ARTICLE III. THE SECURITIES.............................................. 33
SECTION 3.1. Title and Terms........................................ 33
SECTION 3.2. Denominations.......................................... 33
SECTION 3.3. Execution, Authentication, Delivery and Dating......... 34
SECTION 3.4. Temporary Securities................................... 34
SECTION 3.5. Registration, Registration of Transfer and Exchange.... 35
SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities....... 36
SECTION 3.7. Payment of Interest; Interest Rights Preserved......... 37
SECTION 3.8. Persons Deemed Owners.................................. 38
SECTION 3.9. Cancellation........................................... 38
SECTION 3.10. Computation of Interest................................ 38
SECTION 3.11. Right of Set-Off....................................... 38
SECTION 3.12. Agreed Tax Treatment................................... 38
SECTION 3.13. CUSIP Numbers.......................................... 38
ARTICLE IV. SATISFACTION AND DISCHARGE................................... 39
SECTION 4.1. Satisfaction and Discharge of Indenture................ 39
SECTION 4.2. Application of Trust Money; Reinstatement.............. 40
SECTION 4.3. Satisfaction, Discharge and Defeasance of Securities... 40
i
<PAGE> 3
Page
----
ARTICLE V. REMEDIES...................................................... 42
SECTION 5.1. Events of Default...................................... 42
SECTION 5.2. Acceleration of Maturity; Rescission and Annulment..... 44
SECTION 5.3. Collection of Indebtedness and Suits for
Enforcement by Trustee................................. 45
SECTION 5.4. Trustee May File Proofs of Claim....................... 46
SECTION 5.5. Trustee May Enforce Claims Without Possession of
Securities............................................. 46
SECTION 5.6. Application of Money Collected......................... 47
SECTION 5.7. Limitation on Suits.................................... 47
SECTION 5.8. Unconditional Right of Holders to Receive
Principal, Premium and Interest........................ 48
SECTION 5.9. Restoration of Rights and Remedies..................... 48
SECTION 5.10. Rights and Remedies Cumulative......................... 48
SECTION 5.11. Delay or Omission Not Waiver. ......................... 49
SECTION 5.12. Control by Holders. ................................... 49
SECTION 5.13. Waiver of Past Defaults. .............................. 49
SECTION 5.14. Undertaking for Costs. ................................ 50
SECTION 5.15. Waiver of Usury, Stay or Extension Laws. .............. 50
ARTICLE VI. THE TRUSTEE.................................................. 50
SECTION 6.1. Certain Duties and Responsibilities. .................. 50
SECTION 6.2. Notice of Defaults. ................................... 51
SECTION 6.3. Certain Rights of Trustee. ............................ 51
SECTION 6.4. Not Responsible for Recitals or Issuance of
Securities............................................. 52
SECTION 6.5. May Hold Securities. .................................. 52
SECTION 6.6. Money Held in Trust. .................................. 53
SECTION 6.7. Compensation and Reimbursement. ....................... 53
SECTION 6.8. Disqualification; Conflicting Interests. .............. 53
SECTION 6.9. Corporate Trustee Required; Eligibility. .............. 53
SECTION 6.10. Resignation and Removal; Appointment of Successor. .... 54
SECTION 6.11. Acceptance of Appointment by Successor. ............... 55
SECTION 6.12. Merger, Conversion, Consolidation or Succession
to Business............................................ 55
SECTION 6.13. Preferential Collection of Claims Against Company. .... 56
SECTION 6.14. Appointment of Authenticating Agent. .................. 56
ARTICLE VII. HOLDER'S LISTS AND REPORTS BY TRUSTEE AND COMPANY .......... 58
SECTION 7.1. Company to Furnish Trustee Names and Addresses
of Holders............................................. 58
SECTION 7.2. Preservation of Information, Communications
to Holders............................................ 58
SECTION 7.3. Reports by Trustee. ................................... 58
SECTION 7.4. Reports by Company. ................................... 58
ARTICLE VIII. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE....... 59
SECTION 8.1. Company May Consolidate, Etc., Only on Certain Terms... 59
SECTION 8.2. Subsidiary Guarantors May Consolidate, Etc.,
Only on Certain Terms.................................. 60
SECTION 8.3. Successor Corporation Substituted. .................... 60
ARTICLE IX. SUPPLEMENTAL INDENTURES...................................... 61
ii
<PAGE> 4
Page
----
SECTION 9.1. Supplemental Indentures Without Consent of Holders. ... 61
SECTION 9.2. Supplemental Indentures with Consent of Holders. ...... 62
SECTION 9.3. Execution of Supplemental Indentures................... 63
SECTION 9.4. Effect of Supplemental Indentures. .................... 63
SECTION 9.5. Conformity with Trust Indenture Act. .................. 63
SECTION 9.6. Reference in Securities to Supplemental Indentures. ... 63
ARTICLE X. COVENANTS..................................................... 64
SECTION 10.1. Payment of Principal, Premium and Interest. ........... 64
SECTION 10.2. Maintenance of Office or Agency. ...................... 64
SECTION 10.3. Money for Security Payments to be Held in Trust. ...... 64
SECTION 10.4. Existence.............................................. 65
SECTION 10.5. Maintenance of Properties.............................. 65
SECTION 10.6. Payment of Taxes and Other Claims...................... 66
SECTION 10.7. Maintenance of Insurance............................... 66
SECTION 10.8. Limitation on Incurrence of Indebtedness............... 66
SECTION 10.9. Limitation on Restricted Payments...................... 67
SECTION 10.10. Limitation on Restrictions on Distributions from
Subsidiaries.......................................... 68
SECTION 10.11. Senior Subordinated Indebtedness; Liens............... 69
SECTION 10.12. Limitation on Affiliate Transactions.................. 69
SECTION 10.13. Limitation on Sales of Assets and Subsidiary Stock.... 70
SECTION 10.14. Impairment of Security Interest...................... 71
SECTION 10.15. Change of Control..................................... 71
SECTION 10.16. Statement as to Compliance and Default. .............. 72
SECTION 10.17. Ownership of the Trust................................ 72
SECTION 10.18. Waiver of Certain Covenants. ......................... 72
SECTION 10.19. Additional Amounts; Additional Interest............... 73
ARTICLE XI. REDEMPTION OF SECURITIES .................................... 74
SECTION 11.1. Applicability of This Article. ........................ 74
SECTION 11.2. Election to Redeem; Notice to Trustee. ................ 74
SECTION 11.3. Selection of Securities to be Redeemed. ............... 74
SECTION 11.4. Notice of Redemption. ................................. 74
SECTION 11.5. Deposit of Redemption Price. .......................... 75
SECTION 11.6. Payment of Securities Called for Redemption. .......... 75
SECTION 11.7. Company's Right of Redemption. ........................ 75
ARTICLE XII. SUBORDINATION OF SECURITIES ................................ 76
SECTION 12.1. Securities Subordinate to Senior Indebtedness. ........ 76
SECTION 12.2. Payment Over of Proceeds Upon Dissolution, Etc. ....... 76
SECTION 12.3. Prior Payment to Senior Indebtedness Upon
Acceleration of Securities............................. 77
SECTION 12.4. No Payment When Senior Indebtedness in Default. ....... 78
SECTION 12.5. Payment Permitted If No Default. ...................... 79
SECTION 12.6. Subrogation to Rights of Holders of Senior
Indebtedness........................................... 79
SECTION 12.7. Provisions Solely to Define Relative Rights. .......... 79
SECTION 12.8. Trustee to Effectuate Subordination. .................. 80
iii
<PAGE> 5
Page
----
SECTION 12.9. No Waiver of Subordination Provisions. ................ 80
SECTION 12.10. Notice to Trustee. ................................... 80
SECTION 12.11. Reliance on Judicial Order or Certificate of
Liquidating Agent..................................... 80
SECTION 12.12. Trustee Not Fiduciary for Holders of Senior
Indebtedness.......................................... 81
SECTION 12.13. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights...................... 81
SECTION 12.14. Article Applicable to Paying Agents. ................. 81
SECTION 12.15. Certain Conversions or Exchanges Deemed Payment. ..... 81
ARTICLE XIII. SUBSIDIARY GUARANTY......................................... 81
SECTION 13.1. Subsidiary Guaranty. .................................. 81
SECTION 13.2. Execution and Delivery of Subsidiary Guaranties. ...... 84
SECTION 13.3. Subsidiary Guarantors May Consolidate, Etc., on
Certain Terms.......................................... 85
SECTION 13.4. Release of Subsidiary Guarantors. ..................... 85
SECTION 13.5. Additional Subsidiary Guarantors. ..................... 85
ARTICLE XIV. SUBORDINATION OF SUBSIDIARY GUARANTIES....................... 86
SECTION 14.1. Subsidiary Guaranties Subordinate to Senior
Indebtedness of Subsidiary Guarantors.................. 86
SECTION 14.2. Payment Over of Proceeds Upon Dissolution, Etc. ....... 86
SECTION 14.3. Prior Payment to Senior Indebtedness of a
Subsidiary Guarantor Upon Acceleration of Securities... 87
SECTION 14.4. No Payment When Senior Indebtedness of a Subsidiary
Guarantor in Default................................... 87
SECTION 14.5. Payment Permitted If No Default. ...................... 88
SECTION 14.6. Subrogation to Rights of Holders of Senior
Indebtedness of a Subsidiary Guarantor................. 89
SECTION 14.7. Provisions Solely to Define Relative Rights. .......... 89
SECTION 14.8. Trustee to Effectuate Subordination. .................. 89
SECTION 14.9. No Waiver of Subordination Provisions. ................ 90
SECTION 14.10. Notice to Trustee. ................................... 90
SECTION 14.11. Reliance on Judicial Order or Certificate of
Liquidating Agent..................................... 90
SECTION 14.12. Trustee Not Fiduciary for Holders of Senior
Indebtedness of the Subsidiary Guarantors............. 90
SECTION 14.13. Rights of Trustee as Holder of Senior
Indebtedness of the Subsidiary Guarantors;
Preservation of Trustee's Rights...................... 91
SECTION 14.14. Article Applicable to Paying Agents. ................. 91
SECTION 14.15. Certain Conversions or Exchanges Deemed Payment. ..... 91
ARTICLE XV. COLLATERAL AND SECURITY DOCUMENTS............................. 91
SECTION 15.1. Security Documents..................................... 91
SECTION 15.2. Recording and Opinions................................. 92
SECTION 15.3. Release Of Collateral.................................. 93
SECTION 15.4. Certificates Of The Company............................ 93
SECTION 15.5. Collateral Agent....................................... 93
SECTION 15.6. Authorization Of Actions To Be Taken By The Trustee
Under The Security Documents........................... 94
iv
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Page
----
SECTION 15.7. Authorization of Receipt of Funds by the Trustee
Under the Security Documents........................... 94
SECTION 15.8. Duties................................................. 94
EXHIBITS
EXHIBIT A Form of Pledge and Security Agreement
EXHIBIT B Amended and Restated Declaration of Trust of
Fresenius Medical Care Capital Trust
EXHIBIT C Form of Intercreditor and Subordination Agreement
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<PAGE> 7
FRESENIUS MEDICAL CARE AG
Reconciliation and tie between the Trust Indenture Act of 1939 (including
cross-references to provisions of Sections 310 to and including 317 which,
pursuant to Section 318(c) of the Trust Indenture Act of 1939, as amended by the
Trust Reform Act of 1990, are a part of and govern the Indenture whether or not
physically contained therein) and the Senior Subordinated Indenture, dated as of
November 27, 1996.
Trust Indenture Indenture
Act Section Section
- - --------------- ---------
ss.310 (a) (1), (2) and (5).....................................6.9
(a) (3)..................................................Not Applicable
(a) (4)..................................................Not Applicable
(b)......................................................6.8
.........................................................6.10
(c)......................................................Not Applicable
ss.311 (a)......................................................6.13
(b)......................................................6.13
(b) (2)..................................................6.13
.........................................................6.13
ss.312 (a)......................................................7.1
.........................................................7.2(a)
(b)......................................................7.2(b)
(c)......................................................7.2(c)
ss.313 (a)......................................................7.3(a)
(b)......................................................7.3(a)
(c)......................................................7.3(a), 7.3(b)
(d)......................................................7.3(c)
ss.314 (a) (1), (2) and (3).....................................7.4
(a) (4)..................................................10.16
(b)......................................................Not Applicable
(c) (1)..................................................1.2
(c) (2)..................................................1.2
(c) (3)..................................................Not Applicable
(d)......................................................Not Applicable
(e)......................................................1.2
(f)......................................................Not Applicable
ss.315 (a)......................................................6.1(a)
(b)......................................................6.2
.........................................................7.3(a) (6)
(c)......................................................6.1(b)
(d)......................................................6.1(c)
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<PAGE> 8
(d) (1)..................................................6.1(a)
(d) (2)..................................................6.1(c) (2)
(d) (3)..................................................6.1(c) (3)
(e)......................................................5.14
ss.316 (a)......................................................1.1
(a) (1) (A)..............................................5.12
(a) (1) (B)..............................................5.13
(a) (2)..................................................Not Applicable
(b)......................................................5.8
(c)......................................................1.4(f)
ss.317 (a) (1)..................................................5.3
(a) (2)..................................................5.4
(b)......................................................10.3
ss.318 (a)......................................................1.7
- - ----------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Senior Subordinated Indenture.
vii
<PAGE> 9
SENIOR SUBORDINATED INDENTURE, dated as of November 27, 1996, among
FRESENIUS MEDICAL CARE AG, a stock corporation (Aktiengesellschaft) organized
under the laws of the Federal Republic of Germany (hereinafter called the
"Company") having its principal office at Borkenberg 14, 61440 Oberursel,
Germany, each of the SUBSIDIARY GUARANTORS (as hereinafter defined), and FLEET
NATIONAL BANK, a national banking association duly organized and existing under
the laws of the United States, as Trustee (hereinafter called the "Trustee").
RECITALS OF THE COMPANY AND THE SUBSIDIARY GUARANTORS
The Company has duly authorized the execution and delivery of this Indenture
to provide for the issuance of its 9% Senior Subordinated Notes due December 1,
2006 (hereinafter called the "Securities" or "Security") of substantially the
tenor hereinafter provided, including, without limitation, Securities issued to
evidence loans made to the Company of the proceeds from the issuance by
Fresenius Medical Care Capital Trust, a Delaware business trust (the "Trust"),
of preferred trust interests in such Trust (the "Preferred Securities") and
common interests in such Trust (the "Common Securities" and, collectively with
the Preferred Securities, the "Trust Securities"), and to provide the terms and
conditions upon which the Securities are to be authenticated, issued and
delivered.
The Company, directly or indirectly, owns beneficially and of record 100% of
the Capital Stock of the Subsidiary Guarantors (other than the preferred stock
of Fresenius National Medical Care Holdings, Inc.); the Company and the
Subsidiary Guarantors are members of the same consolidated group of companies
and are engaged in related businesses; the Subsidiary Guarantors will derive
direct and indirect economic benefit from the issuance of the Securities;
accordingly, the Subsidiary Guarantors have each duly authorized the execution
and delivery of this Indenture to provide for the Guarantee by each of them with
respect to the Securities as set forth in this Indenture.
All things necessary to make the Securities, when executed by the Company
and authenticated and delivered hereunder and duly issued by the Company, the
valid obligations of the Company, to make the Guarantees of each of the
Subsidiary Guarantors, when executed by the respective Subsidiary Guarantors and
endorsed on the Securities, authenticated and delivered hereunder, the valid
obligations of the respective Subsidiary Guarantors, and to make this Indenture
a valid agreement of the Company and each of the Subsidiary Guarantors in
accordance with its terms, have been done.
NOW THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the
premises and the purchase of the Securities by the Holders thereof, it is
mutually covenanted and agreed, for the equal and proportionate benefit of all
Holders of the Securities, as follows:
ARTICLE I. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.1. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(1) The terms defined in this Article have the meanings assigned to them in
this Article, and include the plural as well as the singular;
(2) All other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;
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<PAGE> 10
(3) All accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles,
and the term "generally accepted accounting principles" with respect to any
computation required or permitted hereunder shall mean such accounting
principles which are generally accepted at the date or time of such computation;
provided, that when two or more principles are so generally accepted, it shall
mean that set of principles consistent with those in use by the Company;
(4) Unless otherwise specifically set forth herein, all calculations or
determinations of a Person shall be performed or made on a consolidated basis in
accordance with generally accepted accounting principles; and
(5) The words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision.
Certain terms, used principally in Article VI, are defined in that Article.
"Act" when used with respect to any Holder has the meaning specified in
Section 1.4.
"Additional Amounts" has the meaning specified in Section 10.19(a).
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Subsidiary as a result of the acquisition of such
Capital Stock by the Company or another Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a
Subsidiary; provided, however, that any such Subsidiary described in clauses
(ii) or (iii) above is primarily engaged in a Related Business.
"Additional Interest" has the meaning specified in Section 10.19(b).
"Additional Sums" means the interest (compounded quarterly), if any, that
shall accrue on any interest on the Securities in arrears for more than one
quarter at the rate per annum specified in this Indenture for the Securities.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, that an Affiliate of the
Company shall not be deemed to include the Trust. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of Sections 10.9, 10.12 and 10.13 only, Affiliate shall
also mean any beneficial owner of Capital Stock representing 5% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the Company
or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Affiliate Transaction" has the meaning specified in Section 10.12(a).
"Approved Lender" has the meaning specified under the definition of
"Temporary Cash Investments."
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Subsidiary, including any disposition by means
2
<PAGE> 11
of a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of any Subsidiary (other than directors qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Subsidiary), (ii) all or substantially all the assets of any division or line of
business of the Company or any Subsidiary or (iii) any other assets of the
Company or any Subsidiary outside of the ordinary course of business of the
Company or such Subsidiary (other than, in the case of (i), (ii) and (iii)
above, (y) a disposition by a Subsidiary to the Company or by the Company or a
Subsidiary to a Wholly Owned Subsidiary and (z) for purposes of Section 10.13
only, a disposition that constitutes a Restricted Payment permitted by Section
10.9).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Authenticating Agent" means any Person authorized by the Trustee pursuant
to Section 6.14 to act on behalf of the Trustee to authenticate Securities.
"Bank Credit Agreement" means the Credit Agreement, dated as of September
27, 1996, among National Medical Care, Inc., certain subsidiaries and affiliates
thereof, the lenders referred to in such Credit Agreement, NationsBank, N.A., as
paying agent, and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner
Bank AG and NationsBank, N.A., as managing agents, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection with such Credit Agreement, in each case as amended, modified,
renewed, refunded, replaced, restated or refinanced from time to time, provided
that such amendment, modification, renewal, refunding, replacement, restatement
or refinancing (i) does not increase the aggregate principal amount of
Indebtedness that may be outstanding under such Credit Agreement except to the
extent that such additional principal amount of Indebtedness could be incurred
pursuant to Section 10.8(b)(9), and (ii) does not contain, with respect to any
Subsidiary, any encumbrances or restrictions of the type contained in clauses
(a), (b) and (c) of Section 10.10 that are less favorable to the Holders of
Securities than the encumbrances and restrictions with respect to such
Subsidiary contained in such Credit Agreement prior thereto.
"Blockage Notice" has the meaning specified in Section 12.4.
"Board of Directors" means, with respect to the Company or a Subsidiary, as
the case may be, the Board of Directors (or other body performing functions
similar to any of those performed by a Board of Directors including those
performed, in the case of a German corporation, by the Managing Board or the
Supervisory Board) of such person or any committee thereof duly authorized to
act on behalf of such Board (or other body).
"Board Resolution" means, with respect to the Company or a Subsidiary
Guarantor, a copy of a resolution certified by the Secretary or an Assistant
Secretary or a member of the Managing Board of the Company or such Subsidiary
Guarantor to have been duly adopted by the Board of Directors, or such committee
of the Board of Directors or officers of the Company to which authority to act
on behalf of the Board of Directors has been delegated, and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"Business Day" means any day other than (i) a Saturday or Sunday, (ii) a day
on which banking institutions in The City of New York are authorized or required
by law or executive order to remain
3
<PAGE> 12
closed or (iii) a day on which the Corporate Trust Office of the Trustee or,
with respect to the Preferred Securities, the Corporate Trust Office of the
Preferred Trustee under the Declaration, is closed for business.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Change of Control" means any transaction or series of transactions in which
any Person or group (within the meaning of Rule 13d-5 under the Exchange Act and
Section 13(d) and 14(d) of the Exchange Act) other than Fresenius
Aktiengesellschaft and its subsidiaries acquires all or substantially all of the
Company's assets or becomes the direct or indirect "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), by way of merger, consolidation,
other business combination or otherwise, of greater than 50% of the total voting
power (on a fully diluted basis as if all convertible securities had been
converted and all options and warrants had been exercised) entitled to vote in
the election of directors of the Company or the Surviving Person (if other than
the Company).
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Collateral" means collectively, the Collateral (as defined in the Pledge
Agreement), and all other property on which a Lien is granted in favor of the
Collateral Agent for the benefit of the Holders pursuant to any Security
Document.
"Collateral Agent" means Fleet National Bank or any successor Trustee under
this Indenture and any Collateral Agent appointed as provided in this Indenture
and the Intercreditor Agreement.
"Commission" means the United States Securities and Exchange Commission.
"Common Securities" has the meaning specified in the first paragraph of the
Recitals to this Indenture.
"Company" means the Person named as the "Company" in the first paragraph of
this Indenture until a successor corporation shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor corporation.
"Company Guarantee" means the guarantee by the Company of distributions on
the Preferred Securities of the Trust to the extent provided in the Guarantee
Agreement, substantially in the form attached hereto as Annex A, as amended from
time to time.
"Company Request" and "Company Order" mean, respectively, the written
request or order signed in the name of the Company by any two members of the
Managing Board and delivered to the Trustee.
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<PAGE> 13
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such determination to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (1) if the Company or any Subsidiary has Incurred any Indebtedness since
the beginning of such period that remains outstanding or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving effect on a pro forma basis to
such Indebtedness as if such Indebtedness had been Incurred on the first day of
such period and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness as
if such discharge had occurred on the first day of such period, (2) if since the
beginning of such period the Company or any Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative), directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Subsidiary is sold, the Consolidated Interest Expense for such
period directly attributable to the Indebtedness of such Subsidiary to the
extent the Company and its continuing Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such period the
Company or any Subsidiary (by merger or otherwise) shall have made an Investment
in any Subsidiary (or any Person which becomes a Subsidiary) or an acquisition
of assets, including any acquisition of assets occurring in connection with a
transaction requiring a calculation to be made hereunder, which constitutes all
or substantially all of an operating unit of a business, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (4) if
since the beginning of such period any Person (that subsequently became a
Subsidiary or was merged with or into the Company or any Subsidiary since the
beginning of such period) shall have made any Asset Disposition, any Investment
or acquisition of assets that would have required an adjustment pursuant to
clause (2) or (3) above if made by the Company or a Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition,
Investment or acquisition occurred on the first day of such period. For purposes
of this definition, whenever pro forma effect is to be given to an acquisition
of assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Subsidiaries, plus, to the extent
not included in such total interest expense, and to the extent incurred by the
Company or its Subsidiaries, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, (viii) interest incurred in connection
5
<PAGE> 14
with Investments in discontinued operations, (ix) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by the Company or any Subsidiary and (x) the cash contributions to any employee
stock ownership plan or similar trust to the extent such contributions are used
by such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Subsidiary, except that (A) subject to the
exclusion contained in clause (iv) below, the Company's equity in the net income
of any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to a
Subsidiary, to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income; (ii) any net income (or
loss) of any Person acquired by the Company or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any net income of any Subsidiary that is not a Wholly Owned Subsidiary if
such Subsidiary is subject to contractual, governmental or regulatory
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Subsidiary, directly or indirectly, to the Company,
except that (A) subject to the exclusion contained in clause (iv) below, the
Company's equity in the net income of any such Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Subsidiary during such period to the Company or
another Subsidiary as a dividend or other distribution (subject, in the case of
a dividend or other distribution paid to another Subsidiary that is not a Wholly
Owned Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Subsidiary for such period shall be
included in determining such Consolidated Net Income; (iv) any gain (but not
loss) realized upon the sale or other disposition of any assets of the Company
or its consolidated Subsidiaries (including pursuant to any sale and leaseback
arrangement) that is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other disposition
of any Capital Stock of any Person; (v) extraordinary gains or losses; and (vi)
the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Corporate Trust Office" means the principal office of the Trustee in
Hartford, Connecticut.
"corporation" means a corporation, association, partnership, business trust
or other business entity.
"Currency Agreement" means any foreign currency exchange contract, currency
swap agreement or other similar agreement or arrangement designed and entered
into to protect the Company or any Subsidiary against fluctuations in currency
exchange rates.
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<PAGE> 15
"Declaration" means the Amended and Restated Declaration of Trust
substantially in the form attached hereto as Exhibit B, as amended from time to
time.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Defaulted Interest" has the meaning specified in Section 3.7.
"Depository" means, with respect to the Securities issuable or issued in
whole or in part in the form of one or more Global Securities, the Person
designated as Depository by the Company (or any successor thereto).
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
Securities; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Securities shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions of Sections 10.13 and 10.15.
"Dollar" means the currency of the United States of America that, as at the
time of payment, is legal tender for the payment of public and private debts.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company and its Subsidiaries, (b) depreciation expense and (c) amortization
expense, in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization of, a Subsidiary that is not a Wholly Owned Subsidiary shall be
added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders.
"Event of Default" has the meaning specified in Article V.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the Commission
governing the inclusion of financial statements (including pro forma
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<PAGE> 16
financial statements) in periodic reports required to be filed pursuant to
Section 13 of the Exchange Act, including opinions and pronouncements in staff
accounting bulletins and similar written statements from the accounting staff of
the Commission.
"Global Security" means a Security in the form prescribed in Section 2.4
evidencing all or part of the Securities, issued to the Depository or its
nominee for such series, and registered in the name of such Depository or its
nominee.
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed by the United States
of America and which, in either case, are full faith and credit obligations of
the United States of America and are not callable or redeemable at the option of
the issuer thereof and shall also include a depository receipt issued by a bank
(as defined in Section 3(a)(2) of the Securities Act of 1933, as amended) as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of any such Government Obligation held by such
custodian for the account of the holder of such depository receipt; provided,
that (except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the Government Obligation or
the specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term Guarantee used as a verb has a
corresponding meaning.
"Guarantor" means any Person Guaranteeing any obligation.
"Guaranty Agreement" means, in the context of a consolidation, merger or
sale of all or substantially all of the assets of a Subsidiary Guarantor, an
agreement by which the Surviving Person from such a transaction expressly
assumes all of the obligations of such Subsidiary Guarantor under its Subsidiary
Guaranty.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means a Person in whose name a Security is registered in the
Securities Register. The Preferred Trustee shall be the initial Holder of the
Securities.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun
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<PAGE> 17
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall be deemed the Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property or services, all conditional
sale obligations of such Person and all obligations of such Person under any
title retention agreement (other than (x) customary reservations or retentions
of title under agreements with suppliers entered into in the ordinary course of
business, (y) trade debt incurred in the ordinary course of business and due
within six months of the incurrence thereof and (z) obligations incurred under a
pension, retirement or deferred compensation program or arrangement regulated
under the Employee Retirement Income Security Act of 1974, as amended, or the
laws of a foreign government); (iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, bank guaranty, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit and bank guaranties (A) not made under the Bank Credit
Agreement and (B) securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following receipt by such Person of a demand for reimbursement following
payment on the letter of credit); (v) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all
obligations of the type referred to in clauses (i) through (v) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee; (vii) all
obligations of the type referred to in clauses (i) through (vi) of other Persons
secured by any Lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount of
the obligation so secured; and (viii) to the extent not otherwise included in
this definition, Hedging Obligations of such Person. The amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this instrument and any such supplemental indenture, respectively, and shall
include the terms of the Securities established as contemplated by Section 3.1.
"Intercreditor Agreement" means the Intercreditor and Subordination
Agreement, dated as of the date hereof, between the Collateral Agent and the
agent for the lenders party to the Bank Credit Agreement, acknowledged and
consented to by the Company and the other pledgors under the Pledge Agreement,
in the form of Exhibit C hereto.
"Interest Payment Date" means December 1, March 1, June 1 and September 1 of
each year, commencing March 1, 1997.
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<PAGE> 18
"Interest Rate" means the rate of interest specified or determined as
specified as being the rate of interest payable on the Securities.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed and
entered into to protect the Company or any Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person.
"Investment Company Event" means the receipt by the Company of an Opinion of
Counsel, rendered by a law firm having a nationally recognized tax and
securities practice, to the effect that, as a result of the occurrence of a
change in law or regulation or a change in interpretation or application of law
or regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in 1940 Act Law"), the Trust is or will be considered an
"investment company" that is required to be registered under the 1940 Act, which
Change in 1940 Act Law becomes effective on or after the date of original
issuance of the Preferred Securities of the Trust.
"Investment Grade" means a rating of BBB- or higher by S&P and Baa3 or
higher by Moody's or the equivalent of such ratings by S&P or Moody's and the
equivalent in respect of Rating Categories of any Rating Agencies substituted
for S&P or Moody's.
"Issue Date" means the date on which the Securities are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Maturity" when used with respect to any Security means the date on which
the principal of such Security becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non-cash form) in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, provincial, foreign
and local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Disposition, (ii) all payments made on any
Indebtedness which is secured by any assets subject to such Asset Disposition,
in accordance with the terms of any Lien upon or other security agreement of any
kind with respect to such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable law be,
repaid out of the proceeds from such Asset Disposition, (iii) all distributions
and other payments required to be made to minority interest
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<PAGE> 19
holders in Subsidiaries or joint ventures as a result of such Asset Disposition
and (iv) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
property or other assets disposed in such Asset Disposition and retained by the
Company or any Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Officers' Certificate" means a certificate signed by (a) the Chairman and
Chief Executive Officer, President or Vice President, and by the Treasurer, an
Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary, or
(b) any two members of the Managing Board, of the Company, or a Subsidiary
Guarantor, as the case may be, and delivered to the appropriate Trustee.
"Opinion of Counsel" or "opinion of counsel" means, as to the Company or a
Subsidiary Guarantor, a written opinion of counsel, who may be counsel for the
Company or such Subsidiary Guarantor, as the case may be, but, other than in
connection with the issuance of the Securities, not an employee of any thereof,
and who shall be reasonably acceptable to the Trustee.
"Outstanding" means, when used in reference to any Securities, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent in
trust for the Holders of such Securities (other than the Company or any
Subsidiary Guarantor) in trust or set aside and segregated in trust by the
Company or a Subsidiary Guarantor (if the Company or a Subsidiary Guarantor
shall act as its own Paying Agent) for the Holders of such Securities; provided,
that if such Securities are to be redeemed, notice of such redemption has been
duly given pursuant to this Indenture or provision therefor satisfactory to the
Trustee has been made;
(iii) Securities in substitution for or in lieu of which other Securities
have been authenticated and delivered or which have been paid pursuant to
Section 3.6, unless proof satisfactory to the Trustee is presented that any such
Securities are held by Holders in whose hands such Securities are valid, binding
and legal obligations of the Company; and
(iv) Securities which have been defeased pursuant to Section 4.3 hereof.
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which the Trustee knows to be so owned shall
be so disregarded. Securities so owned which have been pledged in good faith may
be regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company or any other obligor upon the Securities or any
Affiliate of the Company or such other obligor. Upon the written request of the
Trustee, the Company shall furnish to the Trustee promptly an Officers'
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<PAGE> 20
Certificate listing and identifying all Securities, if any, known by the Company
to be owned or held by or for the account of the Company, or any other obligor
on the Securities or any Affiliate of the Company or such obligor, and, subject
to the provisions of Section 6.1, the Trustee shall be entitled to accept such
Officers' Certificate as conclusive evidence of the facts therein set forth and
of the fact that all Securities not listed therein are Outstanding for the
purpose of any such determination.
"Payment Blockage Period" has the meaning specified in Section 12.4(b).
"Paying Agent" means the Trustee or any Person authorized by the Company to
pay the principal of or interest on any Securities on behalf of the Company.
"Permitted Collateral Liens" means with respect to any asset of the Company
constituting Collateral, (a) Liens securing the Securities arising under this
Indenture or any Security Document, and (b) Liens incurred pursuant to the Bank
Credit Agreement.
"Permitted Investment" means an Investment by the Company or any Subsidiary
in (i) a Person that will, upon the making of such Investment, be or become a
Subsidiary; provided, however, that the primary business of such Subsidiary is a
Related Business; (ii) a Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Subsidiary; provided, however,
that such Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) any demand deposit account with an Approved Lender; (v)
receivables owing to the Company or any Subsidiary if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Subsidiary deems reasonable
under the circumstances; (vi) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vii) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Subsidiary;
(viii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Subsidiary or
in satisfaction of judgments; (ix) any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Disposition as permitted pursuant to Section 10.13; and (x) any Affiliate (the
primary business of which is a Related Business) that is not a Subsidiary (other
than Fresenius Aktiengesellschaft), provided, that the aggregate of all such
Investments outstanding at any one time under this clause (x) shall not exceed
$125,000,000.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency, instrumentality or political subdivision thereof, or any other
entity.
"Pledge Agreement" means the Pledge and Security Agreement dated as of the
date hereof, between the Company and the Collateral Agent for the benefit of the
Holders, in the form of Exhibit A hereto.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any security
authenticated and delivered under Section 3.6 in lieu of a lost, destroyed or
stolen Security shall be deemed to evidence the same debt as the lost, destroyed
or stolen Security.
"Preferred Securities" has the meaning specified in the first paragraph of
the Recitals to this Indenture.
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"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Preferred Trustee" means Fleet National Bank, a national banking
association duly organized and existing under the laws of the United States,
solely in its capacity as Preferred Trustee of the Trust and not in its
individual capacity, or its successor in interest in such capacity, or any
successor Preferred Trustee appointed as provided in the Declaration.
"principal" of a Security means the principal of the Security plus the
premium, if any, payable on the Security which is due or overdue or is to become
due at the relevant time.
"Proceeding" has the meaning specified in Section 12.2.
"Rating Agencies" means (i) S&P and (ii) Moody's or (iii) if S&P or Moody's
or both shall not make rating of the Securities publicly available, a nationally
recognized securities rating agency or agencies, as the case may be, selected by
the Company, which shall be substituted for S&P or Moody's or both, as the case
may be.
"Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii)
with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C and
D (or equivalent successor categories); and (iii) the equivalent of any such
category of S&P or Moody's used by another Rating Agency. In determining whether
the rating of the Securities has decreased by one or more gradations, gradations
within Rating Categories (+ and - for S&P, 1, 2, and 3 for Moody's; or the
equivalent gradations for another Rating Agency) shall be taken into account
(e.g., with respect to S&P, a decline in a rating from BB+ to BB, as well as
from BB- to B+, will constitute a decrease of one gradation).
"Rating Date" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) public notice of the occurrence of a Change of
Control or of the intention by the Company or any Person to effect a Change of
Control.
"Rating Decline" means the occurrence on or within 90 days after the date of
the first public notice of the occurrence of a Change of Control or of the
intention by the Company to effect a Change of Control (which period shall be
extended so long as the rating of the Securities is under publicly announced
consideration for possible downgrade by any of the Rating Agencies) of: (a) in
the event the Securities are rated by either Moody's or S&P on the Rating Date
as Investment Grade, a decrease in the rating of the Securities by both Rating
Agencies to a rating that is below Investment Grade, or (b) in the event the
Securities are rated below Investment Grade by both Rating Agencies on the
Rating Date, a decrease in the rating of the Securities by either Rating Agency
by one or more gradations (including gradations within Rating Categories as well
as between Rating Categories).
"Receivables Financings" means (i) the accounts receivable financing
facility contemplated by the Trade Receivables Purchase and Sale Agreement dated
as of December 30, 1991, as amended, among Bio-Medical Applications Management
Co., Inc., as seller, and Ciesco, L.P., as investor, and Citicorp North America,
Inc., as agent, and (ii) any financing transaction or series of financing
transactions that have been or may be entered into by the Company or a
Subsidiary pursuant to which the Company or a Subsidiary may sell, convey or
otherwise transfer to a Subsidiary or Affiliate, or any other Person, or may
grant a security interest in, any receivables or interests therein secured by
the merchandise or services financed thereby (whether such receivables are then
existing or arising in the future) of the
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<PAGE> 22
Company or such Subsidiary, as the case may be, and any assets related thereto,
including without limitation, all security interests in merchandise or services
financed thereby, the proceeds of such receivables, and other assets which are
customarily sold or in respect of which security interests are customarily
granted in connection with securitization transactions involving such assets.
"Redemption Date," when used with respect to any Security to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price", when used with respect to any Security to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Subsidiary existing on the Issue Date or
Incurred in compliance with the Indenture including Indebtedness that Refinances
Refinancing Indebtedness; provided, however, that (i) such Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being Refinanced, (ii) such Refinancing Indebtedness has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being Refinanced and (iii)
such Refinancing Indebtedness has an aggregate principal amount (or if Incurred
with original issue discount, an aggregate issue price) that is equal to or less
than the aggregate principal amount (or if Incurred with original issue
discount, the aggregate accredit value) then outstanding or committed (plus fees
and expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Subsidiary (other than National
Medical Care, Inc. or a subsidiary of National Medical Care, Inc.) that
Refinances Indebtedness of another Subsidiary.
"Regular Record Date" for the interest payable on any Interest Payment Date
means the date which is the fifteenth day immediately preceding such Interest
Payment Date (whether or not a Business Day).
"Related Business" means any business related, ancillary or complementary to
the businesses of the Company and its Subsidiaries on the Issue Date.
"Responsible Officer" when used with respect to the Trustee means any
officer of the Trustee assigned by the Trustee from time to time to administer
its corporate trust matters.
"Restricted Payment" with respect to any Person means (i) the declaration or
payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock)) and
dividends or distributions payable solely to the Company or a Subsidiary, and
other than pro rata dividends or other distributions made by a Subsidiary that
is not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other than a
corporation)), (ii) the purchase, redemption or other acquisition or retirement
for value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Subsidiary held by any Affiliate of the Company (other than a
Subsidiary), including the exercise of any option to exchange any Capital Stock
(other than into Capital Stock of the Company that is not Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other
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<PAGE> 23
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
(other than the purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of the
date of acquisition) or (iv) the making of any Investment in any Person (other
than a Permitted Investment).
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Securities" or "Security" has the meaning specified in the first paragraph
of the Recitals to this Indenture.
"Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 3.5.
"Security Documents" means, collectively, the Pledge Agreement, the
Intercreditor Agreement and all other agreements, collateral assignments or
other instruments evidencing or creating any security interests in favor of the
Collateral Agent for the benefit of the Holders in all or any portion of the
Collateral, in each case as amended, supplemented or modified from time to time
in accordance with their terms and the terms of the Indenture.
"Senior Indebtedness" means, with respect to the Company or a Subsidiary
Guarantor, as the case may be, (i) Indebtedness of such Person, whether
outstanding on the Issue Date or thereafter incurred and (ii) accrued and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to such person, whether or not the
claim for such interest is allowed as a claim after such filing) in respect of
(A) any Indebtedness of such Person under the Bank Credit Agreement, (B)
Indebtedness of such Person for money borrowed and (C) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the Securities;
provided, however, that Senior Indebtedness shall not include (1) any obligation
of such Person to any subsidiary of such person, (2) any liability for Federal,
state, local or other taxes owed or owing by such person, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness of such Person(and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect to
any other Indebtedness or other obligation of such Person or (5) that portion of
any Indebtedness which at the time of incurrence is incurred in violation of the
Indenture.
"Senior Subordinated Indebtedness" means the Securities and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Securities in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company that is not Senior Indebtedness.
"Senior Subordinated Payment" has the meaning specified in Section 12.2.
"S&P" means Standard & Poor's Corporation and its successors.
"Specified Senior Indebtedness" means, with respect to the Company or a
Subsidiary Guarantor, as the case may be, (i) any Indebtedness of such Person
under the Bank Credit Agreement, and (ii) after all Indebtedness specified in
clause (i) above is no longer outstanding, any other Senior Indebtedness of such
Person permitted under the Indenture the outstanding principal amount of which
is more than
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<PAGE> 24
$25,000,000 at the time of determination and that has been designated by such
Person "Specified Senior Indebtedness."
"Special Record Date" for the payment of any Defaulted Interest means a date
fixed by the Trustee pursuant to Section 3.7.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the Holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) that is subordinate or
junior in right of payment to the Securities pursuant to a written agreement to
that effect.
"Subsidiary" means a corporation (as defined herein) of which more than 50%
of the total voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by the
Company or by one or more Subsidiaries, or by the Company and one or more
Subsidiaries.
"Subsidiary Guarantors" means Fresenius National Medical Care Holdings, Inc.
and Fresenius Medical Care Deutschland GmbH, a German limited liability company.
"Subsidiary Guarantor Blockage Notice" has the meaning equated in Section
14.4(b).
"Subsidiary Guarantor Payment Blockage Period" has the meaning specified in
Section 14.4(b).
"Subsidiary Guarantor Senior Subordinated Payment" has the meaning specified
in Section 14.2.
"Subsidiary Guaranty" means the Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Securities.
"Surviving Person" means, with respect to any Person involved in any merger,
consolidation or other business combination or the sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of such
Person's assets, the Person formed by or surviving such transaction or the
Person to which such disposition is made.
"Tax Event" means that the Company shall have obtained of an Opinion of
Counsel of nationally recognized independent tax counsel to the effect that, as
a result of (a) any amendment to or change (including any announced prospective
change) in the laws (or any regulations thereunder) of the United States or
Germany or any political subdivision or taxing authority thereof or therein or
(b) any amendment to or change in an interpretation or application of such laws
or regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination on or after the date of issuance
of the Preferred Securities), which amendment or change is effective or which
interpretation or pronouncement is announced on or after the date of issuance of
the Preferred Securities, there is more than an insubstantial risk that (i) the
Trust is or will be subject to United States Federal or German income tax with
respect to interest received or accrued on the Securities, (ii) interest payable
to the Trust on the Securities is not or will not be deductible for United
States Federal or German income tax
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<PAGE> 25
purposes or (iii) the Trust is or will be subject to more than a de minimis
amount of other taxes, duties, assessments or other governmental charges of
whatever nature imposed by the United States, Germany or any other taxing
authority.
"Taxes" has the meaning specified in Section 10.19.
"Temporary Cash Investments" means any of the following: (a) securities
issued or directly and fully guaranteed or insured by (i) the United States of
America or any agency or instrumentality thereof (provided, that the full faith
and credit of the United States of America is pledged in support thereof) and
(ii) the governments of Germany and the United Kingdom, having in each case
maturities of not more than twelve months from the date of acquisition, (b) time
deposits and certificates of deposit, eurodollar time deposits and eurodollar
certificates of deposit of (i) any lender under the Bank Credit Agreement, or
(ii) any United States, German, United Kingdom or Swiss commercial bank of
recognized standing (y) having capital and surplus in excess of $500,000,000 and
(z) whose short-term commercial paper rating from S&P is at least A-1 or the
equivalent thereof or from Moody's is at least P-1 or the equivalent thereof
(any such bank being an "Approved Lender"), in each case with maturities of not
more than 270 days from the date of acquisition, (c) commercial paper and
variable or fixed rate notes issued by an Approved Lender (or by the parent
company thereof) and maturing within six months of the date of acquisition, (d)
repurchase agreements entered into by a Person with a bank or trust company
(including any of the lenders under the Bank Credit Agreement) or recognized
securities dealer having capital and surplus in excess of $500,000,000 for (i)
direct obligations issued by or fully guaranteed by the United States of
America, (ii) time deposits or certificates of deposit described under
subsection (b) above, or (iii) commercial paper or other notes described under
subjection (c) above, in which, in each such case, such bank, trust company or
dealer shall have a perfected first priority security interest (subject to no
other Liens) and having, on the date of purchase thereof, a fair market value of
at least 100% of the amount of the repurchase obligations, (e) obligations of
any State of the United States or any political subdivision thereof, the
interest with respect to which is exempt from federal income taxation under
Section 103 of the U.S. Internal Revenue Code, having a long term rating of at
least AA- or Aa-3 by S&P or Moody's, respectively, and maturing within three
years from the date of acquisition thereof, (f) Investments in municipal auction
preferred stock (i) rated AAA (or the equivalent thereof) or better by S&P or
Aaa (or the equivalent thereof) or better by Moody's and (ii) with dividends
that reset at least once every 365 days and (g) Investments, classified in
accordance with GAAP as current assets, in money market investment programs (i)
registered under the Investment Company Act of 1940, as amended, or (ii)
operated by an investment company in Germany or the United Kingdom and subject
to regulations under the laws of such jurisdiction, in each case which are
administered by reputable financial institutions having capital of at least
$100,000,000 and the portfolios of which are limited to Investments of the
character described in clauses (a), (b), (c), (e) and (f) above.
"Trust" has the meaning specified in the first paragraph of the Recitals to
this Indenture.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this Indenture until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean or
include each Person who is then a Trustee hereunder.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as amended and
as in force at the date as of which this Indenture was executed, except as
provided in Section 9.5; provided, however, that in the event the Trust
Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means,
to the extent required by any such amendment, the Trust Indenture Act of 1939 as
so amended.
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<PAGE> 26
"Trust Securities" has the meaning specified in the first paragraph of the
Recitals to this Indenture.
"Vice President" when used with respect to the Company, a Subsidiary
Guarantor or the Trustee means any duly appointed vice president, whether or not
designated by a number or a word or words added before or after the title "vice
president."
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than (i) directors' qualifying shares and shares held by other Persons to
the extent such shares are required by applicable law to be held by a Person
other than the Company or a Subsidiary and (ii) shares of Preferred Stock of
Fresenius National Medical Care Holdings, Inc.) is owned by the Company or by
one or more Wholly Owned Subsidiaries, or by the Company and one or more Wholly
Owned Subsidiaries.
SECTION 1.2. Compliance Certificate and Opinions.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent
(including covenants, compliance with which constitutes a condition precedent),
if any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition
precedent or covenant provided for in this Indenture (other than the
certificates provided pursuant to Section 10.16) shall include:
(1) a statement that each individual signing such certificate or opinion has
read such covenant or condition and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has made
such examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether, in the opinion of each such individual, such
condition or covenant has been complied with.
SECTION 1.3. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
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<PAGE> 27
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless the individual attorneys actively engaged in the transaction
which is the subject matter of such opinion in the office of such counsel have
actual knowledge that the certificate or opinion or representations with respect
to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.4. Acts of Holders; Record Date.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given to or taken by Holders
may be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such Holders in person or by an agent duly appointed in
writing; and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments is or are delivered to the
Trustee, and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.1) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section 1.4.
(b) The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by
the certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is by
a Person acting in other than his individual capacity, such certificate or
affidavit shall also constitute sufficient proof of his authority.
(c) The fact and date of the execution by any Person of any such instrument
or writing, or the authority of the Person executing the same, may also be
proved in any other manner which the Trustee deems sufficient and in accordance
with such reasonable rules as the Trustee may determine.
(d) The ownership of Securities shall be proved by the Securities Register.
(e) Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Security shall bind every future Holder of the
same Security and the Holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
(f) The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to take any action under this
Indenture by vote or consent. Except as otherwise provided herein, such record
date shall be the later of 30 days prior to the first solicitation of such
consent or vote or the date of the most recent list of Securityholders furnished
to the Trustee
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<PAGE> 28
pursuant to Section 7.1 prior to such solicitation. If a record date is fixed,
those Persons who were Securityholders at such record date (or their duly
designated proxies), and only those Persons, shall be entitled to take such
action by vote or consent or to revoke any vote or consent previously given,
whether or not such persons continue to be Holders after such record date,
provided, however, that unless such vote or consent is obtained from the Holders
(or their duly designated proxies) of the requisite principal amount of
Outstanding Securities prior to the date which is the 90th day after such record
date, any such vote or consent previously given shall automatically and without
further action by any Holder be cancelled and of no further effect.
SECTION 1.5. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company or any Subsidiary Guarantor
shall be sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust office, or
(2) the Company or any Subsidiary Guarantor by the Trustee or by any Holder
shall be sufficient for every purpose (except as otherwise provided in Sections
5.1 and 5.2 hereof) hereunder if in writing and mailed, first class, postage
prepaid, in the case of the Company to it at the address of its principal office
specified in the first paragraph of this Indenture or at any other address
previously furnished in writing to the Trustee by the Company and, in the case
of any Subsidiary Guarantor, to it at the address of the Company's principal
office specified in the first paragraph of this Indenture or at any other
address previously furnished in writing to the Trustee by such Subsidiary
Guarantor; provided, however, that all notices sent to the Company and any
Subsidiary Guarantor pursuant to this Indenture shall be sent in copy to
O'Melveny & Myers (Citicorp Center, 153 East 53rd Street, New York, NY
10022-4611, Attn: Dr. Ulrich Wagner) and shall be effective five Business Days
after such mailing.
SECTION 1.6. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first class postage prepaid, to each Holder affected
by such event, at the address of such Holder as it appears in the Securities
Register, not later than the latest date (if any), and not earlier than the
earliest date (if any), prescribed for the giving of such notice. In any case
where notice to Holders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Holder shall
affect the sufficiency of such notice with respect to other Holders. Where this
Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or by reason of
any other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
a sufficient notification for every purpose hereunder.
SECTION 1.7. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a provision of
the Trust Indenture Act that is required or deemed under the Trust Indenture Act
to be part of and govern this Indenture, the latter
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<PAGE> 29
provision shall control. If any provision of this Indenture modifies or excludes
any provision of the Trust Indenture Act that may be so modified or excluded,
the latter provision shall be deemed to apply to this Indenture as so modified
or to be excluded, as the case may be.
SECTION 1.8. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 1.9. Successors and Assigns.
All covenants and agreements in this Indenture by the Company or any
Subsidiary Guarantor shall bind its respective successors and assigns, whether
so expressed or not.
SECTION 1.10. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 1.11. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall
give to any Person, other than (i) the parties hereto, (ii) any Paying Agent and
their successors and assigns, (iii) the holders of Senior Indebtedness (subject
to Articles XII and XIV hereof), and (iv) the Holders of the Securities, any
benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 1.12. Governing Law.
THIS INDENTURE, THE SECURITIES AND THE SUBSIDIARY GUARANTIES ENDORSED
THEREON SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICT OF LAWS.
SECTION 1.13. Non-Business Days.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or the Securities) payment of interest or
principal (and premium, if any) need not be made on such date, but may be made
on the next succeeding Business Day (and no interest shall accrue for the period
from and after such Interest Payment Date, Redemption Date or Stated Maturity,
as the case may be, until such next succeeding Business Day except that, if such
Business Day is in the next succeeding calendar year, such payment shall be made
on the immediately preceding Business Day (in each case with the same force and
effect as if made on the Interest Payment Date or Redemption Date or at the
Stated Maturity)).
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SECTION 1.14. Duplicate Originals.
The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement.
ARTICLE II. SECURITY AND SUBSIDIARY GUARANTY FORMS
SECTION 2.1. Forms Generally.
The Securities, the Subsidiary Guaranties to be endorsed thereon and the
Trustee's certificate of authentication shall be in substantially the forms set
forth in this Article, or in such other form or forms as shall be established by
or pursuant to a Board Resolution or in one or more indentures supplemental
hereto, in each case with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Indenture and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with applicable tax
laws or the rules of any securities exchange or as may, consistently herewith,
be determined by the officers executing such Securities or Subsidiary
Guaranties, as the case may be, as evidenced by their execution of the
Securities or Subsidiary Guaranties, as the case may be. If the form of
Securities or Subsidiary Guaranties is established by action taken pursuant to a
Board Resolution, such Board Resolution to be delivered to the Trustee at or
prior to the delivery of the Company Order contemplated by Section 3.3 with
respect to the authentication and delivery of such Securities.
The Trustee's certificates of authentication shall be substantially in the
form set forth in this Article.
The definitive Securities and Subsidiary Guaranties to be endorsed thereon
shall be printed, lithographed or engraved or produced by any combination of
these methods, if required by any securities exchange on which the Securities
may be listed, on a steel engraved border or steel engraved borders or may be
produced in any other manner permitted by the rules of any securities exchange
on which the Securities may be listed, all as determined by the officers
executing such Securities or Subsidiary Guaranties, as the case may be, as
evidenced by their execution of such Securities or Subsidiary Guaranties, as the
case may be.
SECTION 2.2. Form of Face of Security.
[IF THE SECURITY IS A GLOBAL SECURITY, INSERT--This Security is a Global
Security within the meaning of the Indenture hereinafter referred to and is
registered in the name of The Depository Trust Company (the "Depository") or a
nominee of the Depository. This Security is exchangeable for Securities
registered in the name of a Person other than the Depository or its nominee only
in the limited circumstances described in the Indenture and no transfer of this
Security (other than a transfer of this Security as a whole by the Depository to
a nominee of the Depository or by a nominee of the Depository to the Depository
or another nominee of the Depository) may be registered except in limited
circumstances.
Unless this Security is presented by an authorized representative of The
Depository Trust Company (55 Water Street, New York) to FRESENIUS MEDICAL CARE
AG or its agent for registration of transfer, exchange or payment, and any
Security issued is registered in the name of Cede & Co. or such other name as
requested by an authorized representative of The Depository Trust Company and
any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR
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<PAGE> 31
OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest herein.]
FRESENIUS MEDICAL CARE AG
(9% Senior Subordinated Notes due December 1, 2006
Guaranteed As To Payment of Principal,
Premium, If Any, And Interest By Certain
Subsidiaries of Fresenius Medical Care AG)
No. $
FRESENIUS MEDICAL CARE AG a corporation organized and existing under the
laws of Germany (hereinafter called the "Company", which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to , or registered assigns, the
principal sum of Dollars on December 1, 2006. The Company further promises
to pay interest on said principal sum quarterly in arrears on December 1, March
1, June 1 and September 1 of each year, commencing March 1, 1997, (each such
date, an "Interest Payment Date") at the rate of 9% per annum, (plus Additional
Amounts and Additional Sums, if any) until the principal hereof is paid or duly
provided for or made available for payment and on any overdue principal and
(without duplication and to the extent that payment of such interest is
enforceable under applicable law) on any interest which is in arrears more than
a quarter at the rate of 9% per annum, compounded quarterly. The amount of
interest payable for any period shall be computed on the basis of twelve 30-day
months and a 360-day year. The amount of interest payable for any partial period
shall be computed on the basis of the number of days elapsed in a 360-day year
of twelve 30-day months. In the event that any date on which interest is payable
on this Security is not a Business Day, then a payment of the interest payable
on such date will be made on the next succeeding day which is a Business Day
(and without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on the date the payment was originally payable.
A "Business Day" shall mean any day other than (i) a Saturday or Sunday, (ii) a
day on which banking institutions in The City of New York are authorized or
required by law or executive order to remain closed or (iii) a day on which the
Corporate Trust Office of the Trustee, or, with respect to the Preferred
Securities, the principal office of the Preferred Trustee under the Declaration
hereinafter referred to for Fresenius Medical Care Capital Trust, is closed for
business. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities, as
defined in the Indenture) is registered at the close of business on the Regular
Record Date for such interest, which shall be the date which is the fifteenth
day immediately preceding such Interest Payment Date (whether or not a Business
Day). Any interest not so punctually paid or duly provided for shall forthwith
cease to be payable to the Holder on such Regular Record Date and may either be
paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Trustee, notice
whereof shall be given to Holders not less than 10 days prior to such Special
Record Date, or be paid in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities may be listed,
and upon such notice as may be required by such exchange, all as more fully
provided in said Indenture.
Payments on this Security issued as a Global Security shall be made in
immediately available funds to the Depository. In the event that this Security
is issued in certificated form, the principal of (and premium, if any) and
interest (including Additional Sums and Additional Amounts, if any) on the
Security will be payable at the office maintained by the Company under the
Indenture; provided, that
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<PAGE> 32
unless the Security is held by the Trust or any permissible successor entity as
provided under the Declaration in the event of a merger, consolidation or
amalgamation of the Trust, payment of interest may be made at the option of the
Company by check mailed to the address of the person entitled thereto, as such
address shall appear in the Register.
The indebtedness evidenced by this Security is, to the extent provided in
the Indenture, subordinate and subject in right of payment to the prior payment
in full of all Senior Indebtedness, and this Security is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such actions as may be
necessary or appropriate to effectuate the subordination so provided and (c)
appoints the Trustee his attorney-in-fact for any and all such purposes. Each
Holder hereof, by his acceptance hereof, waives all notice of the acceptance of
the subordination provisions contained herein and in the Indenture by each
holder of Senior Indebtedness, whether now outstanding or hereafter incurred,
and waives reliance by each such holder upon said provisions.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: November 27, 1996
FRESENIUS MEDICAL CARE AG
By:______________________________________
Name: Dr. Gerd Krick
Title: Chairman of the M naging Board
By:______________________________________
Name: Udo Werle
Title: Member of the Managing Board
and Chief Financial Officer
SECTION 2.3. Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the Company
(herein called the "Securities"), issued under a Senior Subordinated Indenture,
dated as of November 27, 1996 (herein called the "Indenture"), between the
Company and FLEET NATIONAL BANK, as Trustee (herein called the "Trustee", which
term includes any successor trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Trustee, the Company and the Holders of the Securities, and of the terms
upon which the Securities are, and are to be, authenticated and delivered.
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<PAGE> 33
All terms used in this Security that are defined in the Indenture and in the
Amended and Restated Declaration of Trust, dated as of November 27, 1996, as
amended (the "Declaration"), for Fresenius Medical Care Capital Trust, shall
have the meanings assigned to them in the Indenture or the Declaration, as the
case may be.
On or after December 1, 2001, the Company may, at its option, subject to the
terms and conditions of Article XI of the Indenture, redeem this Security in
whole at any time or in part from time to time, upon not less than 30 or more
than 60 days' notice, at the Redemption Prices (expressed as a percentage of
principal amount) set forth below plus accrued and unpaid interest, including
Additional Sums and Additional Amounts, if any, to the Redemption Date (subject
to the right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date) if redeemed during the twelve-month period beginning on December 1 of the
years indicated below:
Percentage of
Principal
Year Amount
- - ---- ------------
2001............................................... 104.500%
2002............................................... 102.250%
2003............................................... 101.125%
2004 and thereafter................................ 100.000%
If a Tax Event or an Investment Company Event in respect of the Trust
shall occur and be continuing, the Company shall cause the Trustees (as defined
in the Indenture) to liquidate the Trust and cause Securities to be distributed
to the holders of the Trust Securities in liquidation of the Trust or, in the
event of a Tax Event only, may cause the Securities to be redeemed, in each
case, subject to and in accordance with the provisions of the Declaration,
within 90 days following the occurrence of such Tax Event or Investment Company
Event. The Securities may be redeemed, at the option of the Company, subject to
the provisions of Article XI of the Indenture, at any time as a whole but not in
part, at 100% of the principal amount thereof, plus accrued and unpaid interest
(if any) to the date of redemption (subject to the right of Holders of record on
the relevant Regular Record Date to receive interest due on the relevant
Interest Payment Date), in the event the Company has become or would become
obligated to pay, on the next date on which any amount would be payable with
respect to the Securities, any Additional Amounts as a result of a change in or
an amendment to the laws (including any regulations promulgated thereunder) of
the United States of America, Germany or the United Kingdom (or any political
subdivision or taxing authority thereof or therein), or any change in or
amendment to any official position regarding the application or interpretation
of such laws or regulations, which change or amendment is announced or becomes
effective on or after the date of the issuance of the Securities.
The Securities do not have the benefit of any sinking fund obligations. As
provided in the Indenture, the Securities are secured by a senior subordinated
pledge of the Collateral. The Collateral Agent shall be entitled to the benefits
of the Liens on the Collateral under the Indenture and the Security Documents as
the same may be amended from time to time pursuant to the respective provisions
thereof, subject only to Permitted Collateral Liens, for the benefit of each
Holder accepting a Security.
In the event of redemption of this Security in part only, a new Security for
the unredeemed portion hereof will be issued in the name of the Holder hereof
upon the cancellation hereof.
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If an Event of Default shall occur and be continuing, the principal of all
the Securities may be declared due and payable in the manner, with the effect
and subject to the conditions provided in the Indenture.
As provided in the Indenture and subject to certain limitations therein set
forth, the obligations of the Company under the Indenture and this Security are
Guaranteed on a senior subordinated basis pursuant to Subsidiary Guaranties
endorsed hereon. The Indenture provides that a Subsidiary Guarantor shall be
released from its Subsidiary Guarantee upon compliance with certain conditions.
The Indenture contains provisions for satisfaction, discharge and defeasance
at any time of the entire indebtedness of this Security upon compliance by the
Company with certain conditions set forth in the Indenture, in each case
together with the release of the Collateral from the Liens of the Security
Documents.
The Indenture permits, with certain exceptions as therein provided, the
Company, the Subsidiary Guarantors and the Trustee at any time to enter into a
supplemental indenture or indentures for the purpose of modifying in any manner
the rights and obligations of the Company, the Subsidiary Guarantors and of the
Holders of the Securities, with the consent of the Holders of not less than a
majority in principal amount of the Outstanding Securities to be affected by
such supplemental indenture. The Indenture also contains provisions permitting
Holders of specified percentages in aggregate outstanding principal amount of
the Outstanding Securities affected thereby, on behalf of the Holders of all
Securities, to waive compliance by the Company or the Subsidiary Guarantors with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, if an Event
of Default with respect to the Securities at the time Outstanding occurs and is
continuing, then and in every such case the Trustee or the Holders of not less
than 25% in aggregate outstanding principal amount of the Outstanding Securities
may declare the principal amount of and interest (including Additional Sums and
Additional Amounts, if any) on all the Securities to be due and payable
immediately, by a notice in writing to the Company and the Subsidiary Guarantors
(and to the Trustee if given by Holders), provided, that if the Trustee or such
Holders fail to do so, the Preferred Trustee shall have such right by a notice
in writing to the Company and the Trustee; and upon any such declaration such
specified amount of and the accrued interest (including Additional Sums and
Additional Amounts, if any) on all the Securities shall become immediately due
and payable, provided, that the payment of principal and interest (including
Additional Sums and Additional Amounts, if any) on such Securities shall remain
subordinated to the extent provided in Article XII of the Indenture.
No reference herein to the Indenture and no provision of this Security or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Securities Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Company maintained under Section 10.2 of the Indenture duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Securities Registrar duly executed by, the
Holder hereof or his attorney duly authorized in
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<PAGE> 35
writing, and thereupon one or more new Securities, of authorized denominations
and for the same aggregate principal amount, will be issued to the designated
transferee or transferees. No service charge shall be made for any such
registration of transfer or exchange, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Company, the Subsidiary Guarantors, the Trustee and any agent of the Company,
the Subsidiary Guarantors or the Trustee may treat the Person in whose name this
Security is registered as the owner hereof, for all purposes (subject to certain
limitations set forth in the Indenture), whether or not this Security be
overdue, and neither the Company, the Subsidiary Guarantors, the Trustee nor any
such agent shall be affected by notice to the contrary.
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities are
exchangeable for a like aggregate principal amount of Securities of a different
authorized denomination, as requested by the Holder surrendering the same.
The Company and, by its acceptance of this Security or a beneficial interest
therein, the Holder of, and any Person that acquires a beneficial interest in,
this Security agree that for German and United States Federal, state and local
tax purposes it is intended that this Security constitute indebtedness.
All terms used in this Security which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT
OF LAWS PRINCIPLES THEREOF.
SECTION 2.4. Additional Provisions Required in Global Security.
Any Global Security issued hereunder shall, in addition to the provisions
contained in Sections 2.2 and 2.3, bear a legend in substantially the following
form:
"This Security is a Global Security within the meaning of the Indenture
hereinafter referred to and is registered in the name of The Depository Trust
Company (the "Depository") or a nominee of the Depository. This Security is
exchangeable for Securities registered in the name of a Person other than the
Depository or its nominee only in the limited circumstances described in the
Indenture and no transfer of this Security (other than a transfer of this
Security as a whole by the Depository to a nominee of the Depository or by a
nominee of the Depository to the Depository or another nominee of the
Depository) may be registered except in limited circumstances.
Unless this Security is presented by an authorized representative of The
Depository Trust Company (55 Water Street, New York) to FRESENIUS MEDICAL CARE
AG or its agent for registration of transfer, exchange or payment, and any
Security issued is registered in the name of Cede & Co. or such other name as
requested by an authorized representative of The Depository Trust Company and
any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest herein."
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SECTION 2.5. Form of Trustee's Certificate of Authentication.
This is one of the Securities with the Subsidiary Guaranties endorsed
thereon referred to in the within mentioned Indenture.
________________________________________
as Trustee
By:_____________________________________
Authorized officer
SECTION 2.6. Form of Subsidiary Guaranty.
SUBSIDIARY GUARANTY
For value received, each of the Subsidiary Guarantors hereby jointly and
severally unconditionally Guarantees, on a senior subordinated basis, to each
Holder of a Security authenticated and delivered by the Trustee, and to the
Trustee on behalf of such Holder, the due and punctual payment of the principal
of (and premium, if any) and interest (including Additional Sums and Additional
Amounts, if any) on such Security when and as the same shall become due and
payable, whether at the Stated Maturity, by acceleration, call for redemption,
purchase or otherwise, in accordance with the terms of such Security and of this
Indenture. In case of the failure of the Company punctually to make any such
payment, each of the Subsidiary Guarantors hereby jointly and severally agrees
to cause such payment to be made punctually when and as the same shall become
due and payable, whether at the Stated Maturity or by acceleration, call for
redemption, purchase or otherwise, and as if such payment were made by the
Company. The Guarantee extends to the Company's repurchase obligations arising
from a Change of Control pursuant to the Indenture.
Each of the Subsidiary Guarantors hereby jointly and severally agrees that
its obligations hereunder shall be unconditional, irrespective of the validity,
regularity or enforceability of such Security or this Indenture, the absence of
any action to enforce the same, any exchange, release or non-perfection of any
Lien on any collateral for, or any release or amendment or waiver of any term of
any other Guarantee of, or any consent to departure from any requirement of any
other Guarantee of all or any of the Securities, the election by the Trustee or
any of the Holders in any proceeding under Chapter 11 of Title 11 of the United
States Code (the "Bankruptcy Code") of the application of Section 1111(b)(2) of
the Bankruptcy Code, or equivalent provision under applicable law, any borrowing
or grant of a security interest by the Company, as debtor-in-possession, under
Section 364 of the Bankruptcy Code, or equivalent provision under applicable
law, the disallowance, under Section 502 of the Bankruptcy Code, or other
similar applicable law, of all or any portion of the claims of the Trustee or
any of the Holders for payment of any of the Securities, any waiver or consent
by the Holder of such Security or by the Trustee with respect to any provisions
thereof or of the Indenture, the obtaining of any judgment against the Company
or any action to enforce the same or any other circumstances which might
otherwise constitute a legal or equitable discharge or defense of a guarantor.
Each of the Subsidiary Guarantors hereby waives the benefits of diligence,
presentment, demand for payment, any requirement that the Trustee or any of the
Holders protect, secure, perfect or insure any security interest in or other
Lien on any property subject thereto or exhaust any right or take any action
against the Company or any other Person or any collateral, filing of claims with
a court in the event of insolvency or bankruptcy of the Company, any right to
require a proceeding first against the Company, protest or notice with respect
to such Security or the Indebtedness evidenced thereby and all demands
whatsoever, and covenants that this Subsidiary Guaranty will not be discharged
in respect of such Security except by complete performance of the obligations
contained in such Security and in this Subsidiary Guaranty.
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Each of the Subsidiary Guarantors hereby agrees that, in the event of a default
in payment of principal (or premium, if any) or interest (including Additional
Sums and Additional Amounts, if any) on such Security, whether at their Stated
Maturity, by acceleration, call for redemption, purchase or otherwise, legal
proceedings may be instituted by the Trustee on behalf of, or by, the Holder of
such Security, subject to the terms and conditions set forth in the Indenture,
directly against each of the Subsidiary Guarantors to enforce this Subsidiary
Guaranty without first proceeding against the Company. Each Subsidiary Guarantor
agrees that, to the extent permitted by law, if, after the occurrence and during
the continuance of an Event of Default, the Trustee or any of the Holders are
prevented by applicable law from exercising their respective rights to
accelerate the maturity of the Securities, to collect interest on the
Securities, or to enforce or exercise any other right or remedy with respect to
the Securities, or the Trustee or the Holders are prevented from taking any
action to realize on any collateral, such Subsidiary Guarantor agrees to pay to
the Trustee for the account of the Holders, upon demand therefor, the amount
that would otherwise have been due and payable had such rights and remedies been
permitted to be exercised by the Trustee or any of the Holders.
The indebtedness of each Subsidiary Guarantor evidenced by this Subsidiary
Guaranty is, to the extent provided in the Indenture, subordinate and subject in
right of payment to the prior payment in full of all Senior Indebtedness of such
Subsidiary Guarantor, and this Subsidiary Guaranty is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination so provided and (c)
appoints the Trustee his attorney-in-fact for any and all such purposes.
No reference herein to the Indenture and no provision of this Subsidiary
Guaranty or of the Indenture shall alter or impair the Subsidiary Guaranty of
any Subsidiary Guarantor, which is absolute and unconditional, of the due and
punctual payment of the principal (and premium, if any) and interest (including
Additional Sums and Additional Amounts, if any) on the Security upon which this
Subsidiary Guaranty is endorsed.
Each Subsidiary Guarantor shall be subrogated to all rights of the Holder of
this Security against the Company in respect of any amounts paid by such
Subsidiary Guarantor on account of this Security pursuant to the provisions of
its Subsidiary Guaranty or the Indenture; provided, however, that such
Subsidiary Guarantor shall not be entitled to enforce or to receive any payments
arising out of, or based upon, such right of subrogation until the principal of
(and premium, if any) and interest on this Security and all other Securities
issued under the Indenture shall have been paid in full.
This Subsidiary Guaranty shall remain in full force and effect and continue
to be effective should any petition be filed by or against the Company for
liquidation or reorganization, or equivalent proceeding under applicable law,
should the Company become insolvent or make an assignment for the benefit of
creditors or should a receiver or trustee be appointed for all or any
significant part of the Company's assets, or the equivalent of any of the
foregoing under applicable law, and shall, to the fullest extent permitted by
applicable law, continue to be effective or be reinstated, as the case may be,
if at any time payment and performance of the Securities is, pursuant to
applicable law, rescinded or reduced in amount, or must otherwise be restored or
returned by any obligee on the Securities whether as a voidable preference,
fraudulent transfer, or as otherwise provided under similar laws affecting the
rights of creditors generally or under applicable laws of Germany, all as though
such payment or performance had not been made. In the event that any payment, or
any part thereof, is rescinded, reduced, restored or returned, the Securities
shall, to the fullest extent permitted by applicable law, be reinstated and
deemed reduced only by such amount paid and not so rescinded, reduced, restored
or returned.
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The Subsidiary Guarantors shall have the right to seek contribution from any
non-paying Subsidiary Guarantor so long as the exercise of such right does not
impair the rights of the Holders under this Subsidiary Guaranty.
The Subsidiary Guarantors or any particular Subsidiary Guarantor shall be
released from this Subsidiary Guaranty upon the terms and subject to certain
conditions provided in the Indenture.
By delivery of a supplemental indenture to the Trustee in accordance with
the terms of the Indenture, each Person that becomes a Subsidiary Guarantor
after the date of the Indenture will be deemed to have executed and delivered
this Guaranty for the benefit of the Holder of this Security with the same
effect as if such Subsidiary Guarantor was named below.
All terms used in this Subsidiary Guaranty which are defined in the
Indenture referred to in the Security upon which this Subsidiary Guaranty is
endorsed shall have the meanings assigned to them in such Indenture.
This Subsidiary Guaranty shall not be valid or obligatory for any purpose
until the certificate of authentication on the Security upon which this
Subsidiary Guaranty is endorsed shall have been executed by the Trustee under
the Indenture by manual signature.
Each Subsidiary Guaranty will be limited in amount to an amount not to
exceed the maximum amount that can be guaranteed by the applicable Subsidiary
Guarantor without rendering the Subsidiary Guaranty, as it relates to such
Subsidiary Guarantor, voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally or under applicable law of Germany. In the case of Fresenius
Medical Care Deutschland GmbH ("FMCD"), the following provisions will apply.
FMCD, having a stated capital of DM80 million, had a capital reserve account
of DM168,302,162 (the "January 1, 1996 Amount") in its balance sheet as of
January 1, 1996. Assuming that the January 1, 1996 Amount has not decreased by
losses in the business of FMCD since January 1, 1996, at least such amount
exceeds the Company's assets protecting its share capital within the meaning of
Section 30 of the German GmbH Law. Since August 21, 1996, a Profit and Loss
Pooling Agreement (the "Agreement") (Ergebnisabfuhrungsvertrag) is in place
between the Company and FMCD to be entered into the commercial register as
approved by the stockholders of the Company and the shareholders of the FMCD to
make such agreement tax effective by January 1, 1996. Since January 1, 1996, the
January 1, 1996 Amount has not been decreased by the actions of the Company (the
sole shareholder of FMCD), e.g. no distributions against the January 1, 1996
Amount have been made.
Based thereon, the guaranty obligations of FMCD hereunder is limited to the
amount of the capital reserves of FMCD as per the date hereof less its
obligations as a guarantor from time to time under the Bank Credit Agreement
(the "Minimum Guaranty Amount"). If, in the case of a default under the
Indenture, the capital reserves are higher than such Minimum Guaranty Amount,
such higher amount (the "Higher Guaranty Amount") shall serve as limitation to
the obligations of FMCD, as Subsidiary Guarantor. In case FMCD, as Subsidiary
Guarantor, has to sell off assets to fulfill its obligations under the
Indenture, after such guaranty obligations have been drawn, and if the proceeds
from the sale of such assets exceed the amount of their book value, such excess
amounts shall be paid to the Collateral Agent for the benefit of the Holders,
subject to the provisions of Article XIV hereof, in addition to the Minimum
Guaranty Amount or the Higher Guaranty Amount, respectively for the
determination of the applicable book value, the book value of assets which were
included into the balance sheet per January 1, 1996 applies, and for such assets
which were not yet included but added to the business of FMCD since that date,
the book value on the day of the sale of such assets applies. Should
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Section 30 of the German GmbH law however require a lower Minimum Guaranty
Amount or a lower Higher Guaranty Amount, then such lower amounts required by
law shall be applicable.
FMCD undertakes not to decrease its capital reserves, neither by capital
increase from such reserve accounts nor by other kinds of contributions to its
shareholders or affiliates without the prior written approval of the Collateral
Agent, which consent by the Collateral Agent shall not unreasonably be withheld.
FMCD undertakes to maintain a profit and loss pooling agreement with the
Company during the term of the Indenture, in particular, to extend the term of
such agreement to the term of the Indenture and not to terminate, rescind or
amend such agreement without prior notice to the Collateral Agent and the
Collateral Agent's consent thereto. In case of a termination of such profit and
loss pooling agreement, FMCD will grant, upon the Collateral Agent's request,
further collateral to minimize the legal and financial disadvantages caused by
the termination of such agreement, as far as legally available under German law.
FMCD undertakes to give notice immediately to the Collateral Agent if it intends
to give notice of termination to such agreement or to agree to the termination
of such agreement, or if it becomes aware that the Company intends to terminate
such agreement. During the term of the profit and loss pooling agreement, any
and all allocations of profit to the Company and any and all cash distributions
to the Company as a consequence thereof upon the terms and conditions of the
profit and loss pooling agreement are permitted and unrestricted.
Reference is made to Article XIII and Article XIV of the Indenture for
further provisions with respect to this Subsidiary Guaranty.
THIS SUBSIDIARY GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF
CONFLICT OF LAWS.
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IN WITNESS WHEREOF, each of the Subsidiary Guarantors has caused this
Subsidiary Guaranty to be duly executed.
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC.
As Subsidiary Guarantor
By:____________________________________________
Authorized Officer
FRESENIUS MEDICAL CARE DEUTSCHLAND GMBH
As Subsidiary Guarantor
By:____________________________________________
Member of the Managing Board
By:____________________________________________
Member of the Managing Board
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ARTICLE III. THE SECURITIES
SECTION 3.1. Title and Terms.
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is limited to $360,500,000 except for Securities
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Securities pursuant to Section 3.4, 3.5, 3.6, 9.6 or
11.6.
The Securities shall be known and designated as the "9% Senior Subordinated
Notes due December 1, 2006" of the Company. Their Stated Maturity shall be
December 1, 2006, at which time the Securities will become due and payable
together with any accrued and unpaid interest thereon (including Additional Sums
and Additional Amounts, if any) and they shall bear interest at the rate of 9%
per annum, from the Issue Date, payable quarterly in arrears on each Interest
Payment Date, to the Persons in whose name the Securities are registered at the
close of business on the Regular Record Date.
Interest on the Securities will accrue from the most recent date on which
interest has been paid or, if no interest has been paid, from the Issue Date.
Interest in arrears for more than one quarter (and interest thereon) will accrue
interest (compounded quarterly) at the same rate.
Payments on the Securities issued as a Global Security shall be made in
immediately available funds to the Depository. In the event that Securities are
issued in certificated form, the principal of (and premium, if any) and interest
(including Additional Sums and Additional Amounts, if any) on the Securities
shall be payable at the office maintained by the Company pursuant to Section
10.2; provided, that unless the Securities are held by the Trust or any
permissible successor entity as provided under the Declaration in the event of a
merger, consolidation or amalgamation of the Trust, payment of interest may be
made at the option of the Company by check mailed to the address of the persons
entitled thereto, as such address shall appear in the Register.
The Securities shall be redeemable as provided in Article XI.
The Securities shall be subordinated in right of payment to Senior
Indebtedness of the Company as provided in Article XII.
The Securities shall be Guaranteed by the Subsidiary Guarantors as provided
in Article XIII.
The Subsidiary Guaranties shall be subordinated in right of payment to
Senior Indebtedness of the Subsidiary Guarantors as provided in Article XIV.
The Securities shall be subject to defeasance at the option of the Company
as provided in Section 4.3.
SECTION 3.2. Denominations.
The Securities shall be issuable only in registered form without coupons and
only in denominations of $1,000 and any integral multiple thereof.
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SECTION 3.3. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by any two members
of the Managing Board. The signature of any of these officers on the Securities
may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities executed by the Company and having
endorsed thereon the Subsidiary Guaranties executed pursuant to Section 13.2 by
the Subsidiary Guarantors to the Trustee for authentication, together with a
Company Order for the authentication and delivery of such Securities with the
Subsidiary Guaranties of the Subsidiary Guarantors endorsed thereon; and the
Trustee in accordance with such Company Order shall authenticate and deliver
such Securities with the Subsidiary Guaranties of the Subsidiary Guarantors
endorsed thereon as in this Indenture provided and not otherwise.
Each Security shall be dated the date of its authentication.
No Security or Subsidiary Guaranty endorsed thereon shall be entitled to any
benefit under this Indenture or be valid or obligatory for any purpose, unless
there appears on such Security a certificate of authentication substantially in
the form provided for herein executed by the Trustee by the manual signature of
one of its authorized officers, and such certificate upon any Security shall be
conclusive evidence, and the only evidence, that such Security and the
Subsidiary Guaranty endorsed thereon have been duly authenticated and delivered
hereunder.
SECTION 3.4. Temporary Securities.
Pending the preparation of definitive Securities, the Company may execute,
and upon Company Order the Trustee shall authenticate and deliver, temporary
Securities which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Securities in lieu of which they are issued and having
endorsed thereon the Subsidiary Guaranties substantially of the tenor of the
definitive Subsidiary Guaranties in lieu of which they are issued duly executed
by the Subsidiary Guarantors and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Securities and
Subsidiary Guaranties, as the case may be, may determine, as evidenced by their
execution of such Securities and Subsidiary Guaranties, as the case may be.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the office
or agency of the Company designated for that purpose without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Securities,
the Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor a like principal amount of definitive Securities of authorized
denominations having the same Issue Date and Stated Maturity, having the same
terms and like tenor, and having endorsed thereon the Subsidiary Guaranties
executed by the Subsidiary Guarantors. Until so exchanged, the temporary
Securities shall in all respects be entitled to the same benefits under this
Indenture as definitive Securities.
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SECTION 3.5. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee, a register in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Securities and of
transfers of Securities. Such register is herein sometimes referred to as the
"Securities Register." The Trustee is hereby appointed "Securities Registrar"
for the purpose of registering Securities and transfers of Securities as herein
provided.
Upon surrender for registration of transfer of any Security at the office or
agency of the Company designated for that purpose the Company shall execute, and
the Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Securities of any authorized
denominations, of a like aggregate principal amount, of the same Issue Date and
Stated Maturity, having the same terms and like tenor, and having endorsed
thereon the Subsidiary Guaranties executed by the Subsidiary Guarantors.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denominations, of a like aggregate principal
amount, of the same Issue Date and Stated Maturity and having the same terms and
like tenor, and having endorsed thereon the Subsidiary Guaranties executed by
the Subsidiary Guarantors, upon surrender of the Securities to be exchanged at
such office or agency. Whenever any Securities are so surrendered for exchange,
the Company shall execute, the Subsidiary Guarantors shall execute the
Subsidiary Guaranties endorsed on and the Trustee shall authenticate and
deliver, the Securities which the Holder making the exchange is entitled to
receive.
All Securities and the Subsidiary Guaranties endorsed thereon issued upon
any registration of transfer or exchange of Securities shall be the valid
obligations of the Company and the respective Subsidiary Guarantors, evidencing
the same debt and Subsidiary Guaranties, and entitled to the same benefits under
this Indenture, as the Securities and Subsidiary Guaranties surrendered upon
such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company or the Trustee) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and the Securities Registrar, duly executed by the Holder thereof or
his attorney duly authorized in writing.
No service charge shall be made to a Holder for any registration of transfer
or exchange of Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Securities.
Notwithstanding any of the foregoing, any Global Security shall be
exchangeable pursuant to this Section 3.5 for Securities registered in the names
of Persons other than the Depositary for such Global Security or its nominee
only if (i) such Depositary notifies the Company that it is unwilling or unable
to continue as Depositary for such Global Security or if at any time such
Depositary ceases to be a clearing agency registered under the Exchange Act, as
amended, (ii) the Company executes and delivers to the Trustee a Company Order
that such Global Security shall be so exchangeable or (iii) there shall have
occurred and be continuing an Event of Default with respect to the Securities.
Any Global Security that is exchangeable pursuant to the preceding sentence
shall be exchangeable for Securities registered in such names as such Depositary
shall direct.
Notwithstanding any other provision in this Indenture, a Global Security may
not be transferred except as a whole by the Depositary with respect to such
Global Security to a nominee of such
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Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary.
Neither the Company nor the Trustee shall be required to, pursuant to the
provisions of this Section, (a) issue, register the transfer of or exchange any
Security during a period beginning at the opening of business 15 days before any
selection for redemption of Securities pursuant to Article XI and ending at the
close of business on the earliest date on which the relevant notice of
redemption is deemed to have been given to all Holders of Securities to be so
redeemed, and (b) register the transfer of or exchange any Security so selected
for redemption, in whole or in part, except, in the case of any Security to be
redeemed in part, any portion thereof not to be redeemed.
SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee together with such
security or indemnity as may be required by the Company or the Trustee to save
each of them harmless, the Company shall execute, the Subsidiary Guarantors
shall execute the Subsidiary Guaranties endorsed on and the Trustee shall
authenticate and deliver in exchange therefor, a new Security of like tenor and
principal amount, having the same Issue Date and Stated Maturity and bearing the
same Interest Rate as such mutilated Security, and bearing a number not
contemporaneously outstanding.
If there shall be delivered to the Company and to the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Security, and
(ii) such security or indemnity as may be required by each of them to save each
of them, each Subsidiary Guarantor and any agent of either of them harmless,
then, in the absence of notice to the Company or the Trustee that such Security
has been acquired by a bona fide purchaser, the Company shall execute and upon
its request the Trustee shall authenticate and deliver, in lieu of any such
destroyed, lost or stolen Security, a new Security of like tenor and principal
amount, having endorsed thereon the Subsidiary Guaranties executed by the
Subsidiary Guarantors, having the same Issue Date and Stated Maturity and
bearing the same Interest Rate as such destroyed, lost or stolen Security, and
bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become or
is about to become due and payable, the Company in its discretion may, instead
of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any destroyed,
lost or stolen Security, and the Subsidiary Guaranties endorsed thereon, shall
constitute an original additional contractual obligation of the Company and the
respective Subsidiary Guarantors, whether or not the destroyed, lost or stolen
Security, and the Subsidiary Guaranties endorsed thereon, shall be at any time
enforceable by anyone, and shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Securities duly
issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
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SECTION 3.7. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date, shall be paid to the Person in whose
name that Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest, except that
interest payable on the Stated Maturity of a Security shall be paid to the
Person to whom principal is paid.
Any interest on any Security which is payable, but is not punctually paid or
duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest"), shall forthwith cease to be payable to the Holder on the relevant
Regular Record Date by virtue of having been such Holder, and such Defaulted
Interest may be paid by the Company, at its election in each case, as provided
in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Security and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit prior to the date of the proposed payment, such
money when deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as in this Clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest which
shall be not more than 15 days and not less than 10 days prior to the date of
the proposed payment and not less than 10 days after the receipt by the Trustee
of the notice of the proposed payment. The Trustee shall promptly notify the
Company of such Special Record Date and, in the name and at the expense of the
Company, shall cause notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor to be mailed, first-class, postage prepaid,
to each Holder at the address of such Holder as it appears in the Securities
Register not less than 10 days prior to such Special Record Date. The Trustee
may, in its discretion, in the name and at the expense of the Company, cause a
similar notice to be published at least once in a newspaper, customarily
published in the English language on each Business Day and of general
circulation in the Borough of Manhattan, The City of New York, but such
publication shall not be a condition precedent to the establishment of such
Special Record Date. Notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor having been mailed as aforesaid, such
Defaulted Interest shall be paid to the Persons in whose names the Securities
(or their respective Predecessor Securities) are registered at the close of
business on such Special Record Date and shall no longer be payable pursuant to
the following Clause (2).
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities may be listed, upon such notice as may be required by
such exchange (or by the Trustee if the Securities are not listed), if, after
notice given by the Company to the Trustee of the proposed payment pursuant to
this Clause, such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security delivered
under this Indenture upon registration of transfer of or in exchange for or in
lieu of any other Security shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Security.
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SECTION 3.8. Persons Deemed Owners.
Prior to the presentment of a Security for registration of transfer, the
Company, the Subsidiary Guarantors, the Trustee and any agent of the Company,
the Subsidiary Guarantors or the Trustee may treat the Person in whose name such
Security is registered as the owner of such Security for the purpose of
receiving payment of principal (and premium, if any) of and (subject to Section
3.7) interest on such Security and for all other purposes whatsoever, whether or
not such Security be overdue, and neither the Company, the Subsidiary
Guarantors, the Trustee nor any agent of the Company, the Subsidiary Guarantors
or the Trustee shall be affected by notice to the contrary.
SECTION 3.9. Cancellation.
All Securities surrendered for payment, redemption, registration of transfer
or exchange shall, if surrendered to any Person other than the Trustee, be
delivered to the Trustee, and any such Securities surrendered directly to the
Trustee for any such purpose shall be promptly canceled by it. The Company may
at any time deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in any
manner whatsoever, and all Securities so delivered shall be promptly canceled by
the Trustee. No Securities shall be authenticated in lieu of or in exchange for
any Securities canceled as provided in this Section, except as expressly
permitted by this Indenture. All canceled Securities shall be destroyed by the
Trustee and the Trustee shall deliver to the Company a certificate of such
destruction.
SECTION 3.10. Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day year
of twelve 30-day months and, for any partial period, on the basis of the number
of days elapsed in a 360-day year of twelve 30-day months.
SECTION 3.11. Right of Set-Off.
Notwithstanding anything to the contrary in this Indenture, the Company
shall have the right to set-off any payment it is otherwise required to make
hereunder in respect of any Security to the extent the Company has theretofore
made, or is concurrently on the date of such payment making, a payment under the
Company Guarantee relating to such Security or under Section 5.8 of this
Indenture.
SECTION 3.12. Agreed Tax Treatment.
Each Security issued hereunder shall provide that the Company and, by its
acceptance of a Security or a beneficial interest therein, the Holder of, and
any Person that acquires a beneficial interest in, such Security agree that for
German and United States Federal, state and local tax purposes it is intended
that such Security constitute indebtedness.
SECTION 3.13. CUSIP Numbers.
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided, that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers.
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ARTICLE IV. SATISFACTION AND DISCHARGE
SECTION 4.1. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to (i) any
surviving rights of registration of transfer, substitution and exchange of
Securities, (ii) rights hereunder of Holders to receive payments of principal of
(and premium, if any) and interest (including Additional Sums and Additional
Amounts, if any) on the Securities and other rights, duties and obligations of
the Holders as beneficiaries hereof with respect to the amounts, if any,
deposited with the Trustee pursuant to this Article IV and (iii) the rights and
obligations of the Trustee hereunder), and the Trustee, on demand of and at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either:
(A) all Securities theretofore authenticated and delivered (other than (i)
Securities which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 3.6 and (ii) Securities for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust, as provided in Section 10.3) have been delivered to the Trustee for
cancellation; or
(B) all such Securities not theretofore delivered to the Trustee for
cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity within one year of
the date of deposit,
and the Company or a Subsidiary Guarantor, in the case of Clause (B) (i) or
(B) (ii) above, has deposited or caused to be deposited with the Trustee as
trust funds in trust for such purpose an amount in the currency or
currencies in which the Securities are payable sufficient (without
reinvestment) to pay and discharge the entire indebtedness on such
Securities not theretofore delivered to the Trustee for cancellation, for
principal (and premium, if any) and interest (including Additional Sums and
Additional Amounts, if any) to the date of such deposit (in the case of
Securities which have become due and payable) or to the Stated Maturity;
(2) the Company or a Subsidiary Guarantor has paid or caused to be paid all
other sums payable hereunder by the Company and the Subsidiary Guarantors; and
(3) the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Holders of the Outstanding Securities will not recognize gain or
loss for German and United States Federal income tax purposes as a result of the
application of this Section 4.1 and will be subject to German and United States
Federal income tax, if any, on the same amount, in the same manner and at the
same times as would have been the case if such satisfaction and discharge of the
Indenture had not occurred; and
(4) the application of this Section 4.1 shall not cause the Trustee to have
a conflicting interest as defined in Section 6.8 hereof and for purposes of the
Trust Indenture Act with respect to any securities of the Company; and
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(5) the funds deposited with the Trustee pursuant to Clause (1)(B) above
shall not be deemed an "investment company" as defined in the 1940 Act, or such
trust shall be qualified under the 1940 Act or exempt from regulation
thereunder; and
(6) the Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent provided in this
subsection 4.1 for relating to the satisfaction and discharge of this Indenture
have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture pursuant to
this Article IV, the obligations of the Company to the Trustee under Section 6.7
and, if money shall have been deposited with the Trustee pursuant to subclause
(B) of Clause (1) of this Section, the obligations of the Trustee under Section
4.2 and the last paragraph of Section 10.3, shall survive.
SECTION 4.2. Application of Trust Money; Reinstatement.
Subject to the provisions of the last paragraph of Section 10.3, all money
deposited with the Trustee pursuant to Section 4.1 or money or Government
Obligations deposited with the Trustee pursuant to Section 4.3, or received by
the Trustee in respect of Government Obligations deposited with the Trustee
pursuant to Section 4.3, shall be held in trust and applied by the Trustee, in
accordance with the provisions of the Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Persons
entitled thereto, of the principal (and premium, if any) and interest (including
Additional Sums and Additional Amounts, if any) for the payment of which such
money or Government Obligations have been deposited with or received by the
Trustee; provided, however, such moneys need not be segregated from other funds
held in trust except to the extent required by law. Money so held in trust shall
not be subject to the provisions of Article XII or Article XIV.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the Government Obligations deposited
pursuant to Section 4.3 or the principal and interest received in respect
thereof other than any such tax, fee or other charge which by law is for the
account of the Holders of the Outstanding Securities.
If the Trustee or the Paying Agent is unable to apply any money in
accordance with Section 4.1 or 4.3 by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the obligations of the Company and the Subsidiary
Guarantors under this Indenture, the Securities and the Subsidiary Guaranties
shall be revived and reinstated as though no deposit had occurred pursuant to
this Article IV until such time as the Trustee or Paying Agent is permitted to
apply all such money in accordance with Section 4.1 or 4.3; provided, however,
that if the Company or any Subsidiary Guarantor makes any payment of principal
of (and premium, if any) or interest (including Additional Sums and Additional
Amounts, if any) on any Security following the reinstatement of its obligations,
the Company or such Subsidiary Guarantor shall be subrogated to the rights of
the Holders of such Securities to receive such payment from the money held by
the Trustee or the Paying Agent.
SECTION 4.3. Satisfaction, Discharge and Defeasance of Securities.
The Company shall be deemed to have paid and discharged the entire
indebtedness on all the Outstanding Securities, the Subsidiary Guarantors shall
each be released from their respective Subsidiary Guaranties, and the Trustee,
at the expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of such indebtedness and subsidiary Guaranties, when
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(1) with respect to all Outstanding Securities,
(A) the Company has irrevocably deposited or caused to be irrevocably
deposited with the Trustee as trust funds in trust for such purpose an amount
sufficient to pay and discharge the entire indebtedness on all Outstanding
Securities for principal (and premium, if any) and interest (including
Additional Sums and Additional Amounts, if any) to the Stated Maturity or any
Redemption Date as contemplated by the penultimate paragraph of this Section
4.3, as the case may be; or
(B) the Company has irrevocably deposited or caused to be irrevocably
deposited with the Trustee as obligations in trust for such purpose an amount of
Government Obligations as will, in the written opinion of independent public
accountants delivered to the Trustee, together with predetermined and certain
income to accrue thereon, without consideration of any reinvestment thereof, be
sufficient to pay and discharge when due the entire indebtedness on all
Outstanding Securities for principal (and premium, if any) and interest
(including Additional Sums and Additional Amounts, if any) to the Stated
Maturity or any Redemption Date as contemplated by the penultimate paragraph of
this Section 4.3, as the case may be; and
(2) the Company has paid or caused to be paid all other sums payable with
respect to the Outstanding Securities; and
(3) the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Holders of the Outstanding Securities will not recognize gain or
loss for German and United States Federal income tax purposes as a result of the
application of this Section 4.3 and will be subject to German and United States
Federal income tax, if any, on the same amount, in the same manner and at the
same times as would have been the case if such satisfaction, discharge and
defeasance of the Securities had not occurred; and
(4) the Company has delivered to the Trustee an Officers' Certificate to the
effect that the Securities, if then listed on any securities exchange, will not
be delisted as a result of the deposit pursuant to Clause (1) above; and
(5) the application of this Section 4.3 shall not cause the Trustee to have
a conflicting interest as defined in Section 6.8 hereof and for purposes of the
Trust Indenture Act with respect to any securities of the Company; and
(6) at the time of the deposit pursuant to Clause (1) above: (A) no default
in the payment of all or a portion of principal of (or premium, if any) or
interest on any Senior Indebtedness of the Company or any Subsidiary Guarantor
shall have occurred and be continuing, and no event of default with respect to
any such Senior Indebtedness shall have occurred and be continuing and shall
have resulted in such Senior Indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise have become due and
payable and (B) no other event of default with respect to any Senior
Indebtedness of the Company or any Subsidiary Guarantor shall have occurred and
be continuing permitting (after notice or the lapse of time, or both) the
holders of such Senior Indebtedness (or a representative on behalf of the
holders thereof) to declare such Senior Indebtedness due and payable prior to
the date on which it would otherwise have become due and payable, or, in the
case of either Clause (A) or Clause (B) above, each such default or event of
default shall have been cured or waived or shall have ceased to exist; and
(7) no Event of Default or event which with notice or lapse of time or both
would become an Event of Default shall have occurred and be continuing on the
date of such deposit; and
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(8) the funds deposited with the Trustee pursuant to Clause (1) above shall
not be deemed an investment company as defined in the 1940 Act or such trust
shall be qualified under the 1940 Act or exempt from regulation thereunder; and
(9) the Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent herein provided
for relating to the satisfaction and discharge of the entire indebtedness on all
Outstanding Securities have been complied with.
Any deposits with the Trustee referred to in Section 4.3(1) above shall be
irrevocable and shall be made under the terms of an escrow trust agreement in
form and substance reasonably satisfactory to the Trustee. If any Outstanding
Securities are to be redeemed prior to their Stated Maturity, whether pursuant
to any optional or mandatory redemption provisions, the applicable escrow trust
agreement shall provide therefor and the Company shall make such arrangements as
are satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company. If the Securities are
not to become due and payable at their Stated Maturity or upon call for
redemption within one year of the date of deposit, then the Company shall give,
not later than the date of such deposit, notice of such deposit to the Holders.
Upon the satisfaction of the conditions set forth in this Section 4.3 with
respect to all the Outstanding Securities, the terms and conditions of the
Securities and Subsidiary Guaranties, including the terms and conditions with
respect thereto set forth in this Indenture, shall no longer be binding upon, or
applicable to, the Company and the Subsidiary Guarantors; provided, that the
Company and the Subsidiary Guarantors shall not be discharged from any payment
obligations in respect of Securities which are deemed not to be Outstanding
under clause (iii) of the definition thereof if such obligations continue to be
valid obligations of the Company and the Subsidiary Guarantors under applicable
law.
ARTICLE V. REMEDIES
SECTION 5.1. Events of Default.
"Event of Default," wherever used herein means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon any Security, including any
Additional Sums and Additional Amounts in respect thereof, when it becomes due
and payable, and continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any, on) any
Security at its Maturity; or
(3) default in the performance, or breach, in any material respect, of any
covenant or warranty of the Company in this Indenture (other than a covenant or
warranty a default in the performance of which or the breach of which is
elsewhere in this Section specifically dealt with), and continuance of such
default or breach for a period of 90 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the Company
and the Trustee by the Holders of at least 25% in principal amount of the
Outstanding Securities a written notice specifying such default or breach and
requiring it to be remedied; or
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(4) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any Subsidiary (or the payment of which is
guaranteed by the Company or any Subsidiary), whether such Indebtedness or
Guarantee now exists or is incurred after the Issue Date, if (A) such default
results in the acceleration of such Indebtedness prior to its express maturity
or shall constitute a default in the payment of such Indebtedness and (B) the
principal amount of any such Indebtedness that has been accelerated or not paid
at maturity, when added to the aggregate principal amount of all other such
Indebtedness, at such time, that has been accelerated or not paid at maturity,
exceeds $25,000,000; or
(5) the dissolution, winding up or termination of the Trust, except in
connection with the distribution of Securities to the holders of Preferred
Securities in liquidation of the Trust and in connection with such mergers,
consolidations or amalgamations as are permitted by the Declaration; or
(6) the entry of a decree or order by a court having jurisdiction in the
premises adjudging the Company a bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company under any applicable German or United States
Federal or State bankruptcy, insolvency, reorganization or other similar law, or
appointing a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its property or
ordering the winding up or liquidation of its affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 60 consecutive
days; or
(7) the institution by the Company of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under any applicable German or
United States Federal or State bankruptcy, insolvency, reorganization or other
similar law, or the consent by it to the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its property, or
the making by it of an assignment for the benefit for creditors, or the
admission by it in writing of its inability to pay its debts generally as they
become due and its willingness to be adjudicated a bankrupt, or the taking of
corporate action by the Company in furtherance of any such action; or
(8) except as permitted by the terms hereof and the Securities, the
cessation of effectiveness of any Subsidiary Guaranty or the finding by any
judicial proceeding that any such Subsidiary Guaranty is unenforceable or
invalid or the denial or disaffirmation by any Subsidiary Guarantor of its
obligations under its Subsidiary Guarantor.
(9) any of the Security Documents cease to be in full force and effect
(other than in accordance with their respective terms or the terms hereof), or
any of the Security Documents cease to give the Trustee the Liens, rights,
powers and privileges purported to be created thereby, or any Security Document
is declared null and void, or the Company denies any of its obligations under
any Security Document or any Collateral becomes subject to any Lien other than
any Permitted Collateral Liens.
A default under any other indebtedness of the Company or any of its
Subsidiaries or joint ventures or the Trust would not constitute an Event of
Default under the Securities.
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SECTION 5.2. Acceleration of Maturity; Rescission and Annulment.
As provided in and subject to the provisions of this Indenture, if an Event
of Default with respect to the Securities at the time Outstanding occurs and is
continuing, then and in every such case the Trustee or the Holders of not less
than 25% in aggregate outstanding principal amount of the Outstanding Securities
may declare the principal amount of and interest (including Additional Sums and
Additional Amounts, if any) on all the Securities to be due and payable
immediately, by a notice in writing to the Company and the Subsidiary Guarantors
(and to the Trustee if given by Holders), provided, that if the Trustee or such
Holders fail to do so, the Preferred Trustee shall have such right by a notice
in writing to the Company and the Trustee; and upon any such declaration such
specified amount of and the accrued interest (including Additional Sums and
Additional Amounts, if any) on all the Securities shall become immediately due
and payable, provided, that the payment of principal and interest (including
Additional Sums and Additional Amounts, if any) on such Securities shall remain
subordinated to the extent provided in Article XII of the Indenture.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in aggregate principal amount of the Outstanding Securities, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) the Company or any Subsidiary Guarantor has paid or deposited with the
Trustee a sum sufficient to pay:
(A) all overdue installments of interest (including Additional Sums and
Additional Amounts, if any) on the Securities,
(B) the principal of (and premium, if any, on) any Securities which have
become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Securities, and
(C) all sums paid or advanced by the Trustee hereunder and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel;
(2) all Events of Default, other than the non-payment of the principal of
Securities which have become due solely by such declaration of acceleration,
have been cured or waived as provided in Section 5.13.
The Holders of a majority in aggregate outstanding principal amount of the
Securities affected thereby may, on behalf of the Holders of all the Securities,
waive any past default, except a default in the payment of principal, premium,
if any, or interest (unless such default has been cured and a sum sufficient to
pay all matured installments of interest, premium, if any, and principal due
otherwise than by acceleration has been deposited with the Trustee) or a default
in respect of a covenant or provision which under this Indenture cannot be
modified or amended without the consent of the Holder of each Outstanding
Security and, should the Holders of such Securities fail to annul such
declaration and waive such default, the holders of a majority in aggregate
liquidation amount of the Preferred Securities shall have such right. The
Preferred Trustee, as the initial Holder of the Securities, has agreed under the
Declaration not to waive an Event of Default with respect to the Securities
without the consent of holders of a majority in aggregate liquidation amount of
the Preferred Securities then outstanding.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
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Upon receipt by the Trustee of written notice declaring such an
acceleration, or rescission and annulment thereof, a record date shall be
established for determining Holders of Outstanding Securities entitled to join
in such notice, which record date shall be at the close of business on the day
the Trustee receives such notice. The Holders on such record date, or their duly
designated proxies, and only such Persons, shall be entitled to join in such
notice, whether or not such Holders remain Holders after such record date;
provided, that, unless such declaration of acceleration, or rescission and
annulment, as the case may be, shall have become effective by virtue of the
requisite percentage having joined in such notice prior to the day which is 90
days after such record date, such notice of declaration of acceleration, or
rescission and annulment, as the case may be, shall automatically and without
further action by any Holder be canceled and of no further effect. Nothing in
this paragraph shall prevent a Holder, or a proxy of a Holder, from giving,
after expiration of such 90-day period, a new written notice of declaration of
acceleration, or rescission and annulment thereof, as the case may be, that is
identical to a written notice which has been canceled pursuant to the proviso to
the preceding sentence, in which event a new record date shall be established
pursuant to the provisions of this Section 5.2.
SECTION 5.3. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if:
(1) default is made in the payment of any installment of interest (including
Additional Sums and Additional Amounts, if any) on any Security when such
interest becomes due and payable and such default continues for a period of 30
days, or
(2) default is made in the payment of the principal of (and premium, if any,
on) any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Securities, the whole amount then due and payable
on such Securities for principal (and premium, if any) and interest (including
Additional Sums and Additional Amounts, if any); and, in addition thereto, all
amounts owing the Trustee under Section 6.7.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company, any Subsidiary Guarantor or any other obligor upon the
Securities and collect the moneys adjudged or decreed to be payable in the
manner provided by law out of the property of the Company, any Subsidiary
Guarantor or any other obligor upon the Securities, wherever situated.
Subject to Section 6.3 hereof and the terms of the Intercreditor Agreement,
if an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders under this Indenture and under the applicable Security Documents by such
appropriate judicial proceedings as the Trustee shall deem most effectual to
protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in the Security Documents or in aid
of the exercise of any power granted herein, or to enforce any other proper
remedy, including appointment of a receiver for the Collateral, taking
possession of the Collateral, and foreclosure, realization and sale of
Collateral, in each case, pursuant to the terms of this Indenture and the
Security Documents. The Trustee shall be entitled to sue and recover judgment as
aforesaid to enforce any Lien of the Security Documents, in either case, either
before, after or during the pendency of any other proceeding for the enforcement
of any Lien of the Security Documents, and
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the right of the Trustee to recover such judgment shall not be affected by any
sale under any of the Security Documents or by the exercise of any right, power
or remedy for the enforcement of the provisions of any of the Security
Documents, or the foreclosure or enforcement of any Lien of the Security
Documents. No recovery of any such judgment upon any property of the Company
shall affect or impair the Lien on the Collateral or any rights, powers or
remedies of the Trustee or the Holders.
SECTION 5.4. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company, any Subsidiary Guarantor or any
other obligor upon the Securities or the property of the Company, of any
Subsidiary Guarantor or of such other obligor or their creditors,
(a) the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal (and premium, if any) or
interest (including Additional Sums and Additional Amounts, if any)) shall be
entitled and empowered, by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest (including Additional Sums and Additional Amounts,
if any) owing and unpaid in respect to the Securities and to file such other
papers or documents as may be necessary or advisable and to take any and all
actions as are authorized under the Trust Indenture Act in order to have the
claims of the Holders and any predecessor to the Trustee under Section 6.7 and
of the Holders allowed in any such judicial proceedings; and
(ii) and in particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same in accordance with Section 5.6; and
(b) any custodian, receiver, assignee, trustee, liquidator, sequestrator (or
other similar official) in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Trustee for distribution in accordance
with Section 5.6, and in the event that the Trustee shall consent to the making
of such payments directly to the Holders, to pay to the Trustee any amount due
to it and any predecessor Trustee under Section 6.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding; provided, however,
that the Trustee may, on behalf of the Holders, vote for the election of a
trustee in bankruptcy or similar official and be a member of a creditors' or
other similar committee.
SECTION 5.5. Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may
be prosecuted and enforced by the Trustee without the possession of any of the
Securities or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of all the amounts owing the Trustee and any predecessor Trustee
under Section 6.7, its
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agents and counsel, be for the ratable benefit of the Holders of the Securities
in respect of which such judgment has been recovered.
SECTION 5.6. Application of Money Collected.
Any money or property collected or to be applied by the Trustee with respect
to the Securities pursuant to this Article, upon foreclosure of any Lien upon
the Collateral provided pursuant to the Pledge Agreement or the Intercreditor
Agreement shall, subject to Articles XII and XIV and such Pledge Agreement and
Intercreditor Agreement, be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money or property
on account of principal (or premium, if any) or interest (including any
Additional Sums), upon presentation of the Securities and the notation thereon
of the payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee and any predecessor
Trustee under Section 6.7;
SECOND: To the extent provided in Article XII, to the holders of Senior
Indebtedness of the Company in accordance with Article XII or if collected from
a Subsidiary Guarantor, to the extent provided in Article XIV, to the holders of
Senior Indebtedness of the Subsidiary Guarantor in accordance with Article XIV;
THIRD: To the payment of the amounts then due and unpaid upon such
Securities for principal (and premium, if any) and interest (including
Additional Sums and Additional Amounts, if any), in respect of which or for the
benefit of which such money has been collected, ratably, without preference or
priority of any kind, according to the amounts due and payable on such
Securities for principal (and premium, if any) and interest (including any
Additional Sums and Additional Amounts), respectively; and
FOURTH: The balance, if any, to the Person or Persons lawfully entitled
thereto.
SECTION 5.7. Limitation on Suits.
No Holder of any Security shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Indenture or for the appointment of
a receiver, assignee, trustee, liquidator, sequestrator (or other similar
official) or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(2) if the Preferred Trustee is not the Holder of the Securities, the
Holders of not less than 25% in aggregate principal amount of the Outstanding
Securities shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as Trustee
hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance with
such request;
(4) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such proceeding; and
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(5) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Holders of a majority in aggregate
principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
The foregoing limitations shall not apply to a suit instituted by a Holder
of a Security for enforcement of payment of the principal of and premium, it
any, or interest (including Additional Sums and Additional Amounts, if any) on
such Security on or after the respective due dates expressed in such Security.
SECTION 5.8. Unconditional Right of Holders to Receive Principal, Premium
and Interest.
Notwithstanding any other provision in this Indenture, the Holder of any
Security shall have the right which is absolute and unconditional to receive
payment of the principal of (and premium, if any) and (subject to Section 3.7)
interest (including Additional Sums and Additional Amounts, if any) on such
Security on the respective Stated Maturities expressed in such Security and to
institute suit for the enforcement of any such payment, and such rights shall
not be impaired without the consent of such Holder. Except as set forth in the
Declaration, the holders of Preferred Securities shall have no right to exercise
directly any right or remedy available to the Holders of, or in respect of, the
Securities; provided, however, that if the Preferred Trustee or the Special
Trustee (as defined in the Declaration) do not enforce such payment obligations,
a holder of Preferred Securities will have the right to bring an action on
behalf of the Trust to enforce the Trust's rights under the Securities and the
Indenture.
SECTION 5.9. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case the Company, the Subsidiary
Guarantors, the Trustee and the Holders shall, subject to any determination in
such proceeding, be restored severally and respectively to their former
positions hereunder, and thereafter all rights and remedies of the Trustee and
the Holders shall continue as though no such proceeding had been instituted.
SECTION 5.10. Rights and Remedies Cumulative.
Except as otherwise provided in the last paragraph of Section 3.6, no right
or remedy herein conferred upon or reserved to the Trustee or to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
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SECTION 5.11. Delay or Omission Not Waiver.
Except as otherwise provided in the last paragraph of Section 3.6, no delay
or omission of the Trustee or of any Holder of any Security to exercise any
right or remedy accruing upon any Event of Default shall impair any such right
or remedy or constitute a waiver of any such Event of Default or an acquiescence
therein.
Every right and remedy given by this Article or by law to the Trustee or to
the Holders may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Holders, as the case may be.
SECTION 5.12. Control by Holders.
The Holders of a majority in aggregate principal amount of the Outstanding
Securities shall have the right, subject to Section 6.3 hereof, to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee, with
respect to the Securities, provided, that:
(1) such direction shall not be in conflict with any rule of law or with
this Indenture,
(2) the Trustee may take any other action deemed proper by the Trustee which
is not inconsistent with such direction, and
(3) subject to the provisions of Section 6.1, the Trustee shall have the
right to decline to follow such direction if the Trustee in good faith shall, by
a Responsible Officer or Officers of the Trustee, determine that the proceeding
so directed would be unjustly prejudicial to the Holders not joining in any such
direction or would involve the Trustee in personal liability.
Upon receipt by the Trustee of any written notice directing the time, method
or place of conducting any such proceeding or exercising any such trust or
power, a record date shall be established for determining Holders of Outstanding
Securities entitled to join in such notice, which record date shall be at the
close of business on the day the Trustee receives such notice. The Holders on
such record date, or their duly designated proxies, and only such Persons, shall
be entitled to join in such notice, whether or not such Holders remain Holders
after such record date; provided, that, unless the Holders of a majority in
principal amount of the Outstanding Securities shall have joined in such notice
prior to the day which is 90 days after such record date, such notice shall
automatically and without further action by any Holder be canceled and of no
further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of
a Holder, from giving, after expiration of such 90-day period, a new notice
identical to a notice which has been canceled pursuant to the proviso to the
preceding sentence, in which event a new record date shall be established
pursuant to the provisions of this Section 5.12.
SECTION 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in aggregate outstanding principal
amount of the Outstanding Securities affected thereby may on behalf of the
Holders of all the Securities waive any past default hereunder and its
consequences with respect to the Securities except a default:
(1) in the payment of the principal of (or premium, if any) or interest
(including Additional Sums and Additional Amounts, if any) on any Security, or
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(2) in respect of a covenant or provision hereof which under Article IX
cannot be modified or amended without the consent of the Holder of each
Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
SECTION 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in principal amount of the Outstanding Securities,
or to any suit instituted by any Holder for the enforcement of the payment of
the principal of (or premium, if any) or interest (including Additional Sums and
Additional Amounts, if any) on any Security on or after the respective Stated
Maturities expressed in such Security.
SECTION 5.15. Waiver of Usury, Stay or Extension Laws.
Each of the Company and the Subsidiary Guarantors covenants (to the extent
that it may lawfully do so) that it will not at any time insist upon, or plead,
or in any manner whatsoever claim or take the benefit or advantage of, any
usury, stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Indenture; and
each of the Company and the Subsidiary Guarantors (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE VI. THE TRUSTEE
SECTION 6.1. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such duties as
are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may conclusively
rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture; but in the case of any such
certificates or opinions which by any provisions hereof are specifically
required to be furnished to the Trustee, the Trustee shall be under a duty to
examine the same to determine whether or not they conform to the requirements of
this Indenture.
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(b) In case an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent person
would exercise or use under the circumstances in the conduct of his own affairs.
(c) No provision of this Indenture shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act,
or its own willful misconduct except that
(1) this Subsection shall not be construed to limit the effect of Subsection
(a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in good
faith by a Responsible Officer, unless it shall be proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of
Holders pursuant to Section 5.12 relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred upon the Trustee, under this Indenture with respect
to the Securities.
(d) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder, or in the exercise of any of its rights or
powers, if there shall be reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
(e) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
SECTION 6.2. Notice of Defaults.
Within 90 days after actual knowledge by a Responsible Officer of the
Trustee of the occurrence of any default hereunder with respect to the
Securities, the Trustee shall transmit by mail to all Holders, as their names
and addresses appear in the Securities Register, notice of such default
hereunder known to the Trustee, unless such default shall have been cured or
waived; provided, however, that, except in the case of a default in the payment
of the principal of (or premium, if any) or interest (including Additional Sums
and Additional Amounts, if any) on any Security, the Trustee shall be protected
in withholding such notice if and so long as the board of directors, the
executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determines that the withholding of such
notice is in the interests of the Holders; and provided, further, that, in the
case of any default of the character specified in Section 5.1(3), no such notice
to Holders shall be given until at least 30 days after the occurrence thereof.
For the purpose of this Section, the term "default" means any event which is, or
after notice or passage of time or both would be, an Event of Default.
SECTION 6.3. Certain Rights of Trustee.
Subject to the provisions of Section 6.1:
(a) the Trustee may rely and shall be protected in acting or refraining from
acting upon any resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent, order, bond, debenture, note, Security or
other evidence of indebtedness, or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or parties;
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(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem
it desirable that a matter be proved or established prior to taking, suffering
or omitting any action hereunder, the Trustee (unless other evidence be herein
specifically prescribed) may, in the absence of bad faith on its part, rely upon
an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders pursuant to this Indenture, unless such Holders shall have offered
to the Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction;
(f) the Trustee shall not be bound to make any investigation into the facts
or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, Security or other evidence of indebtedness, or other paper or document,
but the Trustee in its discretion may make such further inquiry or investigation
into such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Company or any Subsidiary
Guarantor, personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or perform
any duties hereunder either directly or by or through agents or attorneys and
the Trustee shall not be responsible for any misconduct or negligence on the
part of any agent or attorney appointed with due care by it hereunder.
SECTION 6.4. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in Securities and Subsidiary Guaranties
endorsed thereon, except the Trustee's certificates of authentication, shall be
taken as the statements of the Company, or the Subsidiary Guarantors, as the
case may be, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Securities, the value or condition of any Collateral or the
priority or perfection of any security interest purportedly granted herein. The
Trustee shall not be accountable for the use or application by the Company of
the Securities or the proceeds thereof.
SECTION 6.5. May Hold Securities.
The Trustee, Collateral Agent, any Paying Agent, Securities Registrar or any
other agent of the Company or any Subsidiary Guarantor, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to
Sections 6.8 and 6.13, may otherwise deal with the Company or any Subsidiary
Guarantor with the same rights it would have if it were not Trustee, Paying
Agent, Securities Registrar or such other agent.
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SECTION 6.6. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed in writing with the Company or any Subsidiary Guarantor, as the case may
be.
SECTION 6.7. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation for all
services rendered by it hereunder in such amounts as the Company, the Subsidiary
Guarantors and the Trustee shall agree from time to time (which compensation
shall not be limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) to reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any provision of this Indenture (including the reasonable compensation and the
reasonable expenses and disbursements of its agents and counsel), except any
such expense, disbursement or advance as may be attributable to its negligence
or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any loss,
liability or expense (including the reasonable compensation and the reasonable
expenses and disbursements of its agents and counsel) incurred without
negligence or bad faith on its part, arising out of or in connection with the
acceptance or administration of this trust or the performance of its duties
hereunder, including the costs and expenses of defending itself against any
claim or liability in connection with the exercise or performance of any of its
powers or duties hereunder. This indemnification shall survive the termination
of this Agreement.
To secure the Company's payment obligations in this Section, the Company and
the Holders agree that the Trustee shall have a lien prior to the Securities on
all money or property held or collected by the Trustee. Such lien shall survive
the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 5.1(6) or (7) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any applicable German or United States Federal or State
bankruptcy, insolvency or other similar law.
SECTION 6.8. Disqualification; Conflicting Interests.
The Trustee shall be subject to the provisions of Section 310(b) of the
Trust Indenture Act. Nothing herein shall prevent the Trustee from filing with
the Commission the application referred to in the second to last paragraph of
Section 301(b) of the Trust Indenture Act.
SECTION 6.9. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
(a) a corporation organized and doing business under the laws of the United
States of America or of any State, Territory or the District of Columbia,
authorized under such laws to exercise corporate
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trust powers and subject to supervision or examination by Federal, State,
Territorial or District of Columbia authority, or
(b) a corporation or other Person organized and doing business under the
laws of a foreign government that is permitted to act as Trustee pursuant to a
rule, regulation or order of the Commission, authorized under such laws to
exercise corporate trust powers, and subject to supervision or examination by
authority of such foreign government or a political subdivision thereof
substantially equivalent to supervision or examination applicable to United
States institutional trustees,
in either case having a combined capital and surplus of at least $50,000,000,
subject to supervision or examination by Federal or State authority. If such
corporation publishes reports of condition at least annually, pursuant to law or
to the requirements of the aforesaid supervising or examining authority, then,
for the purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section, it
shall resign immediately in the manner and with the effect hereinafter specified
in this Article. Neither the Company nor any Person directly or indirectly
controlling, controlled by or under common control with the Company shall serve
as Trustee.
SECTION 6.10. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee may resign at any time by giving written notice thereof to
the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time with respect to the Securities by
Act of the Holders of a majority in principal amount of the Outstanding
Securities, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 6.8 after written request
therefor by the Company or by any Holder who has been a bona fide Holder of a
Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.9 and shall fail
to resign after written request therefor by the Company or by any such Holder,
or
(3) the Trustee shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or a receiver of the Trustee or of its property shall be
appointed or any public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation, conservation or
liquidation,
then, in any such case, (i) the Company, acting pursuant to the authority of a
Board Resolution, may remove the Trustee, or (ii) subject to Section 5.14, any
Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any
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court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by a Board Resolution, shall promptly appoint a successor Trustee. If, within
one year after such resignation, removal or incapability, or the occurrence of
such vacancy, a successor Trustee shall be appointed by Act of the Holders of a
majority in principal amount of the Outstanding Securities delivered to the
Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders and accepted
appointment in the manner hereinafter provided, any Holder who has been a bona
fide Holder of a Security for at least six months may, subject to Section 5.14,
on behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to the Holders of
Securities as their names and addresses appear in the Securities Register. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
SECTION 6.11. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee, every such
successor Trustee so appointed shall execute, acknowledge and deliver to the
Company, the Subsidiary Guarantors and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee; but, on the request of the
Company, any Subsidiary Guarantor or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder.
(b) Upon request of any such successor Trustee, the Company and the
Subsidiary Guarantors shall execute any and all instruments for more fully and
certainly vesting in and confirming to such successor Trustee all rights, powers
and trusts referred to in paragraph (a) of this Section.
(c) No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities
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so authenticated, and in case any Securities shall not have been authenticated,
any successor to the Trustee may authenticate such Securities either in the name
of any predecessor Trustee or in the name of such successor Trustee, and in all
cases the certificate of authentication shall have the full force which it is
provided anywhere in the Securities or in this Indenture that the certificate of
the Trustee shall have.
SECTION 6.13. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company, the
Subsidiary Guarantors or any other obligor upon the Securities, the Trustee
shall be subject to the provisions of the Trust Indenture Act regarding the
collection of claims against the Company, the Subsidiary Guarantors or any such
other obligor.
SECTION 6.14. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents which shall be
authorized to act on behalf of the Trustee to authenticate Securities issued
upon original issue and upon exchange, registration of transfer or partial
redemption thereof, and Securities so authenticated shall be entitled to the
benefits of this Indenture and shall be valid and obligatory for all purposes as
if authenticated by the Trustee hereunder. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent. Each Authenticating Agent shall be acceptable to the
Company and shall at all times be a corporation organized and doing business
under the laws of the United States of America, any State thereof, or any
Territory or the District of Columbia, authorized under such laws to act as
Authenticating Agent, having a combined capital and surplus of not less than
$50,000,000 and subject to supervision or examination by Federal or State
authority. If such Authenticating Agent publishes reports of condition at least
annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this Section, the combined capital
and surplus of such Authenticating Agent shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time an Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section, such Authenticating Agent shall
resign immediately in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of an Authenticating Agent shall be the successor
Authenticating Agent hereunder, provided such corporation shall be otherwise
eligible under this Section, without the execution or filing of any paper or any
further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and the Subsidiaries Guarantors
and shall give notice of such appointment in the manner provided in Section 1.6
to all Holders of Securities. Any successor Authenticating Agent upon acceptance
of its appointment hereunder shall become vested with all the rights, powers and
duties of its predecessor hereunder, with
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like effect as if originally named as an Authenticating Agent. No successor
Authenticating Agent shall be appointed unless eligible under the provision of
this Section.
The Trustee agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payments, subject to the provisions
of Section 6.7.
If an appointment is made pursuant to this Section, the Securities may have
endorsed thereon, in addition to the Trustee's certificate of authentication, an
alternative certificate of authentication in the following form:
This is one of the Securities with the Subsidiary Guaranties endorsed
thereon referred to in the within mentioned Indenture.
__________________________________
__________________________________
As Trustee
By:_______________________________
As Authenticating Agent
By:_______________________________
Authorized Officer
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ARTICLE VII. HOLDER'S LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.1. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee:
(a) semi-annually, not more than 15 days after each Regular Record Date, a
list, in such form as the Trustee may reasonably require, of the names and
addresses of the Holders as of such Regular Record Date,
(b) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished;
excluding from any such list names and addresses received by the Trustee in its
capacity as Securities Registrar.
SECTION 7.2. Preservation of Information, Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.1 and the names and
addresses of Holders received by the Trustee in its capacity as Securities
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.1 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Securities, and the corresponding
rights, privileges and duties of the Trustee, shall be as provided by the Trust
Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same, agrees
with the Company, the Subsidiary Guarantors and the Trustee that none of the
Company, the Subsidiary Guarantors, the Trustee and any agent of any of them
shall be held accountable by reason of any disclosure of information as to the
names and addresses of the Holders made pursuant to the Trust Indenture Act.
SECTION 7.3. Reports by Trustee.
(a) The Trustee shall transmit to Holders such reports concerning the
Trustee and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act, at the times and in the manner provided pursuant thereto.
(b) Reports so required to be transmitted at stated intervals of not more
than 12 months shall be transmitted no later than May 15 in each calendar year,
commencing with the first May 15 after the first issuance of Securities under
this Indenture.
(c) A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with the Commission, and delivered to the
Company and to the Subsidiary Guarantors.
SECTION 7.4. Reports by Company.
The Company and each of the Subsidiary Guarantors shall file with the
Trustee and with the Commission, and transmit to Holders, such information,
documents and other reports, and such
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summaries thereof, as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided in the Trust Indenture Act; provided, whether
or not required by the rules and regulations of the Commission, so long as any
Securities are Outstanding, the Company shall provide the Trustee and the
Holders with (i) all annual financial information that would be required to be
contained in a filing with the Commission on Form 20-F as if the Company were
required to file such Forms, and (ii) quarterly financial statements as of end
for the period from the beginning of each year to the close of each quarterly
period (other than the fourth quarter), together with comparable information for
the corresponding periods of the preceding year, including, in each case, a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
from the Company's certified independent public accountants. (In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availability and make such information and reports available to
securities analysts and prospective investors upon request.) The Company also
shall comply with the other provisions of Trust Indenture Act Section 314(a).
ARTICLE VIII. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 8.1. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate or merge with or into any other Person
(whether or not the Company is the Surviving Person) or convey, transfer,
assign, sell, lease or otherwise dispose of, in one or more related
transactions, all or substantially all of its properties and assets as an
entirety to any Person, unless:
(1) the Surviving Person shall be a corporation, organized and existing
under the laws of Germany, the United Kingdom or the United States of America or
any State thereof or the District of Columbia;
(2) the Surviving Person (if other than the Company) shall expressly assume,
by an indenture supplemental hereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under the
Securities, the Indenture and the Security Documents;
(3) at the time of, and immediately after giving effect to, such
transaction, no Default or Event of Default, shall have occurred and be
continuing;
(4) the Surviving Person will have Consolidated Net Worth (immediately after
the transaction) equal to or greater than the Consolidated Net Worth of the
Company immediately preceding the transaction;
(5) at the time of such transaction and after giving pro forma effect
thereto, the Surviving Person would be permitted to incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) of Section 10.8;
(6) such consolidation, merger, conveyance, transfer or lease is permitted
under the Declaration and the Company Guarantee and does not give rise to any
breach or violation of the Declaration or the Company Guarantee; and
(7) the Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel each stating that such consolidation, merger, conveyance,
transfer, assignment, sale, lease or
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disposition, and any such supplemental indenture complies with this Article and
that all conditions precedent herein provided for relating to such transaction
have been complied with and that the security interests on the Collateral
pursuant to the Security Documents are and will remain perfected; and the
Trustee, subject to Section 6.1, may rely upon such Officers' Certificate and
Opinion of Counsel as conclusive evidence that such transaction complies with
this Section 8.1.
SECTION 8.2. Subsidiary Guarantors May Consolidate, Etc., Only on Certain
Terms.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer, sell, assign, lease, or otherwise
dispose of, in one transaction or a series of transactions, all or substantially
all of its properties and assets to any Person unless:
(1) the Surviving Person (if not such Subsidiary) shall be a Person
organized and existing under the laws of the jurisdiction under which such
Subsidiary was organized or under the laws of Germany, the United Kingdom or the
United States of America, or any State thereof or the District of Columbia or,
if the Surviving Person is a corporation organized and existing under the laws
of any other jurisdiction, the Company delivers to the Trustee an Opinion of
Counsel reasonably acceptable to the Trustee to the effect that the rights of
the Holders of the Securities would not be affected adversely as a result of the
law of the jurisdiction of organization of the Surviving Person, insofar as such
law affects the ability of the Surviving Person to pay and perform its
obligations and undertakings in connection with the Subsidiary Guaranty or the
ability of the Surviving Person to obligate itself to pay and perform such
obligations and undertakings or the ability of the Holders to enforce such
obligations and undertakings; and such Person shall expressly assume, by a
Guaranty Agreement, in a form satisfactory to the Trustee, all the obligations
of such Subsidiary, if any, under its Subsidiary Guaranty;
(2) at the time of, and immediately after giving effect to, such transaction
or transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person as a
result of such transaction as having been issued by such Person at the time of
such transaction), no Default shall have occurred and be continuing; and
(3) the Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer, assignment, sale, lease, or disposition and such Guaranty Agreement,
if any, complies with the Indenture.
SECTION 8.3. Successor Corporation Substituted.
Upon any consolidation or merger by the Company with or into any other
Person, or any conveyance, transfer, sale, assignment, lease or other
disposition by the Company, in one or more transactions, of substantially all of
its properties and assets as an entirety to any Person in accordance with
Section 8.1, the Surviving Person shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under this Indenture with the
same effect as if such Surviving Person had been named as the Company herein,
and thereafter the Company shall be discharged from all obligations and
covenants under the Indenture and the Securities.
Such Surviving Person may cause to be signed, and may issue either in its
own name or in the name of the Company, any or all of the Securities issuable
hereunder which theretofore shall not have been signed by the Company and
delivered to the Trustee; and, upon the order of such Surviving Person instead
of the Company and subject to all the terms, conditions and limitations in this
Indenture prescribed, the Trustee shall authenticate and shall deliver any
Securities which previously shall have been signed and delivered by the officers
of the Company to the Trustee for authentication pursuant to such provisions and
any Securities which such Surviving Person thereafter shall cause to be signed
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and delivered to the Trustee on its behalf for the purpose pursuant to such
provisions. All the Securities so issued shall in all respects have the same
legal rank and benefit under this Indenture as the Securities theretofore or
thereafter issued in accordance with the terms of this Indenture as though all
of such Securities had been issued at the date of the execution hereof.
In case of any such consolidation, merger, sale, assignment, transfer,
conveyance, lease, or other disposition such changes in phraseology and form may
be made in the Securities thereafter to be issued as may be appropriate.
Upon any consolidation, or merger of a Subsidiary Guarantor with or into any
other Person or any transfer, conveyance, sale, lease, assignment or other
disposition of all or substantially all of the properties and assets of such
Subsidiary Guarantor as an entirety in accordance with Section 8.2, the
Surviving Person shall succeed to, and be substituted for, and may exercise
every right and power of, such Subsidiary Guarantor under this Indenture with
the same effect as if such Surviving Person had been named as a Subsidiary
Guarantor herein, and thereafter the Subsidiary Guarantor shall be relieved of
all obligations and covenants under this Indenture and the Securities.
ARTICLE IX. SUPPLEMENTAL INDENTURES
SECTION 9.1. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution of the Company, the Subsidiary Guarantors, when authorized by
respective Board Resolutions of the Subsidiary Guarantors, and the Trustee, at
any time and from time to time, may enter into one or more indentures
supplemental hereto, in form satisfactory to the Trustee, for any of the
following purposes:
(1) to evidence the succession of another Person to the Company or any
Subsidiary Guarantor, and the assumption by any such successor of the covenants
of the Company or such Subsidiary Guarantor herein and in the Securities; or
(2) to convey, transfer, assign, mortgage or pledge any property to or with
the Trustee or to surrender any right or power herein conferred upon the
Company; or
(3) to establish the form or terms of Securities and Subsidiary Guaranties
as permitted by Section 2.1; or
(4) to add to the covenants of the Company for the benefit of the Holders or
to surrender any right or power herein conferred upon the Company; or
(5) to add any additional Events of Default; or
(6) to change or eliminate any of the provisions of this Indenture,
provided, that any such change or elimination shall become effective only when
there is no Security Outstanding created prior to the execution of such
supplemental indenture which is entitled to the benefit of such provision; or
(7) to cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein, or to make any other
provisions with respect to matters or questions arising under this Indenture,
provided, that such action pursuant to this clause (7) shall not materially
adversely affect the interest of the Holders or, for so long as any of the
Preferred Securities shall remain outstanding, the holders of such Preferred
Securities; or
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(8) to evidence and provide for the acceptance of appointment hereunder by a
successor Trustee with respect to the Securities and to add to or change any of
the provisions of this Indenture as shall be necessary to provide for or
facilitate the administration of the trusts hereunder by more than one Trustee,
pursuant to the requirements of Section 6.11(b); or
(9) to comply with the requirements of the Commission in order to effect or
maintain the qualification of this Indenture under the Trust Indenture Act; or
(10) to add new Subsidiary Guarantors pursuant to Section 13.5.
SECTION 9.2. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in principal
amount of the Outstanding Securities affected by such supplemental indenture, by
Act of said Holders delivered to the Company, the Subsidiary Guarantors and the
Trustee, the Company, when authorized by a Board Resolution of the Company, the
Subsidiary Guarantors, when authorized by respective Board Resolutions of the
Subsidiary Guarantors, and the Trustee may modify the Indenture or enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of modifying in any manner the rights of the Holders under
this Indenture; provided, however, that no such supplemental indenture shall,
without the consent of the Holder of each Outstanding Security affected thereby,
(1) extend the Stated Maturity of the principal of any Security, or reduce
the principal amount thereof, or reduce the rate or extend the time of payment
of interest thereon, or reduce any premium payable upon the redemption thereof,
or change the place of payment where, or the currency of payment of any
principal of, or any premium or interest on any Security, or impair the right to
institute suit for the enforcement of any such payment on or with respect to a
Security (or, in the case of redemption, on or after the date fixed for
redemption thereof); or
(2) reduce the percentage in principal amount of Securities, the consent of
whose Holders is required for any such modification or supplemental indenture,
or the consent of whose Holders is required for any waiver (of compliance with
certain provisions of this Indenture or certain defaults hereunder and their
consequences) provided for in this Indenture; or
(3) modify any of the provisions of this Section, Section 5.13 or Section
10.18, except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent of
the Holder of each Outstanding Security affected thereby; or
(4) modify the provisions in this Indenture relating to the subordination of
Outstanding Securities in a manner adverse to the Holders; or
(5) modify or amend this Indenture or the Security Documents, or take or
fail to take any action, that would have the effect of impairing the Lien on the
Collateral granted pursuant to the Security Documents or permitting any release
of Collateral from such Lien except as expressly contemplated by this Indenture
or the Security Documents.
provided, that, so long as any of the Preferred Securities remains outstanding,
no such amendment shall be made that adversely affects the holders of such
Preferred Securities, and no termination of this Indenture shall occur, and no
waiver of any Event of Default or compliance with any covenant under this
Indenture shall be effective, without the prior consent of the holders of at
least a majority of the
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aggregate liquidation preference of such Preferred Securities then outstanding
unless and until the principal (and premium, if any) of the Securities and all
accrued and, subject to Section 3.7, unpaid interest (including Additional Sums
and Additional Amounts, if any) thereon have been paid in full; and provided
further, that, so long as any of the Preferred Securities remain outstanding, no
amendment shall be made to Section 5.8 of this Indenture without the prior
consent of the holders of each Preferred Security then outstanding unless and
until the principal (and premium, if any) of the Securities and all accrued and
(subject to Section 3.7) unpaid interest (including Additional Sums and
Additional Amounts, if any) thereon have been paid in full.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 9.3. Execution of Supplemental Indentures.
In executing or accepting the additional trusts created by any supplemental
indenture permitted by this Article or the modifications thereby of the trusts
created by this Indenture, the Trustee shall be entitled to receive, and
(subject to Section 6.1) shall be fully protected in relying upon, an Officers'
Certificate and an Opinion of Counsel stating that the execution of such
supplemental indenture is authorized or permitted by this Indenture, and that
all conditions precedent have been complied with. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.4. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby. No such supplemental indenture shall directly or
indirectly modify the provisions of Article XII, Article XIV, Article XV,
Sections 4.3(b), 5.3, 5.6 or the Security Documents in any manner which might
terminate or impair the rights of the Senior Indebtedness pursuant to such
subordination provisions.
SECTION 9.5. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall conform
to the requirements of the Trust Indenture Act as then in effect.
SECTION 9.6. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Company, bear a notation in form approved by the Company as to any matter
provided for in such supplemental indenture. If the Company and the Subsidiary
Guarantors shall so determine, new Securities so modified as to conform, in the
opinion of the Company and the Subsidiary Guarantors, to any such supplemental
indenture may be prepared and executed by the Company and the Subsidiary
Guaranties endorsed thereon may be executed by the Subsidiary Guarantors and
authenticated and delivered by the Trustee in exchange for Outstanding
Securities.
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ARTICLE X. COVENANTS
SECTION 10.1. Payment of Principal, Premium and Interest.
The Company covenants and agrees for the benefit of each of the Securities
that it will duly and punctually pay the principal of (and premium, if any) and
interest on the Securities in accordance with the terms of such Securities and
this Indenture.
SECTION 10.2. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan, The City of New York
an office or agency where Securities may be presented or surrendered for payment
and an office or agency where Securities may be surrendered for registration of
transfer or for exchange and where notices and demands to or upon the Company or
any Subsidiary Guarantor in respect of the Securities, any Subsidiary Guaranty
endorsed thereon and this Indenture may be served. The Company and the
Subsidiary Guarantors initially appoint the Trustee, acting through its office
or agency in the Borough of Manhattan, The City of New York, as its agent for
said purposes. The Company and the Subsidiary Guarantors will give prompt
written notice to the Trustee of any change in the location of any such office
or agency. If at any time the Company or any Subsidiary Guarantor shall fail to
maintain such office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the Corporate Trust Office of the Trustee, and the Company and each
Subsidiary Guarantor hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices
or agencies in or outside the Borough of Manhattan, The City of New York where
the Securities may be presented or surrendered for any or all of such purposes,
and may from time to time rescind such designations; provided, however, that no
such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in the Borough of Manhattan, The City
of New York for such purposes. The Company will give prompt written notice to
the Trustee of any such designation or rescission and of any change in the
location of any such other office or agency.
SECTION 10.3. Money for Security Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will, on or
before each due date of the principal of or interest on any of the Securities,
segregate and hold in trust for the benefit of the Persons entitled thereto a
sum sufficient to pay the principal (and premium, if any) or interest so
becoming due until such sums shall be paid to such Persons or otherwise disposed
of as herein provided, and will promptly notify the Trustee of its action or
failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, prior to
10:00 a.m. New York City time on each due date of the principal of (and premium,
if any) or interest on any Securities, deposit with a Paying Agent a sum
sufficient to pay the principal, premium, or interest so becoming due, such sum
to be held in trust for the benefit of the Persons entitled to such principal,
premium or interest, and (unless such Paying Agent is the Trustee) the Company
will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that such Paying
Agent will:
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(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Securities in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Securities) in the making of any payment of principal (and
premium, if any) or interest;
(3) at any time during the continuance of any such default, upon the written
request of the Trustee, forthwith pay to the Trustee all sums so held in trust
by such Paying Agent; and
(4) comply with the provisions of the Trust Indenture Act applicable to it
as a Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by the Company or any Paying Agent to the
Trustee, the Company or such Paying Agent shall be released from all further
liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of (and premium, if any)
or interest on any Security and remaining unclaimed for two years after such
principal (and premium, if any) or interest has become due and payable shall
(unless otherwise required by mandatory provision of applicable escheat or
abandoned or unclaimed property law) be paid on Company Request to the Company,
or (if then held by the Company) shall (unless otherwise required by mandatory
provision of applicable escheat or abandoned or unclaimed property law) be
discharged from such trust; and the Holder of such Security shall thereafter, as
an unsecured general creditor, look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may at the expense of the Company cause to
be published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation in The Borough of
Manhattan, The City of New York, notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
SECTION 10.4.Existence.
Subject to Article VIII and the other Sections of this Article X, the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect the existence, rights (charter and statutory) and
franchises of the Company and each Subsidiary Guarantor; provided, however, that
the Company shall not be required to preserve any such right or franchise if the
Board of Directors of the Company in good faith shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and that the loss thereof is not disadvantageous in any material
respect to the Holders.
SECTION 10.5. Maintenance of Properties.
Subject to Article VIII and the other Sections of this Article X, the
Company will cause all properties used or useful in the conduct of its business
or the business of any Subsidiary of the Company to be maintained and kept in
good condition, repair and working order and supplied with all necessary
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equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section shall prevent the Company from
discontinuing the operation or maintenance of any of such properties if such
discontinuance is, as determined by the Company in good faith, desirable in the
conduct of its business or the business of any Subsidiary and not
disadvantageous in any material respect to the Holders.
SECTION 10.6. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (a) all material taxes, assessments and
governmental charges levied or imposed upon the Company or any of its
Subsidiaries or upon the income, profits or property of the Company or any of
its Subsidiaries, and (b) all material lawful claims for labor, materials and
supplies which, if unpaid, might by law become a Lien upon the property of the
Company or any of its Subsidiaries; provided, however, that the Company shall
not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings.
SECTION 10.7. Maintenance of Insurance.
The Company shall, and shall cause its Subsidiaries to, keep at all times
all of their properties which are of an insurable nature insured against loss or
damage with insurers believed by the Company to be responsible to the extent
that property of similar character is usually so insured by corporations
similarly situated and owning like properties in accordance with good business
practice. The Company shall, and shall cause its Subsidiaries to, use the
proceeds from any such insurance policy to repair, replace or otherwise restore
the property to which such proceeds relate, except to the extent that a
different use of such proceeds is, as determined by the Company, in good faith,
desirable in the conduct of its business or the business of any Subsidiary and
not disadvantageous in any material respect to the Holders.
SECTION 10.8. Limitation on Incurrence of Indebtedness.
(a) The Company shall not, and shall not permit any Subsidiary to, Incur,
directly or indirectly, any Indebtedness unless, on the date of such Incurrence
(and after giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5
to 1.
(b) The foregoing limitations contained in paragraph (a) do not apply to the
Incurrence of any of the following Indebtedness:
(1) Indebtedness under the Bank Credit Agreement;
(2) Indebtedness owed to and held by a Wholly Owned Subsidiary; provided,
however, that any subsequent issuance or transfer of any Capital Stock that
results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of such Indebtedness (other than to
another Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness by the Company;
(3) the Securities;
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(4) Capital Lease Obligations and Indebtedness incurred, in each case, to
provide all or a portion of the purchase price or cost of construction of an
asset or, in the case of a sale/leaseback transaction, to finance the value of
such asset owned by the Company or a Subsidiary, in an aggregate principal
amount which, together with all other such Capital Lease Obligations and
Indebtedness outstanding on the date of such Incurrence (other than Indebtedness
permitted by paragraph (a) or clause (2) or (9) of this paragraph (b)), does not
exceed $87,500,000;
(5) Indebtedness in respect of Receivables Financings in an aggregate
principal amount which, together with all other Indebtedness in respect of
Receivables Financings outstanding on the date of such Incurrence (other than
Indebtedness permitted by paragraph (a) or clause (2) or (9) of this paragraph
(b)), does not exceed $250,000,000;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to
paragraph (a) or pursuant to clause (3), (4) or (5) of this paragraph (b);
(7) Hedging Obligations permitted under the Bank Credit Agreement as in
effect on the Issue Date;
(8) customer deposits and advance payments received from customers for goods
purchased in the ordinary course of business; and
(9) Indebtedness in an aggregate principal amount which, together with all
other Indebtedness of the Company and its Subsidiaries outstanding on the date
of such Incurrence (other than Indebtedness permitted by paragraph (a) or
clauses (1) through (8) of this paragraph (b)), does not exceed $300,000,000.
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Subsidiary to, Incur, directly or indirectly, any Indebtedness (i)
that is subordinate or junior in ranking in right of payment to its Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness,
or (ii) pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinate Obligations unless such
Indebtedness shall be subordinated to the Securities to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
SECTION 10.9. Limitation on Restricted Payments.
(a) The Company shall not, and shall not permit any Subsidiary to, directly
or indirectly, make any Restricted Payment if at the time the Company or such
Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of Section 10.8; or
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(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments since the Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from October 1, 1996 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds
received by the Company from the issuance or sale of its Capital Stock (other
than Disqualified Stock) subsequent to the Issue Date (other than an issuance or
sale to a Subsidiary and other than an issuance or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); and (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary), subsequent to the Issue
Date, of any Indebtedness of the Company convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount of any
cash, or the fair value of any other property, distributed by the Company upon
such conversion or exchange).
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any purchase or redemption of Capital Stock or Subordinated Obligations
of the Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); provided, however, that (A)
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be
excluded from the calculation of amounts under clause (3)(B) of paragraph (a)
above;
(2) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Obligations made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Indebtedness of the
Company which is permitted to be Incurred pursuant to Section 10.8; provided,
however, that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the calculation of the
amount of Restricted Payments; or
(3) dividends paid within 60 days after the date of declaration thereof if
at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend, no
other Default shall have occurred and be continuing (or result therefrom);
provided further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments.
SECTION 10.10. Limitation on Restrictions on Distributions from
Subsidiaries.
The Company shall not, and shall not permit any Subsidiary to, create or
otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Subsidiary (a) to pay dividends
or make any other distributions on its Capital Stock to the Company or any other
Subsidiary or pay any Indebtedness owed to the Company or any other Subsidiary,
(b) to make any loans or advances to the Company or any other Subsidiary or (c)
transfer any of its property or assets to the Company or any other Subsidiary,
except:
(i) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such Subsidiary on or
prior to the date on which such
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Subsidiary was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate the transaction or series of related transactions
pursuant to which such Subsidiary became a Subsidiary or was acquired by the
Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (i) or (ii) above or this clause (iii) or contained in any amendment to
an agreement referred to in clause (i) or (ii) above or this clause (iii);
provided, however, that the encumbrances and restrictions with respect to such
Subsidiary contained in any such refinancing agreement or amendment are no less
favorable to the Holders than encumbrances and restrictions with respect to such
Subsidiary contained in such agreements;
(iv) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests or in
licensing agreements to the extent such provisions restrict the transfer of the
lease or the property leased thereunder or the licensing agreement or the rights
licensed thereunder;
(v) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such security
agreements or mortgages; and
(vi) any restriction with respect to a Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Subsidiary pending the closing of such sale
or disposition.
SECTION 10.11. Senior Subordinated Indebtedness; Liens.
The Company shall not, and shall not permit any Subsidiary to, Incur:
(1) any Indebtedness if such Indebtedness is subordinate or junior in ranking in
any respect to any Senior Indebtedness, unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness; or (2) any Secured Indebtedness that is not
Senior Indebtedness unless (A) contemporaneously therewith effective provision
is made to secure the Securities equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien, (B)
such Secured Indebtedness is permitted by clause (1), (4), (5) or (7) of
paragraph (b) of Section 10.8, (C) such Secured Indebtedness is Incurred by a
Subsidiary pursuant to a revolving credit agreement as in effect on the Issue
Date, or (D) such Secured Indebtedness is Refinancing Indebtedness in respect of
Secured Indebtedness Incurred by a Subsidiary pursuant to a revolving credit
agreement as in effect on the Issue Date.
SECTION 10.12. Limitation on Affiliate Transactions.
(a) The Company shall not, and shall not permit any Subsidiary to, enter
into any transaction (including the purchase, sale, lease or exchange of any
property, employee compensation arrangements or the rendering of any service)
with any Affiliate of the Company (an "Affiliate Transaction") unless the terms
thereof:
(1) are no less favorable to the Company or such Subsidiary than those that
could be obtained at the time of such transaction in arm's-length dealings with
a Person who is not such an Affiliate;
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(2) if such Affiliate Transaction involves an amount in excess of
$5,000,000, (i) are set forth in writing and (ii) have been approved by a
majority of the members of the Board of Directors of the Company or such
Subsidiary having no personal stake in such Affiliate Transaction; and
(3) if such Affiliate Transaction involves an amount in excess of
$15,000,000, have been determined by a nationally recognized investment banking
firm or, in appropriate circumstances, an internationally recognized engineering
firm, to be fair from a financial standpoint to the Company and its
Subsidiaries.
(b) The provisions of paragraph (a) above shall not prohibit:
(1) any Restricted Payment permitted to be paid pursuant to Section 10.9;
(2) transactions or payments pursuant to any employee arrangements or
employee or director benefit plans entered into by the Company or any of its
Subsidiaries in the ordinary course of business of the Company or such
Subsidiary; and
(3) any Affiliate Transaction between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries.
SECTION 10.13. Limitation on Sales of Assets and Subsidiary Stock.
(a) The Company shall not, and shall not permit any Subsidiary to, directly
or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Subsidiary receives consideration at the time of
such Asset Disposition at least equal to the fair market value (including as to
the value of all non-cash consideration), as determined in good faith by the
Board of Directors of the Company or such Subsidiary as the case may be, of the
shares and assets subject to such Asset Disposition and at least 70% of the
consideration thereof received by the Company or such Subsidiary is in the form
of cash or cash equivalents; and
(2) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Subsidiary, as the case may be)
(A) first, to the extent the Company elects (or is required by the terms of any
Senior Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness
or Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary
(in each case other than Indebtedness owed to the Company or an Affiliate of the
Company) within one year from the later of the date of such Asset Disposition or
the receipt of such Net Available Cash; (B) second, to the extent of the balance
of such Net Available Cash after application in accordance with clause (A), to
the extent the Company elects, to acquire Additional Assets within one year from
the later of the date of such Asset Disposition or the receipt of such Net
Available Cash; and (C) third, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (A) and (B), to make
an offer to the Holders of the Securities to purchase Securities pursuant to and
subject to the conditions contained in the Indenture; provided, however, that in
connection with any prepayment, repayment or purchase of Indebtedness pursuant
to clause (A) or (C) above, the Company or such Subsidiary shall retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this paragraph,
the Company and the Subsidiaries shall not be required to apply any Net
Available Cash in accordance with this paragraph except to the extent that the
aggregate Net Available Cash from all Asset Dispositions which are not applied
in accordance with this paragraph exceeds $20,000,000. Pending application of
Net Available Cash pursuant to this covenant, such Net Available Cash shall be
invested in Permitted Investments.
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For the purposes of this covenant, the following are deemed to be cash or cash
equivalents: (x) the assumption of Indebtedness of the Company or any Subsidiary
and the release of the Company or such Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Subsidiary from the transferee that are promptly
converted by the Company or such Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
Securities pursuant to clause (a)(ii)(C) above, the Company will be required to
purchase Securities tendered pursuant to an offer by the Company for the
Securities at a purchase price of 100% of their principal amount (without
premium) plus accrued but unpaid interest, in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. The Company shall not be required to make such an offer to purchase
Securities pursuant to this covenant if the Net Available Cash available
therefor is less than $20,000,000 (which lesser amount shall be carried forward
for purposes of determining whether such an offer is required with respect to
any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
SECTION 10.14. Impairment of Security Interest.
The Company shall not take or omit to take any action that would have
the result of adversely affecting or impairing the security interest in favor of
the Collateral Agent, on behalf of itself and the Holders of the Securities,
with respect to the Collateral, and shall not grant to any Person, or suffer any
Person (other than the Company) to have (other than the Collateral Agent on
behalf of itself and the Holders of the Securities) any interest whatsoever in
the Collateral except in connection with the Bank Credit Agreement and as
expressly permitted by the Security Documents. The Company shall not enter into
any agreement or instrument that by its terms requires the proceeds received
from any sale of Collateral to be applied to repay, redeem, defease or otherwise
acquire or retire any Indebtedness of any Person, other than (i) in connection
with the Bank Credit Agreement and (ii) pursuant to the Indenture, the
Securities and the Security Documents.
SECTION 10.15. Change of Control.
(a) Upon the occurrence of a Change of Control Triggering Event, each Holder
shall have the right to require that the Company repurchase such Holder's
Securities at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant Regular Record Date
to receive interest due on the relevant Interest Payment Date).
(b) Within 30 days following a Change of Control Triggering Event, the
Company shall mail a notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control Triggering Event has occurred and that such Holder
has the right to require the Company to purchase such Holder's Securities at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on the relevant Regular Record Date to receive
interest on the relevant Interest Payment Date); (2) the circumstances and
relevant facts regarding such Change of Control Triggering Event (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change
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of Control); (3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with the covenant described
hereunder, that a Holder must follow in order to have its Securities purchased.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this covenant by virtue thereof.
SECTION 10.16. Statement as to Compliance and Default.
(a) The Company and the Subsidiary Guarantors shall deliver to the Trustee,
within 95 days after the end of each of their respective calendar years ending
after the date hereof, a certificate of the principal executive officer,
principal financial officer or principal accounting officer covering the
preceding calendar year, stating whether or not to the best knowledge of the
signers thereof the Company or the Subsidiary Guarantors, as the case may be, is
in default in the performance, observance or fulfillment of or compliance with
any of the terms, provisions, covenants and conditions of this Indenture and, if
the Company or the Subsidiary Guarantors, as the case may be, shall be in
default, specifying all such defaults and the nature and status thereof of which
they may have knowledge.
(b) The Company and each Subsidiary Guarantor shall deliver to the Trustee,
as soon as possible and in any event within 10 days after the Company or any
Subsidiary Guarantor becomes aware of the occurrence of an Event of Default or
an event which, with notice or the lapse of time or both, would constitute an
Event of Default, an Officers' Certificate setting forth the details of such
Event of Default or default, and the action which the Company or any Subsidiary
Guarantor proposes to take with respect thereto.
SECTION 10.17. Ownership of the Trust.
The Company shall continue (i) to directly or indirectly maintain 100%
ownership of the Common Securities of the Trust; provided, however, that any
permitted successor of the Company hereunder may succeed to the Company's
ownership of such Common Securities and (ii) to use its reasonable efforts to
cause the Trust (x) to remain a statutory business trust, except in connection
with the distribution of Securities to the holders of Trust Securities in
liquidation of the Trust, the redemption of all of the Trust Securities, or
certain mergers, consolidations or amalgamations, each as permitted by the
Declaration, and (y) to otherwise continue to be classified for United States
Federal income tax purposes as a grantor trust or another entity which is not
subject to United States Federal income tax at the entity level and the assets
and income of which are treated for United States Federal income tax purposes as
held and derived directly by holders of interests in the entity.
SECTION 10.18. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any covenant
or condition set forth in Section 8.1 and Sections 10.4 to 10.17, if before or
after the time for such compliance the Holders of at least a majority in
principal amount of the Outstanding Securities shall, by Act of such Holders,
either waive such compliance in such instance or generally waive compliance with
such covenant or condition, but no such waiver shall extend to or affect such
covenant or condition except
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to the extent so expressly waived, and, until such waiver shall become
effective, the obligations of the Company in respect of any such covenant or
condition shall remain in full force and effect.
SECTION 10.19. Additional Amounts; Additional Interest.
(a) All payments made on behalf of the Company under or with respect to the
Securities must be made free and clear of and without withholding or deduction
for or on account of any present or future tax, duty, levy, impost, assessment
or other governmental charge (including penalties, interest and other
liabilities related thereto) imposed or levied by or on behalf of the United
States, Germany or the United Kingdom or of any territory thereof or by an
authority or agency therein or thereof having power to tax (hereinafter
"Taxes"), unless the Company is required to withhold or deduct Taxes by law or
by the interpretation or administration thereof by the relevant government
authority or agency. If the Company is so required to withhold or deduct any
amount for or on account of Taxes from any payment made under or with respect to
the Securities, the Company will be required to pay such amounts ("Additional
Amounts") as may be necessary so that the net amount (including Additional
Amounts) received by each Holder after such withholding or deduction will not be
less than the amount such Holder would have received if such Taxes had not been
withheld or deducted; provided, however, that no Additional Amounts will be
payable with respect to payments made to any Holder in respect of a beneficial
owner which is subject to such Taxes by reason of its being connected with the
United States, Germany or the United Kingdom or any territory thereof otherwise
than by the mere holding of Securities or the receipt of payments thereunder.
The Company will also make such withholding or deduction and remit the full
amount deducted or withheld to the relevant authority as and when required in
accordance with applicable law. The Company will furnish to the Holders within
30 days after the date the payment of any Taxes is due pursuant to applicable
law, certified copies of tax receipts evidencing such payment by the Company.
(b) In the event that (i) the Trust is the Holder of all outstanding
Securities, (ii) the Trust would be required to pay any taxes, duties,
assessments or governmental charges of whatever nature (other than withholding
taxes) imposed by the United States of America, or any other taxing authority,
and (iii) the Company shall not have (1) redeemed the Securities pursuant to
Section 11.7(b) or (2) terminated the Trust pursuant to Section 9.2(f) of the
Declaration, then, in any such case, the Company shall pay to the Trust (and its
permitted successors or assigns under the Declaration) for so long as the Trust
(or its permitted successors or assigns) is the registered Holder of any
Securities, as additional interest ("Additional Interest") such amounts as shall
be necessary so that the net amounts received and retained by the Trust after
paying any such taxes, duties, assessments or governmental charges will be not
less than the amounts the Trust would have received had no such taxes, duties,
assessments or governmental charges been imposed. All references herein to
Additional Amounts shall be deemed to include Additional Interest.
(c) Whenever in this Indenture or the Securities there is a reference in
any context to the payment of principal of or interest on the Securities, such
mention shall be deemed to include mention of the payments of the Additional
Amounts provided for in this Section to the extent that, in such context,
Additional Amounts are, were or would be payable in respect thereof pursuant to
the provisions of this Section and express mention of the payment of Additional
Amounts (if applicable) in any provisions hereof shall not be construed as
excluding Additional Amounts in those provisions hereof where such express
mention is not made.
(d) The foregoing obligations shall survive any termination, defeasance or
discharge of the Indenture pursuant to Article IV.
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ARTICLE XI. REDEMPTION OF SECURITIES
SECTION 11.1. Applicability of This Article.
Redemption of Securities as permitted or required by any provision of this
Indenture shall be made in accordance with such provision and this Article. Each
Security shall be subject to partial redemption only in the amount of $1,000, or
integral multiples thereof.
SECTION 11.2. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by
or pursuant to a Board Resolution. In case of any redemption at the election of
the Company of less than all of the Securities, the Company shall, not less than
30 nor more than 60 days prior to the date fixed for redemption (unless a
shorter notice shall be satisfactory to the Trustee), notify the Trustee of such
date and of the principal amount of Securities to be redeemed. In the case of
any redemption of Securities prior to the expiration of any restriction on such
redemption provided in the terms of such Securities, the Company shall furnish
the Trustee with an Officers' Certificate and an Opinion of Counsel evidencing
compliance with such restriction.
SECTION 11.3. Selection of Securities to be Redeemed.
If less than all the Securities to be redeemed (unless such redemption
affects only a single Security), the particular Securities to be redeemed shall
be selected not more than 60 days prior to the Redemption Date by the Trustee,
from the Outstanding Securities not previously called for redemption, by such
method as the Trustee shall deem fair and appropriate and which may provide for
the selection for redemption of a portion of the principal amount of any
Security, provided, that the unredeemed portion of the principal amount of any
Security shall be in an authorized denomination (which shall not be less than
the minimum authorized denomination) for such Security.
The Trustee shall promptly notify the Company in writing of the Securities
selected for partial redemption and the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all
provisions relating to the redemption of Securities shall relate, in the case of
any Security redeemed or to be redeemed only in part, to the portion of the
principal amount of such Security which has been or is to be redeemed. If the
Company shall so direct, Securities registered in the name of the Company, any
Affiliate or any Subsidiary thereof shall not be included in the Securities
selected for redemption.
SECTION 11.4. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage prepaid,
mailed not later than the thirtieth day, and not earlier than the sixtieth day,
prior to the date fixed for redemption, to each Holder of Securities to be
redeemed, at the address of such Holder as it appears in the Securities
Register.
With respect to the Securities to be redeemed, each notice of redemption
shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all Outstanding Securities are to be redeemed, the
identification (and, in the case of partial redemption, the respective principal
amounts) of the particular Securities to be redeemed;
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(d) that on the Redemption Date, the Redemption Price at which such
Securities are to be redeemed will become due and payable upon each such
Security or portion thereof, and that interest thereon, if any, shall cease to
accrue on and after said date; and
(e) the place or places where such Securities are to be surrendered for
payment of the Redemption Price at which such Securities are to be redeemed.
Notice of redemption of Securities to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company and shall not be
irrevocable. The notice if mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the Holder
receives such notice. In any case, a failure to give such notice by mail or any
defect in the notice to the Holder of any Security designated for redemption as
a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Security.
SECTION 11.5. Deposit of Redemption Price.
Prior to 10:00 a.m. New York City time on the Redemption Date specified in
the notice of redemption given as provided in Section 11.4, the Company will
deposit with the Trustee or with one or more Paying Agents an amount of money
sufficient to redeem on the Redemption Date all the Securities so called for
redemption at the applicable Redemption Price.
SECTION 11.6. Payment of Securities Called for Redemption.
If any notice of redemption has been given as provided in Section 11.4, the
Securities or portion of Securities with respect to which such notice has been
given shall become due and payable on the date and at the place or places stated
in such notice at the applicable Redemption Price. On presentation and surrender
of such Securities at a place of payment in said notice specified, the said
Securities or the specified portions thereof shall be paid and redeemed by the
Company at the applicable Redemption Price.
Upon presentation of any Security redeemed in part only, the Company shall
execute and the Trustee shall authenticate and deliver to the Holder thereof, at
the expense of the Company, a new Security (and the Subsidiary Guarantors shall
execute their Subsidiary Guaranties to be endorsed thereon) of authorized
denominations, in aggregate principal amount equal to the unredeemed portion of
the Security so presented and having the same Issue Date, Stated Maturity and
terms. If a Global Security is so surrendered, such new Security will also be a
new Global Security.
If any Security called for redemption shall not be so paid upon surrender
thereof for redemption, the principal of and premium, if any, on such Security
shall, until paid, bear interest from the Redemption Date at the rate prescribed
therefor in the Security.
SECTION 11.7. Company's Right of Redemption.
(a) The Company may, at its option, redeem the Securities after their date
of issuance in whole at any time or in part from time to time after December 1,
2001, subject to the provisions of this clause (a) and the other provisions of
this Article XI. The Redemption Prices (expressed as a percentage of principal
amount) for any Security so redeemed pursuant to this clause (a) shall be as set
forth below plus any accrued and unpaid interest, including Additional Sums and
Additional Amounts, if any, to the Redemption Date (subject to the right of
Holders of record on the relevant Regular Record Date to
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receive interest due on an Interest Payment Date that is on or prior to the
Redemption Date) if redeemed during the twelve month period beginning on
December 1 of the years indicated below:
Percentage of
Principal
Year Amount
- - ---- --------------
2001......................................... 104.500%
2002......................................... 102.250%
2003......................................... 101.125%
2004 and thereafter.......................... 100.000%
(b) If a Tax Event or an Investment Company Event in respect of the Trust
shall occur and be continuing, the Company shall cause the Trustees (as defined
in the Indenture) to liquidate the Trust and cause Securities to be distributed
to the holders of the Trust Securities in liquidation of the Trust or, in the
event of a Tax Event only, may cause the Securities to be redeemed, in each
case, subject to and in accordance with the provisions of the Declaration,
within 90 days following the occurrence of such Tax Event or Investment Company
Event. The Securities may be redeemed, at the option of the Company, at any time
as a whole but not in part, subject to this clause (b) and the other provisions
of Article XI, at 100% of the principal amount thereof, plus accrued and unpaid
interest (if any) to the date of redemption (subject to the right of Holders of
record on the relevant Regular Record Date to receive interest due on the
relevant Interest Payment Date), in the event the Company has become or would
become obligated to pay, on the next date on which any amount would be payable
with respect to the Securities, any Additional Amounts as a result of a change
in or an amendment to the laws (including any regulations promulgated
thereunder) of the United States of America, Germany or the United Kingdom (or
any political subdivision or taxing authority thereof or therein), or any change
in or amendment to any official position regarding the application or
interpretation of such laws or regulations, which change or amendment is
announced or becomes effective on or after the date of the issuance of the
Securities.
ARTICLE XII. SUBORDINATION OF SECURITIES
SECTION 12.1. Securities Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Security, by its
acceptance thereof, likewise covenants and agrees, that, to the extent and in
the manner hereinafter set forth in this Article (subject to Article IV), the
payment of the principal of (and premium, if any) and interest (including
Additional Sums and Additional Amounts, if any) on each and all of the
Securities are hereby expressly made subordinate and subject in right of payment
to the prior payment in full of all amounts then due and payable in respect of
all Senior Indebtedness of the Company.
SECTION 12.2. Payment Over of Proceeds Upon Dissolution, Etc.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or its property (each such event, if
any, herein sometimes referred to as a "Proceeding"), the holders of Senior
Indebtedness of the Company shall be entitled to receive payment in full of
principal of (and premium, if any) and interest, if any, on such Senior
Indebtedness, or provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of Senior
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Indebtedness, before the Holders of the Securities are entitled to receive or
retain any payment or distribution of any kind or character, whether in cash,
property or securities (including any payment or distribution which may be
payable or deliverable by reason of the payment of any other Indebtedness of the
Company (including the Securities) subordinated to the payment of the
Securities, such payment or distribution being hereinafter referred to as a
"Senior Subordinated Payment"), on account of principal of (or premium, if any)
or interest (including Additional Sums and Additional Amounts, if any) on the
Securities or on account of the purchase or other acquisition of Securities by
the Company or any Subsidiary, and to that end the holders of Senior
Indebtedness shall be entitled to receive, for application to the payment
thereof, any payment or distribution of any kind or character, whether in cash,
property or securities, including any Senior Subordinated Payment, which may be
payable or deliverable in respect of the Securities in any such Proceeding.
In the event that, notwithstanding the foregoing provisions of this Section,
the Trustee or the Holder of any Security shall have received any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, including any Senior Subordinated Payment, before all
Senior Indebtedness is paid in full or payment thereof is provided for in cash
or cash equivalents or otherwise in a manner satisfactory to the holders of
Senior Indebtedness, and if such fact shall, at or prior to the time of such
payment or distribution, have been made known to the Trustee or, as the case may
be, such Holder, then and in such event such payment or distribution shall be
paid over or delivered forthwith to the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee, agent or other Person making payment
or distribution of assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
For purposes of this Article only, the words "any payment or distribution of
any kind or character, whether in cash, property or securities" shall not be
deemed to include shares of stock of the Company as reorganized or readjusted,
or securities of the Company or any other corporation provided for by a plan of
reorganization or readjustment which securities are subordinated in right of
payment to all then outstanding Senior Indebtedness to substantially the same
extent as the Securities are so subordinated as provided in this Article. The
consolidation of the Company with, or the merger of the Company into, another
Person or the liquidation or dissolution of the Company following the sale of
all or substantially all of its properties and assets as an entirety to another
Person or the liquidation or dissolution of the Company following the sale of
all or substantially all of its properties and assets as an entirety to another
Person upon the terms and conditions set forth in Article VIII shall not be
deemed a Proceeding for the purposes of this Section if the Person formed by
such consolidation or into which the Company is merged or the Person which
acquires by sale such properties and assets as an entirety, as the case may be,
shall, as a part of such consolidation, merger, or sale comply with the
conditions set forth in Article VIII.
SECTION 12.3. Prior Payment to Senior Indebtedness Upon Acceleration of
Securities.
In the event that, upon the occurrence of an Event of Default, any
Securities are declared due and payable before their Stated Maturity, then (a)
the Company or the Trustee, at the direction of the Company, shall promptly
notify the holders of Senior Indebtedness of the Company or the representative
of such holders of the acceleration, and (b) in such event, if any Senior
Indebtedness is outstanding, the Company may not pay the Securities until five
Business Days after the representative of all issues of Senior Indebtedness
receive notice of such acceleration and, thereafter, may pay the Securities only
if payment is otherwise permitted hereunder at that time.
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In the event that, notwithstanding the foregoing, the Company shall make any
payment to the Trustee or the Holder of any Security prohibited by the foregoing
provisions of this Section, and if such fact shall, at or prior to the time of
such payment, have been made known to the Trustee or, as the case may be, such
Holder, then and in such event such payment shall be paid over and delivered
forthwith to the Company.
The provisions of this Section shall not apply to any payment with respect
to which Section 12.2 would be applicable.
SECTION 12.4. No Payment When Senior Indebtedness in Default.
(a) The Company may not pay principal of, or premium (if any) or interest
(and Additional Sum and Additional Amounts, if any) on, the Securities, and may
not repurchase, redeem or otherwise retire any Securities (collectively "pay the
Notes") if (i) any Specified Senior Indebtedness of the Company (or any other
Senior Indebtedness of the Company having an outstanding principal amount at the
time of determination in excess of $25,000,000) is not paid when due or (ii) any
other default on Specified Senior Indebtedness of the Company occurs and the
maturity of such Specified Senior Indebtedness is accelerated in accordance with
its terms, unless, in either case, the default has been cured or waived and any
such acceleration has been rescinded or such Specified Senior Indebtedness has
been paid in full. However, the Company may pay the Securities without regard to
the foregoing if the Company and the Trustee receive written notice approving
such payment from a representative of the Specified Senior Indebtedness with
respect to which either of the events set forth in clause (i) or (ii) of the
immediately preceding sentence has occurred and is continuing.
(b) During the continuance of any default (other than a default described in
clause (i) or (ii) of the preceding paragraph (a)) with respect to any Specified
Senior Indebtedness of the Company pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not pay the Securities to the Holders for a period (a
"Payment Blockage Period") commencing upon the receipt by the Trustee (with a
copy to the Company) of written notice (a "Blockage Notice") of such default
from the representative of the holders of such Specified Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the representative of the
holders of such Specified Senior Indebtedness, (ii) because the default giving
rise to such Blockage Notice is no longer continuing, as certified to the
Trustee by the representative of the holders of such Specified Senior
Indebtedness, or (iii) because such Specified Senior Indebtedness has been
repaid in full, as certified to the Trustee by the representative of the holders
of such Specified Senior Indebtedness).
(c) Notwithstanding the preceding paragraph (b), unless the holders of such
Specified Senior Indebtedness or the representative of such holders have
accelerated the maturity of such Specified Senior Indebtedness, the Company may
resume payments on the Securities after the end of such Payment Blockage Period.
The Securities shall not be subject to more than one Payment Blockage Period in
any consecutive 360-day period, irrespective of the number of defaults with
respect to Specified Senior Indebtedness during such period.
(d) In the event that, notwithstanding the foregoing, the Company shall make
any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior to the
time of such payment, have been made known to the Trustee or, as the case may
be, such Holder, then and in such event such payment shall be paid over and
delivered forthwith to the Company.
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The provisions of this Section shall not apply to any payment with respect
to which Section 12.2 would be applicable.
SECTION 12.5. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in any
of the Securities shall prevent (a) the Company, at any time except during the
pendency of any Proceeding referred to in Section 12.2 or under the conditions
described in Sections 12.3 and 12.4, from making payments at any time of
principal of (and premium, if any) or interest on the Securities, or (b) the
application by the Trustee of any money or Government Obligations deposited with
it hereunder in accordance with the provisions of Section 4.3 to the payment of
or on account of the principal of (and premium, if any) or interest (including
Additional Sums and Additional Amounts, if any) on the Securities or the
retention of such payment by the Holders, if, at the time of such payment or
application, as the case may be, by the Company or the Trustee, as the case may
be, the Company or the Trustee, as the case may be, did not have knowledge that
such payment would have been prohibited by the provisions of this Article.
SECTION 12.6. Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness of the Company, or
the provision for such payment in cash or cash equivalents or otherwise in a
manner satisfactory to the holders of Senior Indebtedness of the Company, the
Holders of the Securities shall be subrogated to the extent of the payments or
distributions made to the holders of such Senior Indebtedness pursuant to the
provisions of this Article (equally and ratably with the holders of all
indebtedness of the Company which by its express terms is subordinated to Senior
Indebtedness of the Company to substantially the same extent as the Securities
are subordinated to the Senior Indebtedness and is entitled to like rights of
subrogation by reason of any payments or distributions made to holders of such
Senior Indebtedness) to the rights of the holders of such Senior Indebtedness to
receive payments and distributions of cash, property and securities applicable
to the Senior Indebtedness of the Company until the principal of (and premium,
if any) and interest on the Securities shall be paid in full. For purposes of
such subrogation or assignment, no payments or distributions to the holders of
the Senior Indebtedness of the Company of any cash, property or securities to
which the Holders of the Securities or the Trustee would be entitled except for
the provisions of this Article, and no payments over pursuant to the provisions
of this Article to the holders of Senior Indebtedness by Holders of the
Securities or the Trustee, shall, as among the Company, its creditors other than
holders of Senior Indebtedness, and the Holders of the Securities, be deemed to
be a payment or distribution by the Company to or on account of the Senior
Indebtedness.
SECTION 12.7. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the purpose
of defining the relative rights of the Holders of the Securities on the one hand
and the holders of Senior Indebtedness on the other hand. Nothing contained in
this Article or elsewhere in this Indenture or in the Securities is intended to
or shall (a) impair, as between the Company and the Holders of the Securities,
the obligations of the Company, which are absolute and unconditional, to pay to
the Holders of the Securities the principal of (and premium, if any) and
interest (including Additional Sums and Additional Amounts, if any) on the
Securities as and when the same shall become due and payable in accordance with
their terms; or (b) affect the relative rights against the Company of the
Holders of the Securities and creditors of the Company other than their rights
in relation to the holders of Senior Indebtedness of the Company; or (c) prevent
the Trustee or the Holder of any Security from exercising all remedies otherwise
permitted by applicable law upon default under this Indenture including, without
limitation, filing and voting claims in any Proceeding, subject to the rights,
if any, under this Article of the holders
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of Senior Indebtedness to receive cash, property and securities otherwise
payable or deliverable to the Trustee or such Holder and subject to the terms of
the Intercreditor Agreement.
SECTION 12.8. Trustee to Effectuate Subordination.
Each Holder of a Security by his or her acceptance thereof authorizes and
directs the Trustee on his or her behalf to take such action as may be necessary
or appropriate to acknowledge or effectuate the subordination provided in this
Article and appoints the Trustee his or her attorney-in-fact for any and all
such purposes.
SECTION 12.9. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof that any such holder may have or
be otherwise charged with.
SECTION 12.10. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until a Responsible Officer of the Trustee shall have received written
notice thereof from the Company or a holder of Senior Indebtedness or from any
trustee, agent or representative therefor (whether or not the facts contained in
such notice are true); provided, however, that if the Trustee shall not have
received the notice provided for in this Section at least two Business Days
prior to the date upon which by the terms hereof any monies may become payable
for any purpose (including, without limitation, the payment of the principal of
(and premium, if any) or interest (including Additional Sums and Additional
Amounts, if any) on any Security), then, anything herein contained to the
contrary notwithstanding, the Trustee shall have full power and authority to
receive such monies and to apply the same to the purpose for which they were
received and shall not be affected by any notice to the contrary which may be
received by it within two Business Days prior to such date.
SECTION 12.11. Reliance on Judicial Order or Certificate of Liquidating
Agent.
Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to the provisions of Article VI, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such Proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article.
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SECTION 12.12. Trustee Not Fiduciary for Holders of Senior Indebtedness.
The Trustee, in its capacity as trustee under this Indenture, shall not be
deemed to owe any fiduciary duty to the holders of Senior Indebtedness of the
Company and shall not be liable to any such holders if it shall in good faith
mistakenly pay over or distribute to Holders of Securities or to the Company or
to any other Person cash, property or securities to which any holders of Senior
Indebtedness of the Company shall be entitled by virtue of this Article or
otherwise.
SECTION 12.13. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article with respect to any Senior Indebtedness of the Company
which may at any time be held by it, to the same extent as any other holder of
Senior Indebtedness of the Company, and nothing in this Indenture shall deprive
the Trustee of any of its rights as such holder.
SECTION 12.14. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article shall in such case (unless the context otherwise requires)
be construed as extending to and including such Paying Agent within its meaning
as fully for all intents and purposes as if such Paying Agent were named in this
Article in addition to or in place of the Trustee.
SECTION 12.15. Certain Conversions or Exchanges Deemed Payment.
For the purposes of this Article only, (a) the issuance and delivery of
junior securities upon conversion or exchange of Securities shall not be deemed
to constitute a payment or distribution on account of the principal of (or
premium, if any) or interest (including Additional Sums and Additional Amounts,
if any) on Securities or on account of the purchase or other acquisition of
Securities, and (b) the payment, issuance or delivery of cash, property or
securities (other than junior securities) upon conversion or exchange of a
Security shall be deemed to constitute payment on account of the principal of
such security. For the purposes of this Section, the term "junior securities"
means (i) shares of any stock of any class of the Company and (ii) securities of
the Company which are subordinated in right of payment to all Senior
Indebtedness of the Company which may be outstanding at the time of issuance or
delivery of such securities to substantially the same extent as, or to a greater
extent than, the Securities are so subordinated as provided in this Article.
ARTICLE XIII. SUBSIDIARY GUARANTY
SECTION 13.1. Subsidiary Guaranty.
Each of the Subsidiary Guarantors hereby jointly and severally
unconditionally Guarantees, on a senior subordinated basis, to each Holder of a
Security authenticated and delivered by the Trustee, and to the Trustee on
behalf of such Holder, the due and punctual payment of the principal of (and
premium, if any) and interest (including Additional Sums and Additional Amounts,
if any) on such Security when and as the same shall become due and payable,
whether at the Stated Maturity, by acceleration, call for redemption, purchase
or otherwise, in accordance with the terms of such Security and of this
Indenture. In case of the failure of the Company punctually to make any such
payment, each of the Subsidiary Guarantors hereby jointly and severally agrees
to cause such payment to be
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made punctually when and as the same shall become due and payable, whether at
the Stated Maturity or by acceleration, call for redemption, purchase or
otherwise, and as if such payment were made by the Company. The Guarantee
extends to the Company's repurchase obligations arising from a Change of Control
pursuant to Section 10.15.
Each of the Subsidiary Guarantors hereby jointly and severally agrees that
its obligations hereunder shall be unconditional, irrespective of the validity,
regularity or enforceability of such Security or this Indenture, the absence of
any action to enforce the same, any exchange, release or non-perfection of any
Lien on any collateral for, or any release or amendment or waiver of any term of
any other Guarantee of, or any consent to departure from any requirement of any
other Guarantee of all or any of the Securities, the election by the Trustee or
any of the Holders in any proceeding under Chapter 11 of Title 11 of the United
States Code (the "Bankruptcy Code") of the application of Section 1111(b)(2) of
the Bankruptcy Code, or equivalent provision under applicable law, any borrowing
or grant of a security interest by the Company, as debtor-in-possession, under
Section 364 of the Bankruptcy Code, or equivalent provision under applicable
law, the disallowance, under Section 502 of the Bankruptcy Code, or other
similar applicable law, of all or any portion of the claims of the Trustee or
any of the Holders for payment of any of the Securities, any waiver or consent
by the Holder of such Security or by the Trustee with respect to any provisions
thereof or of this Indenture, the obtaining of any judgment against the Company
or any action to enforce the same or any other circumstances which might
otherwise constitute a legal or equitable discharge or defense of a guarantor.
Each of the Subsidiary Guarantors hereby waives the benefits of diligence,
presentment, demand for payment, any requirement that the Trustee or any of the
Holders protect, secure, perfect or insure any security interest in or other
Lien on any property subject thereto or exhaust any right or take any action
against the Company or any other Person or any collateral, filing of claims with
a court in the event of insolvency or bankruptcy of the Company, any right to
require a proceeding first against the Company, protest or notice with respect
to such Security or the Indebtedness evidenced thereby and all demands
whatsoever, and covenants that this Subsidiary Guaranty will not be discharged
in respect of such Security except by complete performance of the obligations
contained in such Security and in this Subsidiary Guaranty. Each of the
Subsidiary Guarantors hereby agrees that, in the event of a default in payment
of principal (or premium, if any) or interest (including Additional Sums and
Additional Amounts, if any) on such Security, whether at their Stated Maturity,
by acceleration, call for redemption, purchase or otherwise, legal proceedings
may be instituted by the Trustee on behalf of, or by, the Holder of such
Security, subject to the terms and conditions set forth in this Indenture,
directly against each of the Subsidiary Guarantors to enforce this Subsidiary
Guaranty without first proceeding against the Company. Each Subsidiary Guarantor
agrees that, to the extent permitted by law, if, after the occurrence and during
the continuance of an Event of Default, the Trustee or any of the Holders are
prevented by applicable law from exercising their respective rights to
accelerate the maturity of the Securities, to collect interest on the
Securities, or to enforce or exercise any other right or remedy with respect to
the Securities, or the Trustee or the Holders are prevented from taking any
action to realize on any collateral, such Subsidiary Guarantor agrees to pay to
the Trustee for the account of the Holders, upon demand therefor, the amount
that would otherwise have been due and payable had such rights and remedies been
permitted to be exercised by the Trustee or any of the Holders.
The indebtedness evidenced by the Subsidiary Guaranties is, to the extent
provided in this Indenture, subordinate and subject in right of payment to the
prior payment in full of all Senior Indebtedness of each Subsidiary Guarantor,
and the Subsidiary Guaranties are issued subject to the provisions of this
Indenture with respect thereto. Each Holder of such Security, by accepting the
same, (a) agrees to and shall be bound by such provisions, (b) authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination so provided and (c) appoints the
Trustee his attorney-in-fact for any and all such purposes.
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Each Subsidiary Guarantor shall be subrogated to all rights of the Holders
of the Securities upon which its Guarantee is endorsed against the Company in
respect of any amounts paid by such Subsidiary Guarantor on account of such
Security pursuant to the provisions of its Subsidiary Guaranty or this
Indenture; provided, however, that no Subsidiary Guarantor shall be entitled to
enforce or to receive any payments arising out of, or based upon, such right of
subrogation until the principal of (and premium, if any) and interest (including
Additional Sums and Additional Amounts, if any) on all Securities issued
hereunder shall have been paid in full.
Each Subsidiary Guaranty shall remain in full force and effect and continue
to be effective should any petition be filed by or against the Company for
liquidation or reorganization or equivalent proceeding under applicable law,
should the Company become insolvent or make an assignment for the benefit of
creditors or should a receiver or trustee be appointed for all or any
significant part of the Company's assets, or the equivalent of any of the
foregoing under applicable law, and shall, to the fullest extent permitted by
law, continue to be effective or be reinstated, as the case may be, if at any
time payment and performance of the Securities, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by any
obligee on the Securities, whether as a voidable preference, fraudulent
transfer, or otherwise, all as though such payment or performance had not been
made. In the event that any payment, or any part thereof, is rescinded, reduced,
restored or returned, the Securities shall, to the fullest extent permitted by
law, be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.
The Subsidiary Guarantors shall have the right to seek contribution from any
non-paying Subsidiary Guarantor so long as the exercise of such right does not
impair the rights of the Holders under this Subsidiary Guaranty.
Each Subsidiary Guaranty will be limited in amount to an amount not to
exceed the maximum amount that can be guaranteed by the applicable Subsidiary
Guarantor without rendering the Subsidiary Guaranty, as it relates to such
Subsidiary Guarantor, voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally or under applicable law of Germany. In the case of Fresenius
Medical Care Deutschland GmbH ("FMCD"), the following provisions will apply.
FMCD, having a stated capital of DM80 million, had a capital reserve account
of DM168,302,162 (the "January 1, 1996 Amount") in its balance sheet as of
January 1, 1996. Assuming that the January 1, 1996 Amount has not decreased by
losses in the business of FMCD since January 1, 1996, at least such amount
exceeds the Company's assets protecting its share capital within the meaning of
Section 30 of the German GmbH Law. Since August 21, 1996, a Profit and Loss
Pooling Agreement (the "Agreement") (Ergebnisabfuhrungsvertrag) is in place
between the Company and FMCD to be entered into the commercial register as
approved by the stockholders of the Company and the shareholders of the FMCD to
make such agreement tax effective by January 1, 1996. Since January 1, 1996, the
January 1, 1996 Amount has not been decreased by the actions of the Company (the
sole shareholder of FMCD), e.g. no distributions against the January 1, 1996
Amount have been made.
Based thereon, the guaranty obligations of FMCD hereunder is limited to the
amount of the capital reserves of FMCD as per the date hereof less its
obligations as a guarantor from time to time under the Bank Credit Agreement
(the "Minimum Guaranty Amount"). If, in the case of a default under this
Indenture, the capital reserves are higher than such Minimum Guaranty Amount,
such higher amount (the "Higher Guaranty Amount") shall serve as limitation to
the obligations of FMCD, as Subsidiary Guarantor. In case FMCD, as Subsidiary
Guarantor, has to sell off assets to fulfill its obligations under this
Indenture, after such guaranty obligations have been drawn, and if the proceeds
from the sale of such assets exceed the amount of their book value, such excess
amounts shall be paid to the Collateral
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Agent for the benefit of the Holders, subject to the provisions of Article XIV
hereof, in addition to the Minimum Guaranty Amount or the Higher Guaranty
Amount, respectively for the determination of the applicable book value, the
book value of assets which were included into the balance sheet per January 1,
1996 applies, and for such assets which were not yet included but added to the
business of FMCD since that date, the book value on the day of the sale of such
assets applies. Should Section 30 of the German GmbH law however require a lower
Minimum Guaranty Amount or a lower Higher Guaranty Amount, then such lower
amounts required by law shall be applicable.
FMCD undertakes not to decrease its capital reserves, neither by capital
increase from such reserve accounts nor by other kinds of contributions to its
shareholders or affiliates without the prior written approval of the Collateral
Agent, which consent by the Collateral Agent shall not unreasonably be withheld.
FMCD undertakes to maintain a profit and loss pooling agreement with the
Company during the term of this Indenture, in particular, to extend the term of
such agreement to the term of this Indenture and not to terminate, rescind or
amend such agreement without prior notice to the Collateral Agent and the
Collateral Agent's consent thereto. In case of a termination of such profit and
loss pooling agreement, FMCD will grant, upon the Collateral Agent's request,
further collateral to minimize the legal and financial disadvantages caused by
the termination of such agreement, as far as legally available under German law.
FMCD undertakes to give notice immediately to the Collateral Agent if it intends
to give notice of termination to such agreement or to agree to the termination
of such agreement, or if it becomes aware that the Company intends to terminate
such agreement. During the term of the profit and loss pooling agreement, any
and all allocations of profit to the Company and any and all cash distributions
to the Company as a consequence thereof upon the terms and conditions of the
profit and loss pooling agreement are permitted and unrestricted.
SECTION 13.2. Execution and Delivery of Subsidiary Guaranties.
The Subsidiary Guaranties to be endorsed on the Securities shall include the
terms of the Subsidiary Guaranty set forth in Section 13.1 and any other terms
that may be set forth in the form established pursuant to Section 2.6. Each of
the Subsidiary Guarantors hereby agrees to execute its Subsidiary Guaranty, in a
form established pursuant to Section 2.6, to be endorsed on each Security
authenticated and delivered by the Trustee.
The Subsidiary Guaranty shall be executed on behalf of each respective
Subsidiary Guarantor by any one of such Subsidiary Guarantor's Chairman of the
Board of Directors or two members of the Managing Board, as the case may be, or
other person duly authorized by the Board of Directors or Managing Board of such
Subsidiary Guarantor. The signature of any or all of these persons on the
Subsidiary Guaranty may be manual or facsimile.
A Subsidiary Guaranty bearing the manual or facsimile signature of
individuals who were at any time the proper officers of a Subsidiary Guarantor
shall bind such Subsidiary Guarantor, notwithstanding that such individuals or
any of them have ceased to hold such offices prior to the authentication and
delivery of the Security on which such Subsidiary Guaranty is endorsed or did
not hold such offices at the date of such Subsidiary Guaranty.
The delivery of any Security by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of the Subsidiary Guaranty
endorsed thereon on behalf of the Subsidiary Guarantors. Each of the Subsidiary
Guarantors hereby jointly and severally agrees that its Subsidiary Guaranty set
forth in Section 13.1 shall remain in full force and effect notwithstanding any
failure to endorse a Subsidiary Guaranty on any Security.
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SECTION 13.3. Subsidiary Guarantors May Consolidate, Etc., on Certain Terms.
Except as set forth in Section 13.4 and in Articles VIII and X hereof,
nothing contained in this Indenture or in any of the Securities shall prevent
any consolidation or merger of a Subsidiary Guarantor with or into the Company
or a Subsidiary Guarantor or shall prevent any sale, transfer, assignment,
lease, conveyance or other disposition of the property of a Subsidiary Guarantor
as an entirety or substantially as an entirety to the Company or a Subsidiary
Guarantor.
SECTION 13.4. Release of Subsidiary Guarantors.
(a) Concurrently with any consolidation or merger of a Subsidiary Guarantor
or any sale, transfer, assignment, lease, conveyance or other disposition of the
property of a Subsidiary Guarantor as an entirety or substantially as an
entirety, in each case as permitted by Section 13.3 hereof, and upon delivery by
the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel
to the effect that such consolidation, merger, sale, transfer, assignment,
conveyance or other disposition was made in accordance with Section 13.3 hereof,
the Trustee shall execute any documents reasonably required in order to
acknowledge the release of such Subsidiary Guarantor from its obligations under
its Subsidiary Guaranty endorsed on the Securities and under this Indenture. Any
Subsidiary Guarantor not released from its obligations under its Subsidiary
Guaranty endorsed on the Securities and under this Indenture shall remain liable
for the full amount of principal of (premium, if any) and interest (including
Additional Sums and Additional Amounts, if any) on the Securities and for the
other obligations of a Subsidiary Guarantor under its Subsidiary Guaranty
endorsed on the Securities and under this Indenture.
(b) Concurrently with the defeasance of the Securities under Section 4.3
hereof, the Subsidiary Guarantors shall be released from all of their
obligations under their Subsidiary Guaranties endorsed on the Securities and
under this Indenture, without any action on the part of the Trustee or any
Holder of Securities.
(c) Upon the sale or other disposition (including by way of merger or
consolidation) of any Subsidiary Guarantor or the sale, conveyance, transfer,
assignment, lease or other disposition of all or substantially all the assets of
a Subsidiary Guarantor (in each case other than to the Company or any Affiliate
of the Company) pursuant to Section 10.13 hereof, such Subsidiary Guarantor
shall automatically be released from all obligations under its Subsidiary
Guaranties endorsed on the Securities and under this Indenture.
SECTION 13.5. Additional Subsidiary Guarantors.
The Company may cause any Subsidiary to become a Subsidiary Guarantor with
respect to the Securities by executing and delivering to the Trustee (a) a
supplemental indenture, in form and substance satisfactory to the Trustee, which
subjects such Person to the provisions (including the representations and
warranties) of this Indenture as a Subsidiary Guarantor and (b) an Opinion of
Counsel to the effect that such supplemental indenture has been duly authorized
and executed by such Person and constitutes the legal, valid, binding and
enforceable obligation of such Person (subject to such customary exceptions
concerning creditors' rights and equitable principles as may be acceptable to
the Trustee in its discretion).
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ARTICLE XIV. SUBORDINATION OF SUBSIDIARY GUARANTIES
SECTION 14.1. Subsidiary Guaranties Subordinate to Senior Indebtedness of
Subsidiary Guarantors.
Each Subsidiary Guarantor covenants and agrees, and each Holder of a
Security, by his acceptance thereof, likewise covenants and agrees, that, to the
extent and in the manner hereinafter set forth in this Article (subject to the
provisions of Article IV), the payment of the principal of (and premium, if any)
and interest (including Additional Sums and Additional Amounts, if any) on the
Subsidiary Guaranty of each Subsidiary Guarantor in respect of the Securities
are hereby expressly made subordinate and subject in right of payment in full of
all amounts then due and payable in respect of all Senior Indebtedness of the
Company and such Subsidiary Guarantor.
SECTION 14.2. Payment Over of Proceeds Upon Dissolution, Etc.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to a Subsidiary Guarantor or its property (each
such event, if any, herein sometimes referred to as a "Subsidiary Guarantor
Proceeding"), the holders of Senior Indebtedness of the Company and such
Subsidiary Guarantor shall be entitled to receive payment in full of principal
of (and premium, if any) and interest, if any (including Additional Sums and
Additional Amounts, if any), on such Senior Indebtedness, or provision shall be
made for such payment in cash or cash equivalents or otherwise in a manner
satisfactory to the holders of Senior Indebtedness of the Company and such
Subsidiary Guarantor, before the Holders of the Securities are entitled to
receive or retain any payment or distribution of any kind or character, whether
in cash, property or securities (including any payment or distribution which may
be payable or deliverable by reason of the payment of any other Indebtedness of
the Company or such Subsidiary Guarantor (including the Securities) subordinated
to the payment of the Securities, such payment or distribution being hereinafter
referred to as a "Subsidiary Guarantor Senior Subordinated Payment"), on account
of principal of (or premium, if any) or interest (including Additional Sums and
Additional Amounts, if any) on the Securities or on account of the purchase or
other acquisition of Securities by the Company or any Subsidiary, and to that
end the holders of Senior Indebtedness of the Company and such Subsidiary
Guarantor shall be entitled to receive, for application to the payment thereof,
any payment or distribution of any kind or character, whether in cash, property
or securities, including any Subsidiary Guarantor Senior Subordinated Payment,
which may be payable or deliverable in respect of the Securities in any such
Subsidiary Guarantor Proceeding.
In the event that, notwithstanding the foregoing provisions of this Section,
the Trustee or the Holder of any Security shall have received any payment or
distribution of assets of the Company or any Subsidiary Guarantor of any kind or
character, whether in cash, property or securities, including any Subsidiary
Guarantor Senior Subordinated Payment, before all Senior Indebtedness of the
Company and such Subsidiary Guarantor is paid in full or payment thereof is
provided for in cash or cash equivalents or otherwise in a manner satisfactory
to the holders of such Senior Indebtedness, and if such fact shall, at or prior
to the time of such payment or distribution, have been made known to the Trustee
or, as the case may be, such Holder, then and in such event such payment or
distribution shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company or such
Subsidiary Guarantor for application to the payment of all Senior Indebtedness
of the Company and such Subsidiary Guarantor remaining unpaid, to the extent
necessary to pay all Senior Indebtedness of the Company and such Subsidiary
Guarantor in full, after giving effect to any concurrent payment or distribution
to or for the holders of Senior Indebtedness of the Company and such Subsidiary
Guarantor.
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For purposes of this Article only, the words "any payment or distribution of
any kind or character, whether in cash, property or securities" shall not be
deemed to include shares of stock of the Company or any Subsidiary Guarantor as
reorganized or readjusted, or securities of the Company or any Subsidiary
Guarantor or any other corporation provided for by a plan of reorganization or
readjustment which securities are subordinated in right of payment to all then
outstanding Senior Indebtedness of the Company and such Subsidiary Guarantor to
substantially the same extent as the Securities are so subordinated as provided
in this Article. The consolidation of the Company or any Subsidiary Guarantor
with, or the merger of the Company or any Subsidiary Guarantor into, another
Person or the liquidation or dissolution of the Company or any Subsidiary
Guarantor following the sale of all or substantially all of its properties and
assets as an entirety to another Person or the liquidation or dissolution of the
Company or any Subsidiary Guarantor following the sale of all or substantially
all of its properties and assets as an entirety to another Person upon the terms
and conditions set forth in Article VIII shall not be deemed a Subsidiary
Guarantor Proceeding for the purposes of this Section if the Person formed by
such consolidation or into which the Company or such Subsidiary Guarantor is
merged or the Person which acquires by sale such properties and assets as an
entirety, as the case may be, shall, as a part of such consolidation, merger, or
sale comply with the conditions set forth in Article VIII.
SECTION 14.3. Prior Payment to Senior Indebtedness of a Subsidiary Guarantor
Upon Acceleration of Securities.
In the event that, upon the occurrence of an Event of Default, any
Securities are declared due and payable before their Stated Maturity, then (a) a
Subsidiary Guarantor shall promptly notify the holders of Senior Indebtedness of
such Subsidiary Guarantor or the representative of such holders of the
acceleration, and (b) in such event, if any Senior Indebtedness of the Company
or such Subsidiary Guarantor is outstanding, such Subsidiary Guarantor may not
pay the Securities until five Business Days after the representative of all
issues of Senior Indebtedness of the Company and such Subsidiary Guarantor
receive notice of such acceleration and, thereafter, may pay the Securities only
if payment is otherwise permitted hereunder at that time.
In the event that, notwithstanding the foregoing, a Subsidiary Guarantor
shall make any payment to the Trustee or the Holder of any Security prohibited
by the foregoing provisions of this Section, and if such fact shall, at or prior
to the time of such payment, have been made known to the Trustee or, as the case
may be, such Holder, then and in such event such payment shall be paid over and
delivered forthwith to such Subsidiary Guarantor.
The provisions of this Section shall not apply to any payment with respect
to which Section 14.2 would be applicable.
SECTION 14.4. No Payment When Senior Indebtedness of a Subsidiary Guarantor
in Default.
(a) A Subsidiary Guarantor may not pay principal of, or premium (if any) or
interest (including Additional Sums and Additional Amounts, if any) on, the
Securities, and may not repurchase, redeem or otherwise retire any Securities
(collectively "pay the Notes") if (i) any Specified Senior Indebtedness of the
Company or such Subsidiary Guarantor (or any other Senior Indebtedness of the
Company or such Subsidiary Guarantor having an outstanding principal amount at
the time of determination in excess of $25,000,000) is not paid when due or (ii)
any other default on Specified Senior Indebtedness of the Company or such
Subsidiary Guarantor occurs and the maturity of such Specified Senior
Indebtedness is accelerated in accordance with its terms, unless, in either
case, the default has been cured or waived and any such acceleration has been
rescinded or such Specified Senior Indebtedness has been paid in full. However,
a Subsidiary Guarantor may pay the Securities without regard to the foregoing if
the Company, such Subsidiary Guarantor and the Trustee receive written notice
approving
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such payment from a representative of Specified Senior Indebtedness of the
Company and such Subsidiary Guarantor with respect to which either of the events
set forth in clause (i) or (ii) of the immediately preceding sentence has
occurred and is continuing.
(b) During the continuance of any default (other than a default described in
clause (i) or (ii) of the preceding paragraph (a) with respect to any Specified
Senior Indebtedness of the Company or any Subsidiary Guarantor pursuant to which
the maturity thereof may be accelerated immediately without further notice
(except such notice as may be required to effect such acceleration) or the
expiration of any applicable grace periods, such Subsidiary Guarantor may not
pay the Securities to the Holders for a period (a "Subsidiary Guarantor Payment
Blockage Period") commencing upon the receipt by the Trustee (with a copy to
such Subsidiary Guarantor) of written notice (a "Subsidiary Guarantor Blockage
Notice") of such default from the representative of the holders of such
Specified Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Trustee and the
Subsidiary Guarantor from the representative of the holders of such Specified
Senior Indebtedness, (ii) because the default giving rise to such Blockage
Notice is no longer continuing, as certified to the Trustee by the
representative of the holders of such Specified Senior Indebtedness or (iii)
because such Specified Senior Indebtedness has been repaid in full, as certified
to the Trustee by the representative of the holders of such Specified Senior
Indebtedness).
(c) Notwithstanding the preceding paragraph (b), unless the holders of such
Specified Senior Indebtedness or the representative of such holders have
accelerated the maturity of such Specified Senior Indebtedness, the Subsidiary
Guarantor may resume payments on the Securities after the end of such Payment
Blockage Period. The Securities shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period, irrespective of the number of
defaults with respect to Specified Senior Indebtedness of the Company or such
Subsidiary Guarantor during such period.
(d) In the event that, notwithstanding the foregoing, the Subsidiary
Guarantor shall make any payment to the Trustee or the Holder of any Security
prohibited by the foregoing provisions of this Section, and if such fact shall,
at or prior to the time of such payment, have been made known to the Trustee or,
as the case may be, such Holder, then and in such event such payment shall be
paid over and delivered forthwith to such Subsidiary Guarantor.
The provisions of this Section shall not apply to any payment with respect
to which Section 14.2 would be applicable.
SECTION 14.5. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in any
of the Securities shall prevent (a) any Subsidiary Guarantor, at any time except
during the pendency of any Proceeding referred to in Section 14.2 or under the
conditions described in Sections 14.3 and 14.4, from making payments at any time
of principal of (and premium, if any) or interest on the Securities, or (b) the
application by the Trustee of any money or Government Obligations deposited with
it hereunder in accordance with the provisions of Section 4.3 to the payment of
or on account of the principal of (and premium, if any) or interest (including
Additional Sums and Additional Amounts, if any) on the Securities or the
retention of such payment by the Holders, if, at the time of such payment or
application, as the case may be, by the Company or the Trustee, as the case may
be, the Company or the Trustee, as the case may be, did not have knowledge that
such payment would have been prohibited by the provisions of this Article.
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SECTION 14.6. Subrogation to Rights of Holders of Senior Indebtedness of a
Subsidiary Guarantor.
Subject to the payment in full of all Senior Indebtedness of a Subsidiary
Guarantor, or the provision for such payment in cash or cash equivalents or
otherwise in a manner satisfactory to the holders of Senior Indebtedness of a
Subsidiary Guarantor, the Holders of the Securities shall be subrogated to the
extent of the payments or distributions made to the holders of such Senior
Indebtedness of a Subsidiary Guarantor pursuant to the provisions of this
Article (equally and ratably with the holders of all indebtedness of such
Subsidiary Guarantor which by its express terms is subordinated to Senior
Indebtedness of such Subsidiary Guarantor to substantially the same extent as
the Securities are subordinated to Senior Indebtedness and is entitled to like
rights of subrogation by reason of any payments or distributions made to holders
of such Senior Indebtedness) to the rights of the holders of such Senior
Indebtedness to receive payments and distributions of cash, property and
securities applicable to the Senior Indebtedness of such Subsidiary Guarantor
until the principal of (and premium, if any) and interest on the Securities
shall be paid in full. For purposes of such subrogation or assignment, no
payments or distributions to the holders of the Senior Indebtedness of such
Subsidiary Guarantor of any cash, property or securities to which the Holders of
the Securities or the Trustee would be entitled except for the provisions of
this Article, and no payments over pursuant to the provisions of this Article to
the holders of Senior Indebtedness of such Subsidiary Guarantor by Holders of
the Securities or the Trustee, shall, as among the Subsidiary Guarantors, their
creditors other than holders of Senior Indebtedness of the Subsidiary
Guarantors, and the Holders of the Securities, be deemed to be a payment or
distribution by a Subsidiary Guarantor to or on account of the Senior
Indebtedness of such Subsidiary Guarantor.
SECTION 14.7. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the purpose
of defining the relative rights of the Holders of the Securities on the one hand
and the holders of Senior Indebtedness of each Subsidiary Guarantor on the other
hand. Nothing contained in this Article or elsewhere in this Indenture or in the
Securities is intended to or shall (a) impair, as between the Subsidiary
Guarantors and the Holders of the Securities, the obligations of each Subsidiary
Guarantor, which are absolute and unconditional, to pay to the Holders of the
Securities the principal of (and premium, if any) and interest (including
Additional Sums and Additional Amounts, if any) on the Securities as and when
the same shall become due and payable in accordance with their terms; or (b)
affect the relative rights against any Subsidiary Guarantor of the Holders of
the Securities and creditors of such Subsidiary Guarantor other than their
rights in relation to the holders of Senior Indebtedness of such Subsidiary
Guarantor; or (c) prevent the Trustee or the Holder of any Security from
exercising all remedies otherwise permitted by applicable law upon default under
this Indenture including, without limitation, filing and voting claims in any
Subsidiary Guarantor Proceeding, subject to the rights, if any, under this
Article of the holders of Senior Indebtedness of a Subsidiary Guarantor to
receive cash, property and securities otherwise payable or deliverable to the
Trustee or such Holder and subject to the terms of the Intercreditor Agreement.
SECTION 14.8. Trustee to Effectuate Subordination.
Each Holder of a Security by his or her acceptance thereof authorizes and
directs the Trustee on his or her behalf to take such action as may be necessary
or appropriate to acknowledge or effectuate the subordination provided in this
Article and appoints the Trustee his or her attorney-in-fact for any and all
such purposes.
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SECTION 14.9. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness of any
Subsidiary Guarantor to enforce subordination as herein provided shall at any
time in any way be prejudiced or impaired by any act or failure to act on the
part of such Subsidiary Guarantor or by any act or failure to act, in good
faith, by any such holder, or by any noncompliance by such Subsidiary Guarantor
with the terms, provisions and covenants of this Indenture, regardless of any
knowledge thereof that any such holder may have or be otherwise charged with.
SECTION 14.10. Notice to Trustee.
Each Subsidiary Guarantor shall give prompt written notice to the Trustee of
any fact known to such Subsidiary Guarantor which would prohibit the making of
any payment to or by the Trustee in respect of the Securities. Notwithstanding
the provisions of this Article or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts which
would prohibit the making of any payment to or by the Trustee in respect of the
Securities, unless and until the Trustee shall have received written notice
thereof from a Subsidiary Guarantor or a holder of Senior Indebtedness of a
Subsidiary Guarantor or from any trustee, agent or representative therefor
(whether or not the facts contained in such notice are true); provided, however,
that if the Trustee shall not have received the notice provided for in this
Section at least two Business Days prior to the date upon which by the terms
hereof any monies may become payable for any purpose (including, without
limitation, the payment of the principal of (and premium, if any) or interest
(including Additional Sums and Additional Amounts, if any) on any Security),
then, anything herein contained to the contrary notwithstanding, the Trustee
shall have full power and authority to receive such monies and to apply the same
to the purpose for which they were received and shall not be affected by any
notice to the contrary which may be received by it within two Business Days
prior to such date.
SECTION 14.11. Reliance on Judicial Order or Certificate of Liquidating
Agent.
Upon any payment or distribution of assets of the Subsidiary Guarantors
referred to in this Article, the Trustee, subject to the provisions of Article
VI, and the Holders of the Securities shall be entitled to rely upon any order
or decree entered by any court of competent jurisdiction in which such
Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee for the benefit of creditors, agent or
other Person making such payment or distribution, delivered to the Trustee or to
the Holders of Securities, for the purpose of ascertaining the Persons entitled
to participate in such payment or distribution, the holders of the Senior
Indebtedness of a Subsidiary Guarantor and other indebtedness of such Subsidiary
Guarantor, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.
SECTION 14.12. Trustee Not Fiduciary for Holders of Senior Indebtedness of
the Subsidiary Guarantors.
The Trustee, in its capacity as trustee under this Indenture, shall not be
deemed to owe any fiduciary duty to the holders of Senior Indebtedness of any
Subsidiary Guarantor and shall not be liable to any such holders if it shall in
good faith mistakenly pay over or distribute to Holders of Securities or to any
Subsidiary Guarantor or to any other Person cash, property or securities to
which any holders of Senior Indebtedness of such Subsidiary Guarantor shall be
entitled by virtue of this Article or otherwise.
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SECTION 14.13. Rights of Trustee as Holder of Senior Indebtedness of the
Subsidiary Guarantors; Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article with respect to any Senior Indebtedness of any
Subsidiary Guarantor which may at any time be held by it, to the same extent as
any other holder of Senior Indebtedness of such Subsidiary Guarantor, and
nothing in this Indenture shall deprive the Trustee of any of its rights as such
holder.
SECTION 14.14. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article shall in such case (unless the context otherwise requires)
be construed as extending to and including such Paying Agent within its meaning
as fully for all intents and purposes as if such Paying Agent were named in this
Article in addition to or in place of the Trustee.
SECTION 14.15. Certain Conversions or Exchanges Deemed Payment.
For the purposes of this Article only, (a) the issuance and delivery of
junior securities upon conversion or exchange of Securities shall not be deemed
to constitute a payment or distribution on account of the principal of (or
premium, if any) or interest (including Additional Sums and Additional Amounts,
if any) on Securities or on account of the purchase or other acquisition of
Securities, and (b) the payment, issuance or delivery of cash, property or
securities (other than junior securities) upon conversion or exchange of a
Security shall be deemed to constitute payment on account of the principal of
such security. For the purposes of this Section, the term "junior securities"
means (i) shares of any stock of any class of any Subsidiary Guarantor and (ii)
securities of any Subsidiary Guarantor which are subordinated in right of
payment to all Senior Indebtedness of such Subsidiary Guarantor which may be
outstanding at the time of issuance or delivery of such securities to
substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article.
ARTICLE XV. COLLATERAL AND SECURITY DOCUMENTS
SECTION 15.1. Security Documents.
The due and punctual payment of the principal of, and premium, if any, and
interest (including Additional Sums and Additional Amounts, if any) on, the
Securities when and as the same shall be due and payable, whether on its Stated
Maturity, by acceleration, repurchase, redemption or otherwise, and performance
of all other obligations of the Company to the Holders or the Trustee under this
Indenture, the Securities and the Security Documents, according to the terms
hereunder or thereunder, shall be secured, on a senior subordinated basis, as
provided in the Security Documents. Each Holder, by its acceptance of a
Security, consents and agrees to the terms of the Security Documents (including,
without limitation, the provisions providing for foreclosure and release of
Collateral), as the same may be in effect or may be amended from time to time in
accordance with their terms and this Indenture, and authorizes and directs the
Trustee to enter into the Security Documents and to perform its obligations and
exercise its rights thereunder in accordance therewith.
The Company covenants and agrees that, subject to the provisions of the Bank
Credit Agreement, it has full right, power and lawful authority to grant,
bargain, sell, release, convey, hypothecate, assign, mortgage, pledge, transfer
and confirm the property constituting the Collateral, in the manner and form
done in the Security Documents, or intended to be done, free and clear of all
Liens whatsoever (other
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than Permitted Collateral Liens), and that (i) it shall forever warrant and
defend the title to the same against the claims of all persons whatsoever
(except as to Permitted Collateral Liens), (ii) it shall deliver to the Trustee
and the Collateral Agent copies of all Security Documents and execute,
acknowledge and deliver to the Trustee and the Collateral Agent such further
assignments, transfers, assurances or other instruments as the Trustee or the
Collateral Agent may require or request, and (iii) it shall do or cause to be
done all such acts and things as may be necessary or proper, or as may be
required by the provisions of the Security Documents or the Trustee or the
Collateral Agent, to assume and confirm to the Trustee and the Collateral Agent
the security interest in the Collateral contemplated hereby or by the Security
Documents or any part thereof, as from time to time constituted, so as to render
the same available for the security and benefit of the Security Documents, this
Indenture and of the Securities, according to the intent and purposes herein
expressed. The Company further covenants and agrees that each Security Document,
as applicable, creates or will create, as the case may be, a direct and valid
senior subordinated security interest (subject to Permitted Collateral Liens) on
the Collateral subject thereto.
SECTION 15.2. Recording and Opinions.
(a) The Company will cause, at its own expense, this Indenture and each
Security Document, and all amendments or supplements thereto, to be registered,
recorded and filed and/or re-recorded and/or re-filed and/or renewed in such
manner and in such place or places, if any, as may be required by law in order
to preserve, protect and maintain the perfected senior subordinated Liens of the
Security Documents and all parts of the Collateral and to effectuate and
preserve the security of the Holders and all rights of the Collateral Agents.
The Company will pay all taxes, of whatever nature, required to be paid by any
Person under applicable laws and regulations in connection with the execution,
delivery, recordation, filing, perfection or enforcement of any of the Security
Documents.
(b) The Company shall furnish to the Trustee and the Collateral Agent:
(1) promptly after the execution and delivery of this Indenture, an Opinion
of Counsel or Opinions of Counsel stating that, in the opinion of such counsel,
this Indenture, the Security Documents, and all other instruments of further
assurance have been properly recorded, registered and filed to the extent
necessary under applicable law to make effective the Lien intended to be created
by the Security Documents, and reciting the details of such action or referring
to prior Opinions of Counsel in which such details are given, and stating that
all statements have been executed and filed that are necessary under applicable
law fully to preserve and protect the rights of the Holders and the Collateral
Agent hereunder and under the Security Documents, or stating that, in the
opinion of such counsel, no such action is necessary to make such Liens
effective;
(2) within three months after each anniversary of the date of this
Indenture, an Opinion or Opinions of Counsel, dated as of such date, either
stating that, in the opinion of such counsel, such action has been taken with
respect to the recording, registering, filing, re-recording, re-registering and
re-filing of (x) this Indenture, (y) the Security Documents, and all
supplemental indentures and amendments thereto, and (z) financing statements,
continuation statements or other instruments of further assurances, as is
necessary under applicable law to maintain the Lien of each such Security
Document and reciting the details of such action or referring to prior Opinions
of Counsel in which such details are given, and stating that all such financing
statements and continuation statements have been executed and filed that are
necessary to preserve and protect the rights of the Holders and the Trustee
hereunder, the rights of the Collateral Agent under the Security Documents, or
stating that, in the opinion of such counsel, no such action is necessary to
maintain such Liens.
92
<PAGE> 101
SECTION 15.3. Release Of Collateral.
(a) Subject to subsections (b), (c) and (d) of this Section 15.3, Collateral
may be released from the security interest created by the Security Documents at
any time or from time to time in accordance with the provisions of the Security
Documents or as provided hereby. In the event that the Company delivers an
Officer's Certificate certifying that all obligations under this Indenture have
been satisfied and discharged by complying with the provisions of Article IV,
the Trustee shall (i) to the extent the satisfaction and discharge of the
Security Documents is given in accordance with Article IV, deliver to the
Holders a notice stating that the Trustee, on behalf of the Holders, disclaims
and gives up any and all rights it has in and to the Collateral and under this
Indenture and the Security Documents, and, upon and after the receipt by the
Holders of such notice, the Collateral Agent shall not be deemed to hold any of
the Collateral pursuant to this Indenture and the Security Documents for the
benefit of the Trustee or the Holders; or (ii) otherwise disclaim and give up
any and all rights it has in and to the Collateral, and any rights it has under
any of the Security Documents, and the Collateral Agent shall not be deemed to
hold any of the Collateral for the benefit of the Holders.
(b) At any time when an Event of Default shall have occurred and be
continuing and the maturity of the Securities shall have been accelerated
(whether by declaration or otherwise) pursuant to Section 5.2 hereof, no
Collateral shall be released except as permitted by the provisions of the
Security Documents, and no release of Collateral in contravention of this
Section 15.3(b) shall be effective as against the Holders.
(c) The release of any Collateral from the security interests created by
this Indenture and Security Documents shall not be deemed to impair the Lien
described in Section 15.1 in contravention of the provisions of this Indenture
if and to the extent that the Collateral or Lien are released pursuant to the
terms hereof or, subject to this Section 15.3, pursuant to the terms of the
Security Documents. To the extent applicable, the Company shall cause Section
314(d) of the Trust Indenture Act relating to the release of property or
securities from the security interest of the Security Documents and relating to
the substitution therefor of any property or securities to be subjected to the
security interest of the Security Documents to be complied with. Any certificate
or opinion required by Section 314(d) of the Trust Indenture Act may be made by
an officer of the Company except in cases where 314(d) of the Trust Indenture
Act requires that such certificate or opinion be made by an independent Person,
which Person shall be an independent expert selected or approved by the Trustee
in the exercise of reasonable care.
SECTION 15.4. Certificates Of The Company.
The Company shall furnish to the Trustee and the Collateral Agent, prior to
each proposed release of Collateral pursuant to the Security Documents, (i) all
documents required by Section 314(d) of the Trust Indenture Act and (ii) an
Opinion of Counsel, which may be rendered by internal counsel to the Company, to
the effect that such accompanying documents constitute all documents required by
Section 314(d) of the Trust Indenture Act. The Trustee may, to the extent
permitted hereby, accept as conclusive evidence of compliance with the foregoing
provisions the appropriate statements contained in such documents and such
Opinion of Counsel.
SECTION 15.5. Collateral Agent.
So long as the Trustee acts as Collateral Agent under this Indenture or the
Intercreditor Agreement, the Trustee may, from time to time, appoint one or more
additional Collateral Agents hereunder. Each of such additional Collateral
Agents may be delegated any one or more of the duties or rights of the Trustee
hereunder or under the Security Documents or which are specified in any Security
Documents,
93
<PAGE> 102
including without limitation, the right to hold any Collateral in the name of,
registered to, or in the physical possession of such Collateral Agent, for the
ratable benefit of the Holders. Each such Collateral Agent shall have such
rights and duties as may be specified in an agreement between the Trustee and
such Collateral Agent.
SECTION 15.6. Authorization Of Actions To Be Taken By The Trustee Under The
Security Documents.
The Trustee may collect and receive any and all amounts payable in respect
of the Obligations of the Company hereunder. The Trustee shall have power to
institute and maintain such suits and proceedings as it may deem expedient to
prevent any impairment of the Collateral by any acts that may be unlawful or in
violation of the Security Documents or this Indenture, and such suits and
proceedings as the Trustee may deem expedient to preserve or protect its
interests and the interests of the Holders in the Collateral (including power to
institute and maintain suits or proceedings to restrain the enforcement of or
compliance with any legislative or other governmental enactment, rule or order
that may be unconstitutional or otherwise invalid if the enforcement of, or
compliance with, such enactment, rule or order would impair the security
interest hereunder or under any Collateral Document, or be prejudicial to the
interests of the Holders or of the Trustee).
Subject to the provisions of Article VI, the Trustee and the Collateral
Agent shall have power to, in its sole discretion and without the consent of the
Holders, on behalf of the Holders, take all actions it deems necessary or
appropriate in order to (a) enforce any of the terms of the Security Documents
and (b) institute and maintain such suits and proceedings as it may deem
expedient to prevent any impairment of the Collateral by any acts which may be
unlawful or in violation of this Indenture or any of the Security Documents, and
such suits and proceedings as the Trustee or the Collateral Agent may deem
expedient to preserve or protect its interests and the interests of the Trustee
and the Holders in the Collateral (including power to institute and maintain
suits or proceedings to restrain the enforcement of or compliance with any
legislative or other governmental enactment, rule or order that may be
unconstitutional or otherwise invalid, if the enforcement of, or compliance
with, such enactment, rule or order would impair the security hereunder or under
any of the Security Documents, or be prejudicial to the interests of the Holders
or the Trustee).
SECTION 15.7. Authorization of Receipt of Funds by the Trustee Under the
Security Documents.
The Trustee is authorized to receive in its own name or through any
Collateral Agent any funds for the benefit of the Holders distributed under the
Security Documents and the Intercreditor Agreement, and to make further
distributions of such funds to the Holders according to the provisions of this
Indenture.
SECTION 15.8. Duties of Trustee and Collateral Agent.
The powers conferred upon the Trustee and the Collateral Agent by this
Article XV are solely to protect its interest and the interest of the Holders in
the Collateral and shall not impose any duty upon the Trustee and the Collateral
Agent to exercise any such powers except as expressly provided in this Indenture
or in the Security Documents. The Trustee and the Collateral Agent shall be
under no duty to the Company whatsoever to make or give any presentment, demand
for performance, notice of nonperformance, protest, notice of protest, notice of
dishonor, or other notice or demand in connection with any Collateral, to take
any steps necessary to preserve any rights against prior parties except as
expressly provided in this Indenture or in the Security Documents. Neither the
Trustee nor the Collateral Agent shall be liable to the Company, except for
their negligence or wilful misconduct, for failure to collect or realize upon
any and all of the Collateral, or for any delay in so doing nor shall the
94
<PAGE> 103
Trustee and the Collateral Agent be under any duty to the Company to take any
action whatsoever with regard thereto. The Trustee and the Collateral Agent
shall have no duty to the Company to comply with any recording, filing, or other
legal requirements necessary to establish or maintain the validity, priority or
enforceability of, or the Trustee's and Collateral Agent's rights in or to, any
of the Collateral.
--------------------
95
<PAGE> 104
This instrument may be executed in any number of counterparts, each of which
so executed shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly
executed, all as of the day and year first above written.
FRESENIUS MEDICAL CARE AG
By: /s/ Dr. Gerd Krick
------------------------------------------
Name: Dr. Gerd Krick
Title: Chairman of the Managing Board
By: /s/ Udo Werle
------------------------------------------
Name: Udo Werle
Title: Member of the Managing Board and
Chief Financial Officer
By: /s/ Dr. Ben J. Lipps
------------------------------------------
Name: Dr. Ben J. Lipps
Title: Chief Executive Officer for North
America, Member of the Managing Board
FLEET NATIONAL BANK
As Trustee
By: /s/ Frank McDonald
------------------------------------------
Name: Frank McDonald
Title: Vice President
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS,
INC.
By: /s/ Dr. Gerd Krick
------------------------------------------
Name: Dr. Gerd Krick
Title: Chairman
FRESENIUS MEDICAL CARE DEUTSCHLAND GMBH
By: /s/ Udo Werle
------------------------------------------
Name: Udo Werle
Title: Member of the Managing Board
By: /s/ Mathias Klinger
------------------------------------------
Name: Mathias Klinger
Title: Member of the Managing Board
96
<PAGE> 1
EXHIBIT 11.1
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ --------------------------------------------------
THREE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
The weighted average number of shares
of Common Stock were as follows 90,000 95,188 95,822 93,936
====== ====== ====== ======
</TABLE>
Income used in the computation of earnings per share were as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ---------------------------------------------------------
THREE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income $ 6,046 $ 62,881 $ 96,897 $ 102,217
Dividends paid on preferred stocks (130) (393) (522) (522)
------- -------- -------- ---------
Income used in per share computation
of earnings $ 5,916 $ 62,488 $ 96,375 $ 101,695
======= ======== ======== =========
Earnings per share $ 0.07 $ 0.66 $ 1.01 $ 1.08
======= ======== ======== =========
</TABLE>
34
<PAGE> 1
FRESENIUS NATIONAL MEDICAL CARE HOLDINGS, INC.
Subsidiaries
Following is a list of the subsidiaries of Fresenius National Medical Care
Holdings, Inc. as of March 1, 1997:
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
National Medical Care, Inc. DE
- - --------------------------------------------------------------------------------
Fresenius USA, Inc. MA
================================================================================
NATIONAL MEDICAL CARE, INC.
Domestic Subsidiaries
Following is a list of the direct and indirect domestic subsidiaries of National
Medical Care, Inc. as of March 1, 1997. For convenience of reference, the
following abbreviations are used below:
BMA = Bio-Medical Applications
QCDC = Quality Care Dialysis Center
HIC = Home Intensive Care
MPD = NMC Medical Products, Inc.
IMC = International Medical Care, Inc.
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
Advanced Integrated MedicalServices, Inc. NJ
- - --------------------------------------------------------------------------------
Advanced Sleep Technologies, Inc. MD
- - --------------------------------------------------------------------------------
Amasi Medical Group, Inc. CA
- - --------------------------------------------------------------------------------
Ambulatory Care Associates, Inc. DE
- - --------------------------------------------------------------------------------
American Home Therapies, Inc. MD
- - --------------------------------------------------------------------------------
American Homecare Equipment, Inc. VA
- - --------------------------------------------------------------------------------
BMA Home Dialysis Services, Inc. DE
- - --------------------------------------------------------------------------------
BMA Management Company, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Aquadilla, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Alabama, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Alameda County, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Anacostia, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Arecibo, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Arizona, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Arkansas, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Bakersfield, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Bayamon, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Blue Springs, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Caguas, Inc. DE
- - --------------------------------------------------------------------------------
<PAGE> 2
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
BMA of California, Inc. DE
d/b/a's
BMA of Culver City
Culver City Dialysis Services
- - --------------------------------------------------------------------------------
BMA of Camarillo, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Capitol Hill, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Carolina, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Carson, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Chula Vista, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Clinton, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Colorado, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Columbia Heights, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Delaware, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Dover, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Dublin, Inc. DE
- - --------------------------------------------------------------------------------
BMA of East Orange, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Essex, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Eureka, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Fajardo, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Fayetteville, Inc. DE
- - --------------------------------------------------------------------------------
<PAGE> 3
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
BMA of Florida, Inc. DE
d/b/a's
Bio-Medical Applications of Alachua
Bio-Medical Applications of Apopka
Bio-Medical Applications of Bradenton
Bio-Medical Applications of Brandon
Bio-Medical Applications of Clearwater
Bio-Medical Applications of Deltona
Bio-Medical Applications of Duval
Bio-Medical Applications of East Orlando
Bio-Medical Applications of Gainseville
Bio-Medical Applications of Hialeah
Bio-Medical Applications of Hollywood
Bio-Medical Applications of Jacksonville
Bio-Medical Applications of Kendall
Bio-Medical Applications of Lake City
Bio-Medical Applications of Lantana
Bio-Medical Applications of Live Oak
Bio-Medical Applications of Metropolitan
Miami
Bio-Medical Applications of Miami
Bio-Medical Applications of Ocala
Bio-Medical Applications of Orlando
Bio-Medical Applications of Palmetto
Bio-Medical Applications of Port St. Lucie
Bio-Medical Applications of Sanford
Bio-Medical Applications of South Fort Myers
Bio-Medical Applications of South Miami
Bio-Medical Applications of South
St.Petersburg
Bio-Medical Applications of St. Petersburg
Bio-Medical Applications of Starke
Bio-Medical Applications of Tampa
Coconut Grove Artificial Kidney Center
Crystal River Kidney Center
Florida Kidney Center
Homestead Artificial Kidney Center
Inverness Dialysis Center
Jupiter Dialysis Center
Mercy Hospital Dialysis Center
N.E. Broward Artificial Kidney Center
N.W. Broward Artificial Kidney Center
Pembroke Pines Dialysis Center
- - --------------------------------------------------------------------------------
South Florida Prison Program Broward
Correctional Institute Women's Prison
South Florida Prison Program South Florida
Reception Center
Tamarac Kidney Center
West Boca Dialysis Center
West Kendall Dialysis Center
Bonita Artificial Kidney Center
Bonita Springs Artificial Kidney Center
Naples Artificial Kidney Center
Clearwater Artificial Kidney Center
- - --------------------------------------------------------------------------------
BMA of Fremont, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Fresno, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Georgia, Inc. DE
- - --------------------------------------------------------------------------------
<PAGE> 4
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
BMA of Glendora, Inc. DE
d/b/a
Foothill Dialysis Center
- - --------------------------------------------------------------------------------
BMA of Guayama, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Hayward, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Hillside, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Hoboken, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Humacao, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Illinois, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Indiana, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Irvington, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Jersey City, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Kansas, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Kentucky, Inc. DE
- - --------------------------------------------------------------------------------
BMA of La Mesa, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Las Americas, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Long Beach, Inc. DE
d/b/a
BMA Long Beach Community Hemodialysis Unit
- - --------------------------------------------------------------------------------
BMA of Los Angeles, Inc. DE
d/b/a's
South Bay Dialysis Center
South Bay Mobile Acute Dialysis
- - --------------------------------------------------------------------------------
BMA of Los Gatos, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Louisiana, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Maine, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Manchester, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Maryland, Inc. DE
d/b/a
BMA of Leonardtown
- - --------------------------------------------------------------------------------
BMA of Massachusetts, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Mayaguez, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Michigan, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Mission Hills, Inc. DE
d/b/a
Mission Hills Kidney Center
- - --------------------------------------------------------------------------------
BMA of Mississippi, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Missouri, Inc. DE
d/b/a
BMA of Kansas City
Penn Valley Dialysis Center
- - --------------------------------------------------------------------------------
BMA of MLK, Inc. DE
- - --------------------------------------------------------------------------------
BMA of National City, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Nevada, Inc. (f/k/a HIC Nevada, Inc.) NV
- - --------------------------------------------------------------------------------
BMA of New Hampshire, Inc. DE
- - --------------------------------------------------------------------------------
BMA of New Jersey, Inc. DE
- - --------------------------------------------------------------------------------
BMA of New Mexico, Inc. DE
- - --------------------------------------------------------------------------------
BMA of New York, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Newington, Inc. DE
- - --------------------------------------------------------------------------------
BMA of North Carolina, Inc. DE
- - --------------------------------------------------------------------------------
BMA of North City, Inc. DE
- - --------------------------------------------------------------------------------
<PAGE> 5
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
BMA of Northeast D.C., Inc. DE
- - --------------------------------------------------------------------------------
BMA of Oakland, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Ohio, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Oklahoma, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Pennsylvania, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Pine Brook, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Ponce, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Port Orange, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Puerto Rico, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Quincy, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Rhode Island, Inc. DE
d/b/a's
Artificial Kidney Center of RI
Artificial Kidney Center of Warwick
- - --------------------------------------------------------------------------------
BMA of Rio Piedras, Inc. DE
- - --------------------------------------------------------------------------------
BMA of San Antonio, Inc. DE
d/b/a
Kidney Disease Clinic of San Antonio
- - --------------------------------------------------------------------------------
BMA of San German, Inc. DE
- - --------------------------------------------------------------------------------
BMA of San Juan, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Sarasota, Inc. DE
- - --------------------------------------------------------------------------------
BMA of South Carolina, Inc. DE
- - --------------------------------------------------------------------------------
BMA of South Queens, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Southeast San Diego, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Southeast Washington, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Tarpon Springs,Inc. DE
- - --------------------------------------------------------------------------------
BMA of Tennessee, Inc. DE
- - --------------------------------------------------------------------------------
<PAGE> 6
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
BMA of Texas, Inc. DE
d/b/a's
Bio-Medical Applications of Dallas Central
Bio-Medical Applications of Northwest Dallas
Bio-Medical Applications of Plano
Bio-Medical Applications of S. Central
Dallas
Bio-Medical Applications of South Dallas
Bio-Medical Applications of Dallas South
Brazos Kidney Disease Center, Inc.
South Arlington Dialysis Center
Kidney Disease Clinic of Central San Antonio
Clear Lake Kidney Center
H.E.B. Dialysis Center
Golden Triangle Dialysis Center
Baytown Dialysis Facility
South Texas Kidney Center
Corsicana Dialysis Center
BMA East El Paso
Cypress Creek Dialysis Facility
BMA El Paso
Medical Arts Kidney Center
North Houston Dialysis Facility
New Braunfels Kidney Disease Clinic
Permian Basin Dialysis
Vally Hemo Dialysis Center
South Plains Kidney Disease Center
Jasper Dialysis
Gulf Coast Dialysis
Island Dialysis Center
Northwest Kidney Disease Center
West Forth Worth Dialysis Center
Weslaco Dialysis Center
Crossroads Dialysis Center of Victoria
Mainland Dialysis Facility
Rosenburg Dialysis Facility
Southeast Kidney Center
Rosedale Kidney Disease Center
West Houston Dialysis
Bio-Medical Applications of Big Springs
West Texas Kidney Center
- - --------------------------------------------------------------------------------
BMA of the District of Columbia, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Torrance, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Trenton, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Ukiah, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Union City, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Virginia, Inc. DE
- - --------------------------------------------------------------------------------
<PAGE> 7
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
BMA of West Virginia, Inc. DE
d/b/a's
Bio-Medical Applications of Beckley
Bio-Medical Applications of Bluefield
Bio-Medical Applications of Charleston
Bio-Medical Applications of Elkins
Bio-Medical Applications of Martinsburg
Bio-Medical Applications of Morgantown
Earl J. Hager Renal Unit
Elkins Dialysis Clinic
Martinsburg Dialysis Facility
Morgantown Dialysis Facility
Raleigh Dialysis Facility
West Virginia Dialysis Facility
- - --------------------------------------------------------------------------------
BMA of Whittier, Inc. DE
d/b/a
Bio-Medical Community Dialysis Unit of
Whittier
- - --------------------------------------------------------------------------------
BMA of Wisconsin, Inc. DE
- - --------------------------------------------------------------------------------
BMA of Woonsocket, Inc. DE
- - --------------------------------------------------------------------------------
Biotrax Connecticut, Inc. CT
- - --------------------------------------------------------------------------------
Bio-Trax International, Inc. DE
- - --------------------------------------------------------------------------------
Bradley Dialysis Clinic, Inc. TN
- - --------------------------------------------------------------------------------
Clinical Diagnostic Systems, Inc. FL
- - --------------------------------------------------------------------------------
Conejo Valley Dialysis, Inc. CA
- - --------------------------------------------------------------------------------
Continue Care Pharmaceuticals, Inc. WY
- - --------------------------------------------------------------------------------
Continue Care of Wyoming, Inc. WY
- - --------------------------------------------------------------------------------
D Interim, Inc. GA
- - --------------------------------------------------------------------------------
Diagnostic Management Services, Inc. MA
- - --------------------------------------------------------------------------------
Dialysis Associates West, Inc. TN
- - --------------------------------------------------------------------------------
Dialysis Management Group, Inc. TN
- - --------------------------------------------------------------------------------
Dialysis Services, Inc. TX
- - --------------------------------------------------------------------------------
Erika International Sales Corporation DE
- - --------------------------------------------------------------------------------
Erika of Texas, Inc. DE
- - --------------------------------------------------------------------------------
Greater S.E. Community Center for Renal DC
Disease, Inc.
- - --------------------------------------------------------------------------------
Gulf Region Mobile Dialysis, Inc. DE
- - --------------------------------------------------------------------------------
Gynesis Healthcare, Inc. DE
- - --------------------------------------------------------------------------------
Gynesis Healthcare for Women of Florida, FL
Inc.
- - --------------------------------------------------------------------------------
Gynesis Healthcare of Maryland, Inc. MD
- - --------------------------------------------------------------------------------
Gynesis Healthcare of New Jersey, Inc. NJ
- - --------------------------------------------------------------------------------
Gynesis Healthcare of New York, Inc. NY
- - --------------------------------------------------------------------------------
Gynesis Healthcare of Oklahoma, Inc. OK
- - --------------------------------------------------------------------------------
Gynesis Healthcare of Pennsylvania, Inc. PA
- - --------------------------------------------------------------------------------
Gynesis Healthcare of South Carolina, Inc. SC
- - --------------------------------------------------------------------------------
Gynesis Resources, Inc. DE
- - --------------------------------------------------------------------------------
Healthdyne Home Infusion Therapy, Inc. CA
- - --------------------------------------------------------------------------------
Healthy Options for Personal Enrichment, GA
Inc.
- - --------------------------------------------------------------------------------
HNS Accucare, Inc. GA
- - --------------------------------------------------------------------------------
<PAGE> 8
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
HNS Integrated Care Centers, Inc. GA
- - --------------------------------------------------------------------------------
HNS Medical Technology Services, Inc. GA
- - --------------------------------------------------------------------------------
HNS Michigan, Inc. GA
- - --------------------------------------------------------------------------------
HNS New York, Inc. NY
- - --------------------------------------------------------------------------------
HNS Quality Home Care, Inc. GA
- - --------------------------------------------------------------------------------
HNS UP Home Care, Inc. GA
- - --------------------------------------------------------------------------------
Home Dialysis Care, Inc. TX
- - --------------------------------------------------------------------------------
Home Intensive Care, Inc. DE
d/b/a's
HIC of Ft. Lauderdale
HIC of Ormand Beach
HIC of Tampa
- - --------------------------------------------------------------------------------
HIC of Arizona, Inc. AZ
- - --------------------------------------------------------------------------------
HIC of California, Inc. CA
- - --------------------------------------------------------------------------------
HIC of Colorado, Inc. CO
- - --------------------------------------------------------------------------------
HIC of Connecticut, Inc. CT
- - --------------------------------------------------------------------------------
HIC of Florida, Inc. FL
- - --------------------------------------------------------------------------------
HIC of Georgia, Inc. GA
- - --------------------------------------------------------------------------------
HIC of Illinois, Inc. IL
- - --------------------------------------------------------------------------------
HIC of Kansas, Inc. KS
- - --------------------------------------------------------------------------------
HIC of Las Vegas, Inc. NV
- - --------------------------------------------------------------------------------
HIC of Louisiana, Inc. LA
- - --------------------------------------------------------------------------------
HIC of Maryland, Inc. MD
- - --------------------------------------------------------------------------------
HIC of Massachusetts, Inc. MA
- - --------------------------------------------------------------------------------
HIC of Michigan, Inc. MI
d/b/a
Lifeline Medical Systems
- - --------------------------------------------------------------------------------
HIC of Missouri, Inc. MO
- - --------------------------------------------------------------------------------
HIC of Nevada, Inc. (n/k/a Bio-Medical Applications of Nevada Inc.) NV
- - --------------------------------------------------------------------------------
HIC of New Jersey, Inc. NJ
- - --------------------------------------------------------------------------------
HIC of New York, Inc. NY
- - --------------------------------------------------------------------------------
HIC of Northern Ohio, Inc. OH
- - --------------------------------------------------------------------------------
HIC of Ohio, Inc. OH
- - --------------------------------------------------------------------------------
HIC of Pennsylvania, Inc. PA
- - --------------------------------------------------------------------------------
HIC of Rhode Island, Inc. RI
- - --------------------------------------------------------------------------------
HIC of Tampa, Inc. FL
- - --------------------------------------------------------------------------------
HIC of Virginia, Inc. VA
- - --------------------------------------------------------------------------------
Home Nutritional Services, Inc. CA
d/b/a
Home Nutritional Support
- - --------------------------------------------------------------------------------
Home Nutritional Services, Inc. NJ
- - --------------------------------------------------------------------------------
Home Pharmacy Care of Michigan, Inc. MI
- - --------------------------------------------------------------------------------
Homestead Artificial Kidney Center, Inc. FL
- - --------------------------------------------------------------------------------
Infusions Innovations of Jacksonville, Inc. FL
- - --------------------------------------------------------------------------------
Infusions Innovations of Tampa, Inc. FL
- - --------------------------------------------------------------------------------
Interamerican Acute Dialysis Services, Inc. FL
- - --------------------------------------------------------------------------------
International Medical Care, Inc. DE
- - --------------------------------------------------------------------------------
I.V. Solutions, LTD (a LLC) TX
- - --------------------------------------------------------------------------------
KDNY, Inc. DE
- - --------------------------------------------------------------------------------
<PAGE> 9
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
Kidney Disease and Hypertension Center, Ltd. AZ
- - --------------------------------------------------------------------------------
LaFollette Dialysis Center, TN
- - --------------------------------------------------------------------------------
Lifechem, Inc. DE
d/b/a's
National Medical Care Medical Products
Division
National Medical Care Products Division
- - --------------------------------------------------------------------------------
Lifeline Medical Supplies, Inc. FL
- - --------------------------------------------------------------------------------
Lifeline Medical Systems, Inc. CA
- - --------------------------------------------------------------------------------
Lifeline Medical Systems, Inc. FL
- - --------------------------------------------------------------------------------
Medical Supply Company, Inc. VA
- - --------------------------------------------------------------------------------
Medi-Sure Testing, Inc. DE
- - --------------------------------------------------------------------------------
Med-X-Press, Inc. DE
- - --------------------------------------------------------------------------------
Metro Dialysis Center-Kirkwood, Inc. MO
- - --------------------------------------------------------------------------------
Metro Dialysis Center-Normandy, Inc. MO
- - --------------------------------------------------------------------------------
Metro Dialysis Center-North, Inc. MO
- - --------------------------------------------------------------------------------
NMC Homecare, Inc. DE
d/b/a's
Community Therapeutic Parentals & Nutrition,
Inc.
Medtech Resp. Products, Inc.
NMC Homecare
Medtech of California
Medical Arts Parenteral Services, Inc.
Medtech of Colorado, Inc.
Infusioncare of Ft. Lauderdale
Center for Sleep Excellence
NMC Homecare Respiratory Services
MedTech/NMC Home Care
Community Alimentation Services, Inc.
Theranutrix, Inc.
Delmed Home Health Care
NMC Homecare, Inc.
Home Nutritional Care
Medtech of Texas, Inc.
- - --------------------------------------------------------------------------------
NMC Asia-Pacific, Inc. DE
- - --------------------------------------------------------------------------------
NMC China, Inc. DE
- - --------------------------------------------------------------------------------
NMC Diabetic Foot Care, Inc. DE
- - --------------------------------------------------------------------------------
NMC Diabetic Foot Care Centers Orthotics, DE
Inc.
- - --------------------------------------------------------------------------------
NMC Diagnostic Services, Inc. DE
d/b/a
Beta Diagnostics
- - --------------------------------------------------------------------------------
NMC Dialysis Services, Inc. DE
- - --------------------------------------------------------------------------------
NMC Dialysis Services (Romania), Inc. DE
- - --------------------------------------------------------------------------------
NMC Homecare of Michigan,Inc. DE
- - --------------------------------------------------------------------------------
NMC International, Inc. DE
- - --------------------------------------------------------------------------------
National Medical Care of Taiwan, Inc. DE
- - --------------------------------------------------------------------------------
NMC Latin America, Inc. FL
- - --------------------------------------------------------------------------------
NMC Management Services, Inc. DE
- - --------------------------------------------------------------------------------
NMC Medical Products, Inc. DE
- - --------------------------------------------------------------------------------
<PAGE> 10
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
NMC Medical Services, Inc. PA
d/b/a's
BioTrax International of Pennsylvania
NMC Diagnostic Imaging Center
- - --------------------------------------------------------------------------------
NMC Services, Inc. DE
- - --------------------------------------------------------------------------------
NMC Services (Romania), Inc. DE
- - --------------------------------------------------------------------------------
NMC Ventures, Inc. DE
- - --------------------------------------------------------------------------------
National Medical Care, Inc. DE
d/b/a's
MedTech, Inc., Division of National Medical
Care Inc.
Cardui Respiratory Care
New Jersey Mobile Acute
Renal Care Center of Belle Glade
Renal Care Center of North Jacksonville
Renal Care Center of Okeechobee
Renal Care Center of Sebring
Renal Care Center of St. Augustine
Renal Care Center of Vero Beach
Renal Care of Wellington
Fresenius Medical Care-North America
- - --------------------------------------------------------------------------------
National Medical Care Home Care Service NY
Agency, Inc.
d/b/a
NMC Homecare
- - --------------------------------------------------------------------------------
Nephrology Applications of Mobile, Inc. AL
- - --------------------------------------------------------------------------------
North Knoxville Dialysis Center, Inc. TN
- - --------------------------------------------------------------------------------
Norlab, Inc. MA
- - --------------------------------------------------------------------------------
PD Solutions, Inc. DE
- - --------------------------------------------------------------------------------
PD Solutions of Arizona, Inc. AZ
- - --------------------------------------------------------------------------------
PD Solutions of California,Inc. CA
- - --------------------------------------------------------------------------------
PD Solutions of Georgia, Inc. GA
- - --------------------------------------------------------------------------------
PD Solutions of Illinois, Inc. IL
- - --------------------------------------------------------------------------------
PD Solutions of Louisiana,Inc. LA
- - --------------------------------------------------------------------------------
PD Solutions of Maryland, Inc. MD
- - --------------------------------------------------------------------------------
PD Solutions of Michigan, Inc. MI
- - --------------------------------------------------------------------------------
PD Solutions of Missouri, Inc. MO
- - --------------------------------------------------------------------------------
PD Solutions of Nevada, Inc. NV
- - --------------------------------------------------------------------------------
PD Solutions of New Jersey, Inc. NJ
- - --------------------------------------------------------------------------------
PD Solutions of New York, Inc. NY
- - --------------------------------------------------------------------------------
PD Solutions of Ohio, Inc. OH
- - --------------------------------------------------------------------------------
PD Solutions of Pennsylvania, Inc. PA
- - --------------------------------------------------------------------------------
PD Solutions of Texas, Inc. TX
- - --------------------------------------------------------------------------------
PD Solutions of Virginia, Inc. VA
- - --------------------------------------------------------------------------------
Park Diagnostic Imaging Center, Inc. FL
- - --------------------------------------------------------------------------------
Park Imaging,Inc. MA
d/b/a
BioTrax International of Massachusetts
- - --------------------------------------------------------------------------------
Park Imaging, Inc. FL
- - --------------------------------------------------------------------------------
Park Portable X-Ray, Inc. MA
- - --------------------------------------------------------------------------------
<PAGE> 11
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
PML, Inc. MA
- - --------------------------------------------------------------------------------
Personal Care Health Services, Inc. DE
d/b/a's
PCHS, Inc.
NMC Homecare
- - --------------------------------------------------------------------------------
Phoenix Consulting Services, Inc. FL
- - --------------------------------------------------------------------------------
Preferred Homecare of Florida,Inc. FL
- - --------------------------------------------------------------------------------
Preferred Homecare of New Jersey, Inc. NJ
- - --------------------------------------------------------------------------------
Preferred Pharmacy Services, Inc. FL
- - --------------------------------------------------------------------------------
Quality Care Dialysis Centers, Inc. FL
- - --------------------------------------------------------------------------------
QCDC of Baltimore, Inc. MD
- - --------------------------------------------------------------------------------
QCDC of Creve Coeur, Inc. MO
- - --------------------------------------------------------------------------------
QCDC of Dallas, Inc. TX
- - --------------------------------------------------------------------------------
QCDC of Greensburg, Inc. LA
- - --------------------------------------------------------------------------------
QCDC of Hammond, Inc. DE
- - --------------------------------------------------------------------------------
QCDC of Houston, Inc. TX
- - --------------------------------------------------------------------------------
QCDC of Las Vegas, Inc. NV
- - --------------------------------------------------------------------------------
QCDC of Margate, Inc. FL
- - --------------------------------------------------------------------------------
QCDC of Mt. Vernon, Inc. VA
- - --------------------------------------------------------------------------------
QCDC of New Orleans, Inc. LA
- - --------------------------------------------------------------------------------
QCDC of North County, Inc. MO
- - --------------------------------------------------------------------------------
QCDC of Patapsco, Inc. MD
- - --------------------------------------------------------------------------------
QCDC of San Antonio, Inc. TX
- - --------------------------------------------------------------------------------
QCDC of Southern Maryland,Inc. MD
- - --------------------------------------------------------------------------------
QCDC of St. Augustine, Inc. FL
- - --------------------------------------------------------------------------------
QCDC of St. Clair Shores,Inc. MI
- - --------------------------------------------------------------------------------
QCDC of St. Louis, Inc. MO
- - --------------------------------------------------------------------------------
QCDC of University City, Inc. MO
- - --------------------------------------------------------------------------------
QCDC of Vega Baja, Inc. PR
- - --------------------------------------------------------------------------------
QCDC of Vista, Inc. CA
- - --------------------------------------------------------------------------------
Renal Scientific Services, Inc. DE
- - --------------------------------------------------------------------------------
Renal Scientific Service of Texas, Inc. DE
- - --------------------------------------------------------------------------------
Renal Supply (Tenn) Corporation NJ
- - --------------------------------------------------------------------------------
Renal Integrated Health Service Network AZ*
L.L.C.
- - --------------------------------------------------------------------------------
Retaw, Inc. FL
- - --------------------------------------------------------------------------------
Rockwood Dialysis Center, Inc. VA
- - --------------------------------------------------------------------------------
S.A.K.D.C., Inc. TX
- - --------------------------------------------------------------------------------
San Diego Dialysis Services, Inc. DE
d/b/a
Bio-Medical Community Dialysis Unit of San
Diego
- - --------------------------------------------------------------------------------
Santa Barbara Community Dialysis Center, CA
Inc.
- - --------------------------------------------------------------------------------
Security Health Services, Inc. NV
- - --------------------------------------------------------------------------------
- - ----------
*A Limited Liability Company whose membership interests are owned by Arizona
Kidney Disease & Hypertension Center, Ltd. (50%) and BMA of Arizona (50%).
<PAGE> 12
- - --------------------------------------------------------------------------------
Corporate Name State of Incorporation
- - -------------- ----------------------
- - --------------------------------------------------------------------------------
Sover Corporation DE
- - --------------------------------------------------------------------------------
St. Louis Regional Dialysis Center, Inc. MO
- - --------------------------------------------------------------------------------
Tappahanock Dialysis Center, Inc. VA
- - --------------------------------------------------------------------------------
Target Health Care, L.L.C. NY*
- - --------------------------------------------------------------------------------
The Medical Accountability Group, Inc. TX
- - --------------------------------------------------------------------------------
United Dialysis Corporation CA
- - --------------------------------------------------------------------------------
University Kidney Center, Inc. TX
- - --------------------------------------------------------------------------------
UKC-North, Inc. TX
- - --------------------------------------------------------------------------------
VMS, Ltd. AZ
- - --------------------------------------------------------------------------------
Warrenton Dialysis Facility, Inc. VA
- - --------------------------------------------------------------------------------
West End Dialysis Center, Inc. VA
- - --------------------------------------------------------------------------------
Zenex Capital Corp. FL
- - --------------------------------------------------------------------------------
- - ----------
*A Limited Liability Company whose membership interests are owned by JGC,
L.L.C. (50%) and NMC Management Services, Inc. (50%).
<PAGE> 13
NATIONAL MEDICAL CARE, INC.
Foreign Subsidiaries
Following is a list of the direct and indirect foreign subsidiaries of NMC as of
September 30, 1996 which are incorporated or registered in foreign
jurisdictions.
<TABLE>
<CAPTION>
Corporate Name Country of Incorporation Stockholders
-------------- ------------------------ ------------
<S> <C> <C>
ARGENTINA
Centro de Dialisis Ituzaingo, S.A. IMC 99%/BMAMC 1 share
Centro Nefrologico Bahia Blanca, S.R.L. IMC 95%/BMAMC 1 of 18 quotas
Diali Salta, S.A. IMC 99%/BMAMC 1 share
Inere, S.A. IMC 99%/BMAMC 1 share
NMC de Argentina, S.A. IMC 99%/BMAMC 1 share
Dr. Domingos Najun 1 share
Creon, S.A. IMC 99%/BMAMC 1 share
Dialisis Medica S.A. IMC 99%/BMAMC 1 share
Centro Nefrologico Zapala S.R.L. IMC 99%/BMAMC 1 share
Centro Nefrologico Cutral-Co S.R.L. IMC 99%/BMAMC 1 share
Centro Nefrologico Neuquen S.A. IMC 99%/BMAMC 1 share
Ceni SRL IMC 99%/BMAMC 1 share
Instituto del Rinon S.R.L. IMC 99%/BMAMC 1 share
BERMUDA
Erika, Ltd. NMCMPD
NMC Holdings, Ltd. Erika, Ltd.
BRAZIL
Maia de Almeida Industria
e Comercio, S.A. IMC
NMC do Brasil Ltda. IMC 99%/BMAMC 1 share
CANADA
National Medical Care Canada, Inc. IMC
NMC Canada Dialysis Services, Inc. IMC
Erika Laboratories, Ltd. NMCMPD
CHINA
Guangzhou Nanfang - NMC
Hemodialysis Center Limited see note 1
Shenyang Liaoning NMC Hemodialysis
Center Co., Ltd. see note 2
Shanghai Ren Ji NMC Dialysis Center see note 3
COLOMBIA
Instituto Renal de Colombia
Medirenal Ltda. IMC 99%/Carlos Umana 1 share
Unirenal del Norte Ltda. IMC 99%/BMAMC 1 share
CZECH REPUBLIC
National Medical Care, s.r.o. IMC
ENGLAND
Renacare Limited Renalyte 99%/IMC 1share
Renalyte Services Limited IMC50%/BMAMC 50%
U.K. Renal Services Limited Renalyte
FRANCE
National Medical Care France, S.A. see note 4
NMC Medical Products France, S.A.R.L. IMC
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
Corporate Name Country of Incorporation Stockholders
-------------- ------------------------ ------------
<S> <C> <C>
GERMANY
NMC Dialysebehandlung GmbH NMCDEUT
NMC Holding GmbH NMC
National Medical Care (Deutschland)GmbH NMCHOLDG/NMC
Riggers Dialysatoren GmbH NMCDEUT
Riggers Dialysatoren Produktion Thalheim GmbH NMCDEUT
*Riggers Dialysatoren Produktion Thalheim GmbH & Co., Betriebs-KG see note 5
Riggers Medizintechnik Thalheim GmbH NMCDEUT
HUNGARY
NMC Dializis Szolgaltato KFT IMC
NMC Vagyonkezelo KFT IMC
ITALY
National Medical Care Italiana, S.p.A. IMC
NMC Medical Products S.r.l. NMC-ITAL
JAPAN
Amicon Japan K.K. IMC
KOREA
NMC Korea Inc. IMC
MALAYSA
Renal Services (Malaysia) SDN BHD IMC
MEXICO
Erika de Reynosa, S.A. de C.V. Erika-TX
POLAND
National Medical Care Polska Sp. z.o.o. IMC
PORTUGAL
Abrandial - Clinica de Doencas Renais, Lda. NMC-Centro Medico
Ambulancias 111 - Servico de Transporte de Deontes e
Sinistrades, S.A. NMC-Centro Medico
Analises Xira, Lda. Teixeira
Ascendao Afonso, Lda. Teixeira
Anamed - Laboratorio Medico, Lda Teixeira
Cal & Silveira - Analises Clinicas, Lda. Teixeira
Cancho Lda. NMC-Centro Medico
Clinica de Diagnosticos da Azambuja Dr. Fernando Teixeira, Lda. Teixeira
Clinica de Diagnosticos Dr. Fernando Texeira, S.A. ("Teixeira") NMC-Centro Medico
Clinica de Diagnosticos de Ferreira do Alentejo, Dr. Fernando
Texeira, S.A. NMC-Centro Medico 99%/Teixeira
20;Palma 10; Adao 10; de Matos 10
CNH - Centro Nacional de Hemodialise, Lda. NMCHOLD 98.99%/Bernier 1.01%
Diagnostico Laboratorial Dra. Helena Farrajota Teixeira
e Dra. Iolanda Rodrigues, Lda.
Egidial - Centro de Dialises, Lda. NMC-Centro Medico
Flaviano Gusmao, Lda. Teixeira
Gnostica - Laboratroio de Analisis Clinicas, S.A. Teixeira
Hemodial - Centro de Dialise Renal do Restelo, Lda. NMC-Centro Medico
LAC - Laboratorio de Analises Clinicas, Lda. Teixeira
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
Corporate Name Country of Incorporation Stockholders
-------------- ------------------------ ------------
<S> <C> <C>
Laboratorio de Analises Clinicas Dr. Jaoa Ribeiro
e Dra. Maria DaGraca Cardosa, Lda. Teixeira
Louro & Pires, Lda. Teixeira
L.P.C. - Laboratorio de Patologia Clinica, Lda. Teixeira
NMC - Centro Medico Nacional, Lda. NMCHOLD 99.3%/Chris Ford .07%
Ribadial - Clinica de Dialise de Santarem, Lda. NMC-Centro Medico
Soendocrina - Sociedade de Endocrinologia, Lda. Teixeira
Susana Pereira Rosas, Lda. Teixeira
Visodial - Centro de Dialise de Viseu, Lda. NMC-Centro Medico
PUERTO RICO
Life Assist Medical Products Corp. NMCMPD
SPAIN
Amex Canarias, S.A. NMC-Spain
Amex, S.A. NMC-Spain
Centro de Dialisis Recoletas - Albacete, S.L. NMC-Spain
Cilu, S.A. AMEX
Compania Andaluza de Medicina Extrahospitalaria, S.A. NMC-Spain 70.4%/AMEX 29.6%
Corporacion Atex, S.L. NMC-Spain
Dialsun, S.A. AMEX
Dialcentro, S.A. NMC-Spain
Instituto de Ciencias Neurologicas, S.A. NMC-Spain
Kidney, S.L. NMC-Spain
National Medical Care of Spain, S.A IMC
Socodi Club, S.L. NMC-Spain
Amparo Perea, S.L. NMC-Spain
Hemogan, S.A. NMC-Spain
ACJ Dialisis Tenerife, S.L. NMC-Spain
ASEPO, S.A. NMC-Spain
THAILAND
NMC Dialysis Centers
(Thailand) Limited
VENEZUELA
NMC National Medical Care de Venezuela, C.A. IMC
</TABLE>
- - --------------------------------------------------------------------------------
Note 1 Cooperative Joint Venture: NMC China, Inc. contributes 80% of registered
capital and appoints a majority of directors
Note 2 Cooperative Joint Venture; NMC International, Inc. contributes 64% of
registered capital and appoints majority of dir.
Note 3 Cooperative Joint Venture; NMC China, Inc. contributes 63% of
registered capital and appoints a majority of directors.
Note 4 IMC owns 2,494 of 2,500 shares; 1 share each owned by National Medical
Care, Inc., NMC Medical Products, Inc., Constantine L. Hampers, M.D.,
John Walker, Christopher Ford, Eric Prunier.
Note 5 Partnership between National Medical Care (Deutschland) GmbH and Riggers
Dialysatoren Produktion Thalheim GmbH.
NOTE THAT ALL SHARES SHOWN AS BEING OWNED BY CONSTANTINE L. HAMPERS, M.D. ARE
EXPECTED TO BE TRANSFERRED IN LIGHT OF HIS JUNE 14, 1996 RESIGNATION.
NOTE THAT ALL SHARES SHOWN AS BEING OWNED BY JOHN S. WALKER ARE EXPECTED TO
BE TRANSFERRED IN LIGHT OF HIS OCTOBER 24, 1996 RESIGNATION.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 50,422
<SECURITIES> 0
<RECEIVABLES> 670,022
<ALLOWANCES> 153,939
<INVENTORY> 146,751
<CURRENT-ASSETS> 953,643
<PP&E> 587,089
<DEPRECIATION> 61,101
<TOTAL-ASSETS> 4,596,079
<CURRENT-LIABILITIES> 672,137
<BONDS> 1,438,205
0
16,318
<COMMON> 90,000
<OTHER-SE> 1,661,421
<TOTAL-LIABILITY-AND-EQUITY> 4,596,079
<SALES> 234,078
<TOTAL-REVENUES> 2,245,226
<CGS> 153,468
<TOTAL-COSTS> 1,362,612
<OTHER-EXPENSES> 2,989
<LOSS-PROVISION> 93,294
<INTEREST-EXPENSE> 61,531
<INCOME-PRETAX> 144,044
<INCOME-TAX> 75,117
<INCOME-CONTINUING> 68,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,927
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
