<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________________TO__________________
COMMISSION FILE NUMBER: 1-3720
FRESENIUS MEDICAL CARE HOLDINGS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New York 13-3461988
- ---------------------------------------------- -----------------------
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.)
Two Ledgemont Center, 95 Hayden Avenue, Lexington, MA 02420
- ----------------------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: 781-402-9000
----------------------------------------------------------------
---------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicated by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
<PAGE> 2
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: as of the date
hereof, 90,000,000 shares of common stock, par value $1.00 per share, are
outstanding, all of which are held by Fresenius Medical Care AG.
2
<PAGE> 3
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS PAGE
Consolidated Statements of Earnings ............................ 4
Consolidated Statements of Comprehensive Income................. 6
Consolidated Balance Sheets..................................... 7
Consolidated Statements of Cash Flows........................... 8
Notes to Consolidated Financial Statements...................... 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 22
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings............................................... 29
ITEM 6: Exhibits and Reports on Form 8-K................................ 42
3
<PAGE> 4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
-------- ---------
<S> <C> <C>
NET REVENUES
Health care services ......................... $541,052 $440,936
Medical supplies ............................. 114,600 106,742
-------- --------
655,652 547,678
-------- --------
EXPENSES
Cost of health care services ................. 335,434 267,873
Cost of medical supplies ..................... 76,539 78,184
General and administrative expenses .......... 82,653 70,100
Provision for doubtful accounts .............. 16,308 12,616
Depreciation and amortization ................ 55,507 51,335
Research and development ..................... 1,294 441
Interest expense, net, and related
financing costs including $21,730 and
$11,310 of interest with affiliates ........ 54,880 47,547
-------- --------
622,615 528,096
-------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ........................... 33,037 19,582
PROVISION FOR INCOME TAXES ........................ 18,872 9,775
-------- --------
INCOME FROM CONTINUING OPERATIONS ................. $ 14,165 $ 9,807
-------- --------
DISCONTINUED OPERATIONS (NOTE 5)
Loss from discontinued operations, net of
income taxes ............................... -- (7,905)
Loss on disposal of discontinued
operations, net of income tax benefit ...... -- --
-------- --------
Loss from discontinued operations ............ -- (7,905)
-------- --------
NET INCOME ........................................ $ 14,165 $ 1,902
======== ========
Basic and fully dilutive earnings per share
Continuing operations........................... $ 0.16 $ 0.11
Discontinued operations......................... $ -- $ (.09)
Net Income ..................................... $ 0.16 $ 0.02
</TABLE>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
4
<PAGE> 5
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
NET REVENUES
Health care services .......................... $1,550,689 $1,257,786
Medical supplies .............................. 353,291 322,271
---------- ----------
1,903,980 1,580,057
---------- ----------
EXPENSES
Cost of health care services .................. 958,833 766,038
Cost of medical supplies ...................... 238,898 223,342
General and administrative expenses ........... 249,816 209,309
Provision for doubtful accounts ............... 50,187 39,106
Depreciation and amortization ................. 164,954 150,167
Research and development ...................... 3,102 2,311
Interest expense, net, and related
financing costs including $59,315 and
$23,830 of interest with affiliates.......... 155,059 129,733
---------- ----------
1,820,849 1,520,006
---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ............................ 83,131 60,051
PROVISION FOR INCOME TAXES ......................... 46,416 32,464
---------- ----------
INCOME FROM CONTINUING OPERATIONS .................. $ 36,715 $ 27,587
---------- ----------
DISCONTINUED OPERATIONS (NOTE 5)
Loss from discontinued operations, net of
income taxes ................................ (8,669) (6,366)
Loss on disposal of discontinued
operations, net of income tax benefit ....... (97,228) --
---------- ----------
Loss from discontinued operations ............. (105,897) (6,366)
---------- ----------
NET INCOME (LOSS) .................................. $ (69,182) $ 21,221
========== ==========
Basic and fully dilutive earnings per share
Continuing operations ........................... $ 0.41 $ 0.30
Discontinued operations ......................... $ (1.18) $ (0.07)
Net Income (loss) ............................... $ (0.77) $ 0.23
</TABLE>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
5
<PAGE> 6
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) .............................. $14,165 $ 1,902 $(69,182) $ 21,221
Other comprehensive income .....................
Foreign currency translation adjustments .... 226 (8,363) 1,921 (15,162)
------- ------- -------- --------
Total other comprehensive income ............ 226 (8,363) 1,921 (15,162)
------- ------- -------- --------
COMPREHENSIVE INCOME (LOSS) .................... $14,391 $(6,461) $(67,261) $ 6,059
======= ======= ======== ========
</TABLE>
6
<PAGE> 7
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................... $ 8,797 $ 13,054
Accounts receivable, less allowances of
$66,166 and $53,109 .......................... 189,882 252,023
Inventories .................................... 172,677 137,470
Deferred income taxes .......................... 131,939 94,905
Other current assets ........................... 106,180 82,148
Income taxes receivable ........................ 22,737 12,421
Net assets of discontinued operations .......... 150,259 370,676
---------- ----------
Total Current Assets ...................... 782,471 962,697
---------- ----------
Properties and equipment, net ....................... 435,335 505,929
---------- ----------
Other Assets:
Excess of cost over the fair value of net
assets acquired and other intangible
assets, net of accumulated amortization
of $255,328 and $152,506 ..................... 3,352,838 3,265,260
Other assets and deferred charges .............. 58,836 40,295
---------- ----------
Total Other Assets ........................ 3,411,674 3,305,555
---------- ----------
Total Assets ........................................ $4,629,480 $4,774,181
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and
capitalized lease obligations ................ $ 10,350 $ 18,599
Accounts payable ............................... 106,793 119,027
Accrued liabilities ............................ 308,568 338,237
Net accounts payable to affiliates ............. 11,326 20,744
---------- ----------
Total Current Liabilities ................. 437,037 496,607
Long-term debt ...................................... 1,106,086 1,613,657
Non-current borrowings from affiliates .............. 954,404 510,498
Capitalized lease obligations ....................... 3,752 7,968
Deferred income taxes ............................... 147,230 139,536
Other liabilities ................................... 31,003 25,718
---------- ----------
Total Liabilities ......................... 2,679,512 2,793,984
---------- ----------
Equity:
Preferred stock, $100 par value .................. 7,412 7,412
Preferred stock, $.10 par value .................. 8,906 8,906
Common stock, $1 par value; 300,000,000 shares
authorized; outstanding 90,000,000 ............. 90,000 90,000
Paid in capital .................................. 2,016,814 1,975,572
Retained deficit ................................. (172,800) (99,408)
Accumulated comprehensive income ................. (364) (2,285)
---------- ----------
Total Equity ................................ 1,949,968 1,980,197
---------- ----------
Total Liabilities and Equity ........................ $4,629,480 $4,774,181
========== ==========
</TABLE>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
7
<PAGE> 8
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ........................................... $ (69,182) $ 21,221
Adjustments to reconcile net earnings to net
cash from Operating activities:
Depreciation and amortization .......................... 164,954 150,167
Loss from discontinued operations ...................... 8,669 6,366
Loss on disposition of businesses ...................... 97,228 --
Provision for doubtful accounts ........................ 50,187 39,106
Benefit of deferred income taxes ....................... (40,771) (11,846)
Loss on disposal of properties and equipment ........... 91 574
Changes in operating assets and liabilities, net of
effects of purchase acquisitions and foreign exchange:
Increase in accounts receivable ........................ (109,205) (63,881)
Increase in inventories ................................ (34,060) (2,343)
Increase in other current assets ....................... (8,532) (26,079)
Increase in other assets and deferred charges .......... (21,970) (3,495)
Decrease in accounts payable ........................... (12,394) (2,852)
Increase (decrease) in accrued income taxes ............ 94,058 (12,744)
Decrease in accrued liabilities ........................ (36,567) (20,321)
Increase (decrease) in other long-term liabilities ..... 5,284 (7,930)
Net changes due to/from affiliates ..................... (8,346) 7,579
Other, net ............................................. 20,915 19,130
--------- ---------
Net cash provided by operating activities of
continued operations ................................... 100,359 92,652
--------- ---------
Net cash used in operating activities of
discontinued operations ................................ (13,878) (28,553)
--------- ---------
Net cash provided by operating activities ................... 86,481 64,099
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures ................................... (50,794) (95,078)
Payments for acquisitions, net of cash acquired ....... (174,969) (415,954)
Proceeds from disposition of businesses ................ 82,500 --
--------- ---------
Net cash used in investing activities of
continued operations ................................... (143,263) (511,032)
--------- ---------
Net cash used in investing activities of discontinued ....... (8,925) (14,124)
--------- ---------
Net cash used in investing activities ....................... (152,188) (525,156)
--------- ---------
Cash Flows from Financing Activities:
Increase in borrowings from affiliates ................. 457,558 130,136
Cash dividends paid .................................... (390) (390)
Proceeds on issuance of debt ........................... 16,086 189,898
Proceeds from receivable financing facility ............ 125,000 52,000
Payments on debt and capitalized leases ................ (536,122) (52,840)
Transfer of International operations ................... (168) --
Contributed Capital from FMC AG ........................ -- 144,000
Other net .............................................. (448) 2,962
--------- ---------
Net cash provided by financing activities of
continued operations ................................... 61,516 465,766
--------- ---------
Net cash used in financing activities of
discontinued operations ................................ (2,107) (1,457)
--------- ---------
Net cash provided by financing activities ................... 59,409 464,309
--------- ---------
Effects of changes in foreign exchange rates ..................... 2,041 (15,138)
--------- ---------
Change in cash and cash equivalents .............................. (4,257) (11,886)
Cash and cash equivalents at beginning of period ................. 13,054 20,971
--------- ---------
Cash and cash equivalents at end of period ....................... $ 8,797 $ 9,085
========= =========
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest ............................................... $ 102,940 $ 92,169
Income taxes (received)/paid, net ...................... (7,532) 53,469
Details for Acquisitions:
Assets acquired ............................................. 162,621 478,871
Liabilities assumed ......................................... 2,375 26,691
Advances from affiliates .................................... 41,805 0
Contributed capital from FMC AG ............................. -- 34,425
Payments on prior year advances from affiliates ............. 56,528 --
--------- ---------
Cash paid ................................................... 174,969 417,755
Less cash acquired .......................................... -- 1,801
--------- ---------
Net cash paid for acquisitions .............................. $ 174,969 $ 415,954
========= =========
</TABLE>
See accompanying Notes to Unaudited, Consolidated Financial Statements.
8
<PAGE> 9
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY, AND BASIS OF PRESENTATION
THE COMPANY
Fresenius Medical Care Holdings, Inc., a New York corporation ("FMCH or
the "Company"), is a subsidiary of Fresenius Medical Care AG, a German
corporation ("Fresenius Medical Care" or "FMC"). The Company conducts its
operations through three principal subsidiaries, National Medical Care, Inc., a
Delaware corporation ("NMC"), Fresenius USA, Inc., a Massachusetts corporation
("FUSA") and SRC Holding Company, Inc., a Delaware corporation.
The Company is primarily engaged in (i) providing kidney dialysis
services, clinical laboratory testing and renal diagnostic services, and (ii)
manufacturing and distributing products and equipment for dialysis treatment.
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION
The consolidated financial statements in this report at September 30,
1998 and 1997 and for the three month and nine month interim periods then ended
are unaudited and should be read in conjunction with the consolidated financial
statements in the Company's 1997 report on Form 10-K. Such interim financial
statements reflect all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented. Certain amounts in the prior periods' consolidated financial
statements have been reclassified to conform to the current periods' basis of
presentation.
The results of operations for the three and nine-month periods ended
September 30, 1998 are not necessarily indicative of the results of operations
for the fiscal year ending December 31, 1998.
NEW STANDARDS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No.130, Reporting Comprehensive Income, effective January 1,
1998. This statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement further requires that the Company classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
9
<PAGE> 10
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Inventories:
Raw materials ....................................... $ 38,721 $ 37,792
Manufactured goods in process ....................... 20,441 14,074
Manufactured and purchased inventory
available for sale ............................... 85,040 63,385
-------- --------
144,202 115,251
Health care supplies ............................... 28,475 22,219
-------- --------
Total .......................................... $172,677 $137,470
======== ========
</TABLE>
NOTE 3. DEBT
Long-term debt to outside parties consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Credit Agreement...................................... $1,093,800 $1,613,300
Third-party debt, primarily bank borrowings
at various interest rates (3% - 14%) with
various maturities ................................. 16,651 12,475
---------- ----------
1,110,451 1,625,775
Less amounts classified as current.................... 4,365 12,118
---------- ----------
$1,106,086 $1,613,657
========== ==========
</TABLE>
Non current borrowings from affiliates consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Fresenius Medical Care AG non-current borrowings
primarily at fixed interest rates of approximately
7% and 9.25%......................................... $377,669 $352,939
Fresenius Medical Care AG deutsche mark denominated at
variable interest rates approximately 5%............. -- 72,601
Fresenius Medical Care - Deutschland - GmbH at interest
rates approximating 7% (USD denominated) and 5%
(deutsche mark denominated), respectively............ 87,000 17,099
Fresenius Medical Care Finance SA non-current
borrowings primarily at interest rates
approximating 6% .................................... 52,861 67,584
Fresenius Medical Care Trust Finance S.a.r.l. at an
interest rate of 8.43%............................... 435,529 --
Other.................................................. 1,345 275
-------- --------
954,404 510,498
Less amounts classified as current..................... -- --
-------- --------
Total.................................................. $954,404 $510,498
======== ========
</TABLE>
On February 27, 1998, FMCH increased its existing accounts receivable
financing facility with NationsBank to $331,000 from $204,000. As of September
30, 1998, proceeds of $325,000 have been drawn under the NationsBank accounts
receivable financing facility. The amount drawn under the NationsBank account
receivable financing facility is netted against accounts receivable.
NOTE 4. INTERNATIONAL OPERATIONS
Effective January 1, 1998, FMCH transferred legal ownership of
substantially all of its international operations to FMC. This transfer was
accounted for on the cost basis since the international subsidiaries remain
under control of a common parent. The consolidated financial statements in this
report at September 30, 1998 and for the three month and nine month interim
periods then ended do not include the operating results and cash flows of the
international operations which were transferred. The consolidated financial
statements at September 30, 1997 and for the three month and nine month interim
periods then ended have been restated to exclude operating results and cash
flows of the international operations and to conform to the current period
presentation. Total international assets of $208,669 and liabilities of
$249,733, which included $187,525 of intercompany obligations were transferred
at December 31, 1997.
The following table shows the restatement to net revenues and net
earnings for continuing operations and earnings per share for the prior periods:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS THREE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
Net Revenues:.......................................
Consolidated FMCH.............................. $1,709,162 $2,621,300 $630,566
Less International Transfer.................... 129,105 172,415 43,838
---------- ---------- --------
Restated FMCH.................................. $1,580,057 $2,448,885 $586,728
========== ========== ========
Net Earnings........................................
Consolidated FMCH.............................. $ 22,300 $ 20,923 $ 6,046
Less International Transfer.................... 1,079 786 715
---------- ---------- --------
Restated FMCH.................................. $ 21,221 $ 20,137 $ 5,331
========== ========== ========
Restated basic and fully diluted earnings
per share ..................................... $ 0.23 $ 0.22 $ 0.06
</TABLE>
The following table shows the restatement to the previously reported
December 31, 1997 stockholders equity:
<TABLE>
<CAPTION>
Consolidated Less International Restated
FMCH Transfer FMCH
------------ ------------------ --------
<S> <C> <C> <C>
Net Equity...................................... $1,968,979 $11,218 $1,980,197
</TABLE>
10
<PAGE> 11
NOTE 5. DISCONTINUED OPERATIONS
Effective June 1, 1998, the Company classified its Non Renal Diagnostic
Services and Homecare divisions as discontinued operations. The Company disposed
of its Non Renal Diagnostic Services division and its Homecare division on
respectively, June 26, 1998 and July 29, 1998. The Company has recorded a net
after tax loss of $97 million on the sale of these businesses. The net loss on
the disposal of these businesses and their results of operations have been
accounted for as discontinued operations, and accordingly, prior year results
have been restated. The remaining assets and liabilities of these discontinued
operations at the balance sheet date have been classified in the consolidated
balance sheet as Net Assets of Discontinued Operations. Included in net assets
of discontinued operations is approximately $150 million of IDPN receivables.
These assets have not been sold and will remain classified as discontinued
operations until they have been settled. See Note 6 "Commitments and
Contingencies - Legal Proceedings."
Operating results and net assets of discontinued operations are presented below:
Discontinued Operations - Results of Operations
The revenues and results of operations of the discontinued operations
of Non Renal Diagnostic Services and Homecare divisions were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1998 1997 1998 1997
------- -------- --------- --------
<S> <C> <C> <C> <C>
NET REVENUES........................................... $ -- $ 66,558 $ 120,940 $217,683
------- -------- --------- --------
Loss from operations before income tax benefit......... (11,989) (14,212) (9,764)
Income tax benefit..................................... -- (4,084) (5,543) (3,398)
------- -------- --------- ---------
Loss from operations................................... -- (7,905) (8,669) (6,366)
------- -------- --------- --------
Loss on disposal before income tax benefit............. -- (140,000) --
Income tax benefit..................................... -- -- (42,772) --
------- -------- --------- --------
Loss on disposal....................................... -- -- (97,228) --
------- -------- --------- --------
Loss from discontinued operations...................... -- (7,905) (105,897) (6,366)
======= ======== ========= ========
</TABLE>
Discontinued Operations - Consolidated Balance Sheet
The net assets, excluding intercompany assets, of the discontinued
operations of the Non Renal Diagnostic Services and Homecare divisions, included
in the consolidated balance sheet at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Total
<S> <C>
Current assets........................... $172,665
Properties & equipment, net.............. 249
Other assets............................. 594
--------
Total Assets.......................... $173,508
========
Current liabilities...................... 23,002
Other liabilities........................ 247
--------
Total Liabilities..................... 23,249
========
Net assets............................ $150,259
========
</TABLE>
11
<PAGE> 12
NOTE 6. COMMITMENTS AND CONTINGENCIES
Contingent Non-NMC Liabilities of Grace New York (Now Known as
Fresenius Medical Care Holdings, Inc.)
The Company, formerly known as W. R. Grace & Co. ("Grace New York"),
together with its wholly owned subsidiaries, National Medical Care, Inc. and its
subsidiaries ("NMC") and Fresenius USA, Inc. and its subsidiaries ("FUSA"), was
formed as a result of a series of transactions pursuant to the Agreement and
Plan of Reorganization dated as of February 4, 1996 by and between Grace New
York and Fresenius AG (the "Merger"). In connection with the Merger, W. R. Grace
& Co. - Conn. ("Grace Chemicals") has agreed to indemnify the Company and NMC
against all liabilities of the Company and its successors, whether relating to
events occurring before or after the Merger, other than liabilities arising from
or relating to NMC operations. After the Merger the Company will remain
contingently liable for certain liabilities with respect to pre-Merger matters
that are not related to NMC operations. The Company believes that in view of the
nature of the non-NMC liabilities and the expected impact of the Merger 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 Merger, the resulting
tax liability would be the obligation of the Company. Subject to representations
by Grace Chemicals, the Company, and Fresenius AG, Grace Chemicals has agreed to
indemnify the Company for such a tax liability. If the Company was not able to
collect on the indemnity, the tax liability would have a material adverse effect
on the Company's business, the financial condition of the Company and the
results of operations.
LEGAL PROCEEDINGS
Government Investigations
OIG INVESTIGATIVE SUBPOENAS
In October 1995, NMC received five investigative subpoenas from the
Office of the Inspector General ("OIG") of the Department of Health and Human
Services. 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 "OIG Investigation"). The
subpoenas call for extensive document production relating to various aspects of
NMC's business.
In connection with the OIG Investigation, the Company continues to
receive additional subpoenas directed to NMC or the Company to obtain
supplemental information and documents regarding the above-noted issues, or to
clarify the scope of the original subpoenas.
The Company is cooperating with the OIG Investigation. The Company
believes that the government continues to review and evaluate the voluminous
information the Company has provided. As indicated above, the government
continues, from time to time, to seek supplementing and/or clarifying
information from the Company. The Company expects that this process will
continue while the government completes its evaluation of the issues.
The OIG Investigation covers the following areas: (a) NMC's dialysis
services business ("DSD"), principally relating to its Medical Director
contracts and compensation; (b) 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; (c) NMC's LifeChem laboratory subsidiary's
("LifeChem") 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
a 1997 review of dialysis facilities' standing orders; and (d) NMC's homecare
division ("Homecare") and, in particular, information concerning intradialytic
parenteral nutrition ("IDPN") billing practices including various services,
equipment and supplies and payments made to third parties as compensation for
administering IDPN therapy.
The government has indicated that the areas identified above are not
exclusive, and that it may pursue additional areas. As noted, the penalties
applicable under the anti-kickback statutes, the U.S. Federal False Claims Act
(the "False Claims Act") and other federal and state statutes and regulations
applicable to NMC's business can be substantial. 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
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government and/or one or more state agencies will not claim that NMC has
violated statutory or regulatory provisions. Additionally, eight 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.
DIAGNOSTICS SUBPOENA
In October 1996, Biotrax International, Inc. ("Biotrax") and NMC
Diagnostics, Inc., ("DSI") both of which are subsidiaries of NMC, received an
investigative 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 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 is making extensive document production in response to the subpoena.
The outcome of this investigation, its duration, and its effect, if any, on NMC
or the Company cannot be predicted at this time. The Company divested its Non
Renal Diagnostic business on June 26, 1998. See Note 5 - "Discontinued
Operations."
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 statutes, 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 NMC's Medical Products Group ("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.
To comply with provisions of OBRA 93 (as hereafter defined) known as
"Stark II" if Designated Health Services (as defined in Stark II) are involved,
Medical Director 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. Since January 1, 1995, DSD has compensated its Medical
Directors on a fixed compensation arrangement intended to comply with the
requirements of Stark II. In renegotiating its Medical Director compensation
arrangements in connection with Stark II, DSD took and continues to take 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 is not a determinative measure of fair
market value. Although the Company believes that the compensation paid to its
Medical Directors is generally reflective of fair market value, there can be no
assurances that the government will agree with this position or that the Company
ultimately will be able to defend its position successfully. Because of the wide
variation in local market factors and in the profit percentage contractually
negotiated between DSD and its Medical Directors prior to January 1, 1995, there
is a wide variation in the amounts that have been paid to Medical Directors.
As a result, 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
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Directors in connection with their audits of the costs claimed by DSD; that the
OIG stated in its audit reports that, with the exception of certain technical
issues, NMC had complied with applicable Medicare laws and regulations
pertaining to the ESRD program; and that NMC reasonably relied on these audit
reports in concluding that its program for compensating Medical Directors was
lawful. There has been no indication that the government will accept NMC's
assertions concerning the legality of its arrangements generally or NMC's
assertion that it reasonably relied on OIG audits, or that the government will
not focus on specific arrangements that DSD has made with one or more Medical
Directors and claim that those specific arrangements were or are unlawful.
The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them to order unnecessary
ancillary services and items. NMC has asserted to the government that the rate
of utilization of ancillary services and items by its Medical Directors is
reasonable and that it did not provide illegal inducements to Medical Directors
to order ancillary services and items.
CREDIT BALANCES
In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare patients. Medicare intermediaries commonly direct such providers to
notify them of the overpayment and not remit such amounts to the intermediary by
check or otherwise unless specifically requested to do so. In 1992, the Health
Care Financing Administration ("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
has inquired 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 Omnibus Budget Reconciliation Act of 1993 ("OBRA 93")
amendments to the secondary payor provisions of the Medicare Act. 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.
OVERPAYMENTS FOR HOME DIALYSIS SERVICES
NMC acquired Home Intensive Care, Inc. ("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, but there can be no
assurance that the government will accept NMC's view.
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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.
On June 7, 1996, LifeChem voluntarily disclosed an additional billing
problem to the government that had resulted in LifeChem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
LifeChem advised the government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the Composite Rate and that were not
eligible for separate reimbursement. LifeChem also advised the government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, LifeChem advised the government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also
advised the government that certain records suggested 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 payment method (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. 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 Renal Products Division ("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 statutes.
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, internal and
external audits and investigations relating to LifeChem's billing and testing.
Subsequently, the government served an investigative subpoena for documents
concerning the Company's 1997 review of dialysis facilities' standing orders,
and responsive documents were provided.
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INTRADIALYTIC PARENTERAL NUTRITION
Administration kits. 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 "if 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.
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
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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
end-stage renal disease ("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. After 1993, the rate of approval for Medicare reimbursement for
IDPN claims submitted by Homecare for new patients and by the infusion industry
in general, fell to approximately 9%. NMC contends that the reduction in rates
of approval occurred because HCFA and its carriers implemented an unauthorized
change in coverage policy without giving notice to providers. While NMC
continued to offer IDPN to patients pursuant to the prescription of the
patients' treating physicians and to submit claims for Medicare reimbursement
when it believed the requirements stated in HCFA's published regulations were
satisfied, other providers 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 provided IDPN
increased as a result.
The government is investigating the utilization rate of IDPN therapy
among NMC patients, whether NMC submitted IDPN claims to Medicare for patients
who were not eligible for coverage, and whether documentation of eligibility was
adequate. 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 patients' treating physician in
accordance with the requirements published by HCFA and its carrier agents. There
can be no assurance that the government will accept NMC's view or that the
government will not claim that Homecare submitted IDPN claims for individuals
who were not eligible for coverage or with inadequate documentation of
eligibility.
In addition, the government is investigating whether, in certain
circumstances, documentation of eligibility was false or inaccurate. With
respect to some claims, the Company has determined that false or inaccurate
documentation was submitted, deliberately or otherwise. The Company understands
that the government recently has utilized a grand jury to investigate this
matter.
QUI TAM ACTIONS
The Company and NMC have become aware that eight qui tam actions have
been filed in various jurisdictions. Each of these actions is under seal and in
each action, pursuant to court order the seal has been modified to permit the
Company, NMC and other affiliated defendants to disclose the complaint to any
relevant investors, financial institutions and/or underwriters, their successors
and assigns and their respective counsel and to disclose the allegations in the
complaints in their respective U.S. Securities and Exchange Commission (the
"SEC" or the "Commission") and New York Stock Exchange ("NYSE") periodically
required filings.
The first qui tam action was filed in the United States District Court
for the Southern District of Florida in 1996, amended on July 8, 1996 and
disclosed to the Company on July 10, 1996. It alleges, among other things, that
Grace Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO and that as a
result of this allegedly wrongful conduct, the United States suffered actual
damages in excess of $200 million. 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 Merger
constitutes a fraudulent conveyance that will render NMC unable to satisfy the
claims asserted in the Amended Complaint.
The second qui tam action was filed in the United States District Court
for the Middle District of Florida in 1995 and disclosed to the Company on or
before November 7, 1996. It alleges, among other things, that 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 in
excess of $10 million including applicable fines.
The third qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in February 1996
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and was disclosed to the Company in November 1996. It 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 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. On June 28, 1997, in response to relator's motion to
dismiss and the United States' declination to intervene, the District Court
ordered the complaint dismissed without prejudice.
The fourth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in May 1995 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax violated
the False Claims Act in connection with its submission of claims to the Medicare
program for diagnostic tests and induced overutilization of such tests in the
medical community through improper marketing practices also in violation of the
False Claims Act.
The fifth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in August 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax and NMC
Diagnostic Services induced overutilization of diagnostic tests by several named
and unnamed physician defendants in the local medical community, through
improper marketing practices and fee arrangements, in violation of the False
Claims Act.
The sixth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in November 1996 and was disclosed to
the Company in August 1997. It alleges, among other things, that NMC, DSI and
Biotrax violated the False Claims Act in connection with the submission of
claims to the Medicare program by improperly upcoding and otherwise billing for
various diagnostic tests.
The seventh qui tam action was filed in the United States District
Court for the District of Delaware in January 1997 and was disclosed to the
Company in September 1997. It alleges, among other things, that NMC and Biotrax
violated the False Claims Act in connection with the submission of claims to the
Medicare program for diagnostic tests, and induced overutilization of such tests
through improper marketing practices which provided impermissible incentives to
health care providers to order these tests.
The eighth qui tam action was filed in the United States District Court
for the District of New Jersey in February 1997 and was disclosed to the Company
in September 1997. It alleges, among other things, that DSI and NMC violated the
False Claims Act in connection with the submission of claims to the Medicare
program for reimbursement for diagnostic tests, by causing unnamed physicians to
overutilize these tests though a variety of fee arrangements and other
impermissible inducements.
Each of the qui tam complaints 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 any
of the qui tam actions could have a material adverse affect 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 qui tam action filed in the Southern District of Florida
(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, the Company 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 Merger,
Fresenius Medical Care, the Company 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
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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. Under the terms
of the Merger, any potential resulting monetary liability has been retained by
NMC, and the Company has indemnified Grace Chemicals against all potential
liability arising from or relating to the OIG Investigation.
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 under the OIG Agreements and (b) breach of such provisions by the United
States cannot and will not be raised by Fresenius Medical Care to excuse
performance under the OIG Agreements.
The foregoing describes the material terms of the OIG Agreements,
copies of which were previously filed with the Commission and 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 located 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 material will also
be made available by mail from the Public Reference Branch of the Commission at
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.
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, the suspension of payments or exclusion of the Company or one or
more of its subsidiaries from the Medicare program and other federal programs,
and changes in billing and other 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.
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, 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 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 then
began 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
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<PAGE> 20
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. 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, and NMC filed significant
discovery requests concerning how HCFA developed the April 1995 rule. In
December of 1996, NMC moved for partial summary judgment seeking a declaration
from the Court that HCFA's retroactive application of the April 1995 rule was
legally invalid. HCFA cross-moved for summary judgment on the grounds that the
April 1995 rule was validly applied prospectively. In January 1998, the court
granted NMC's motion for partial summary judgment and entered a declaratory
judgment in favor of NMC, holding HCFA's retroactive application of the April
1995 rule legally invalid. Based on its finding, the Court also ordered that
HCFA is permanently enjoined from enforcing and applying the April 1995 rule
retroactively against NMC and granted NMC's outstanding discovery motions. The
Court took no action on HCFA's motion for summary judgment pending completion of
the outstanding discovery. The Court's favorable rulings provide a stronger
legal basis for NMC to collect outstanding amounts from commercial payors on the
retroactive portion of the case during the first half of 1998. HCFA elected not
to appeal from the Court's June 1995 and January 1998 orders and has agreed to a
schedule for providing discovery under the Court's January 1998 order. HCFA may,
however, appeal all rulings at the conclusion of the litigation. If HCFA should
successfully appeal so that the revised interpretation would be applied
retroactively, FMCH's business, financial position and results of operations
would be materially adversely affected.
INTRADIALYTIC PARENTERAL NUTRITION COVERAGE ISSUES
NMC administers IDPN therapy to chronic dialysis patients who suffer
from severe gastrointestinal malfunctions. After 1993, Medicare claims
processors sharply reduced the number of IDPN claims approved for payment as
compared to prior periods. NMC believes that the reduction in IDPN claims
represented an unauthorized policy coverage change. Accordingly, NMC and other
IDPN providers pursued 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)). Subsequently, the
District Court affirmed a prior report of the magistrate judge dismissing NMC's
complaint, without considering any substantive claims, on the grounds that the
underlying cause of action should be submitted fully to the administrative
review processes available under the Medicare Act. NMC decided not to appeal the
Court's decision, but rather, to pursue the claims through the available
administrative processes.
Although NMC management believes that those IDPN claims were 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 $150 million as of September 30, 1998.
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, the Company's business,
financial condition and results of operations could be materially adversely
affected. NMC's IDPN receivables are included in the net assets of the Company's
discontinued operations. However, these receivables have not been sold and will
remain classified as discontinued operations until they have been settled. See
Note 5 -"Discontinued Operations."
OTHER LEGAL PROCEEDINGS
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. In February, 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
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<PAGE> 21
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 has produced documents in response to a
June 1996 subpoena 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 government investigators and the Company have narrowed the
issues with respect to which the government has previously expressed concerns in
order to resolve this investigation. However, the outcome and impact, if any, of
these discussions and potential resolution on the Company's business, financial
condition or results of operations cannot be predicted at this time.
COMMERCIAL INSURER LITIGATION
In December 1997, FMCH, NMC, and certain named NMC subsidiaries, as
well as Grace Chemicals, were served with a civil complaint filed by Aetna Life
Insurance Company in the U.S. District Court for the Southern District of New
York (Aetna Life Insurance Company v. National Medical Care, Inc. et al,
97-Civ-9310). Based in large part on information contained in prior securities
filings, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. The
complaint seeks unspecified damages and costs. Grace Chemicals has sought
indemnification from the Company pursuant to the terms of an indemnification
agreement between Grace and the Company for any liability, costs and expenses
that Grace may incur as a result of the lawsuit. The Company has moved to
dismiss the complaint on the grounds that it does not state a claim against
FMCH, NMC or their affiliates. This action is at an early stage and its outcome
and impact on the Company cannot be predicted at this time. However, the
Company, NMC and its subsidiaries believe that they have substantial defenses to
the claims asserted, and intend to vigorously defend the lawsuit. It is also
possible that one or more other private payors may claim that NMC received
excess payments and similarly, may seek reimbursement and other damages from
NMC. An adverse result could have a material adverse effect on the Company's
business, financial condition or results of operations.
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<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of FMCH. The discussion should be read in conjunction with the
financial statements included elsewhere in this document.
This section contains certain forward-looking statements that are
subject to various risks and uncertainties. Such statements include, without
limitation, discussions concerning the outlook of FMCH, government
reimbursement, future plans and management's expectations regarding future
performance. Actual results could differ materially from those contained in
these forward-looking statements due to certain factors including, without
limitation, changes in business, economic and competitive conditions, regulatory
reforms, foreign exchange rate fluctuations, uncertainties in litigation or
investigative proceedings, and the availability of financing. These and other
risks and uncertainties, which are more fully described elsewhere in this Item 2
and in Management's Discussion and Analysis of Financial Condition and Results
of Operation in FMCH's 1997 Form 10-K and in FMCH's reports filed from time to
time with the Commission, could cause FMCH's results to differ materially from
the results that have been or may be projected by or on behalf of FMCH.
OVERVIEW
FMCH is primarily engaged in (a) providing kidney dialysis services,
clinical laboratory testing and renal diagnostic services and (b) manufacturing
and distributing products and equipment for dialysis treatment. Throughout
FMCH's history, a significant portion of FMCH's growth has resulted from the
development of new dialysis centers and the acquisition of existing dialysis
centers, as well as from the acquisition and development of complementary
businesses in the health care field.
FMCH derives a significant portion of its net revenues from Medicare,
Medicaid and other government health care programs (approximately 64% in 1997).
The reimbursement rates under these programs, including the Composite Rate, the
reimbursement rate for EPO (which accounted for approximately 23% of dialysis
service's domestic net revenues in 1997), and the reimbursement rate for other
dialysis and non-dialysis related services and products, as well as other
material aspects of these programs, have in the past and may in the future be
changed as a result of deficit reduction and health care reform measures.
FMCH's business, financial position and results of operations also
could be materially adversely effected by an adverse outcome in the OIG
investigations, any whistleblower action, the pending challenge by FMCH of
changes effected by Medicare in approving reimbursement claims relating to the
administration of IDPN or the adoption in 1996 of a new coverage policy that
has changed IDPN coverage prospectively. FMCH's business, financial position and
results of operations would also be materially adversely affected by an adverse
outcome in the pending litigation concerning the implementation of certain
provisions of OBRA 93 relating to the coordination of benefits between Medicare
and employer health plans in the case of certain dual eligible ESRD patients.
FMCH also derives a significant portion of its net revenues from
reimbursement by non-government payors. Historically, reimbursement rates paid
by these payors generally have been higher than Medicare and other government
program rates. However, non-government payors are imposing cost containment
measures that are creating significant downward pressure on reimbursement levels
that FMCH receives for its services and products.
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<PAGE> 23
RESULTS OF OPERATIONS
The following table summarizes certain unaudited operating results of
FMCH by principal business unit for the periods indicated. Intercompany
eliminations primarily reflect sales of medical supplies by Dialysis Products to
Dialysis Services. This information has been reorganized and prior period
information has been reclassified to conform with the business unit reporting
requirements of FMC and to distinguish between continued and discontinued
operations.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ------ ------
<S> <C> <C> <C> <C>
NET REVENUES
Dialysis Services ........................... $549 $453 $1,575 $1,291
Dialysis Products ........................... 171 163 514 475
Intercompany Eliminations ................... (64) (68) (185) (186)
---- ---- ------ ------
Total Net Revenues .............................. $656 $548 $1,904 $1,580
==== ==== ====== ======
Operating Earnings:
Dialysis Services ........................... $ 88 $ 71 $ 246 $ 192
Dialysis Products ........................... 29 16 75 57
---- ---- ------ ------
Total Operating Earnings ........................ 117 87 321 249
---- ---- ------ ------
Other Expenses:
General Corporate ........................... $ 28 $ 19 $ 80 $ 57
Research & Development ...................... 1 -- 3 2
Interest Expense, Net ....................... 55 48 155 130
---- ---- ------ ------
Total Other Expenses ............................ 84 67 238 189
---- ---- ------ ------
Earnings Before Income Taxes - Continuing
Operations ................................... 33 20 83 60
(Benefit)/provision for Income Taxes ............ 19 10 46 32
---- ---- ------ ------
Net Earnings - Continuing Operations ............ $ 14 $ 10 $ 37 $ 28
==== ==== ====== ======
Discontinued Operations:
Net Revenues ................................ $ -- $ 67 $ 121 $ 218
Income (Loss) before income taxes ........... -- (12) (14) (10)
(Benefit)/provision for Income Taxes ........ -- (4) (5) (4)
---- ---- ------ ------
Income (Loss) from Operations ............... -- (8) (9) (6)
---- ---- ------ ------
Loss on Disposal before Income Taxes ............ -- -- (140) --
Income Tax Benefit .............................. -- -- (43) --
---- ---- ------ ------
Loss on Disposal ................................ -- -- (97) --
---- ---- ------ ------
Total Income/Loss on Discontinued Operations .... $ -- $ (8) $ (106) $ (6)
==== ==== ====== ======
</TABLE>
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<PAGE> 24
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues from continuing operations for the third quarter of 1998
increased by 20% ($108 million) over the comparable period of 1997. Net earnings
from continuing operations for the third quarter of 1998 increased 40% ($4
million) over the comparable period of 1997 as a result of increased operating
earnings partially offset by higher interest expenses and increased general
corporate expenses.
DIALYSIS SERVICES
Dialysis Services net revenues for the third quarter of 1998 increased
by 22% ($96 million) over the comparable period of 1997, primarily as a result
of a 13% increase in the number of treatments provided, the beneficial impact of
the extension of the Medicare Secondary Payor (MSP) provision, and higher EPO
utilization relative to the comparable 1997 period which reflected relatively
low EPO utilization, partially offset by decreased laboratory testing revenues.
The treatment increase was a result of base business growth and the impact of
1997 and 1998 acquisitions. The laboratory testing revenue decrease was
primarily due to the decreased number of patients of other dialysis providers
serviced by FMCH, as competitors consolidate lab activity.
Dialysis Services operating earnings for the third quarter of 1998
increased by 24% ($17 million) over the comparable period of 1997 primarily due
to the increase in treatment volume, the beneficial impact of the extension of
the MSP provision and higher EPO utilization relative to the comparable 1997
period which reflected relatively low EPO utilization.
DIALYSIS PRODUCTS
Dialysis Products net revenues for the third quarter of 1998 increased
by 5% ($8 million) over the comparable period of 1997. This is due to increased
sales of dialyzers ($9 million), and machines ($5 million), partially offset by
decreased sales of peritoneal products ($2 million), concentrates ($1 million)
and other products ($3 million).
Dialysis Products operating earnings for the third quarter of 1998
increased by 81% ($13 million) over the comparable period of 1997. This is
primarily due to revenue growth and improvements in gross margin resulting from
manufacturing efficiencies from increased production volume.
OTHER EXPENSES
FMCH's other expenses for the third quarter of 1998 increased by 25%
($17 million) over the comparable period of 1997. General corporate expenses
increased by $9 million entirely due to foreign exchange gains realized in 1997.
Research and development expenses for the third quarter of 1998 increased by $1
million over the comparable period of 1997. Interest expense for the third
quarter of 1998 increased by $7 million over the comparable period of 1997
mainly due to an increase in debt to finance acquisitions.
INCOME TAX RATE
The effective tax rate from continuing operations for the third quarter
1998 (57.1%) is significantly higher than the rate for the comparable period of
1997 (49.9%), due primarily to a 1997 rate reduction related to the loss
carryover of FUSA.
DISCONTINUED OPERATIONS
On June 1, 1998, the Company classified its Non Renal Diagnostic
Services and Homecare divisions as discontinued operations. The Company sold its
Non Renal Diagnostic Services division and its Homecare division on,
respectively, June 26, 1998, and July 29, 1998. A net after tax loss of $97
million has been recorded on the sale of these businesses. See "Liquidity and
Capital Resources - Divestitures."
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<PAGE> 25
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net revenues from continuing operations for the first nine months of
1998 increased by 21% ($324 million) over the comparable period of 1997. Net
earnings from continuing operations for the first nine months of 1998 increased
32% ($9 million) over the comparable period of 1997 as a result of increased
operating earnings, partially offset by higher interest expenses and increased
general corporate expenses.
DIALYSIS SERVICES
Dialysis Services net revenues for the first nine months of 1998
increased by 22% ($284 million) over the comparable period of 1997, primarily as
a result of a 16% increase in the number of treatments provided, the beneficial
impact of the extension of the Medicare Secondary Payor (MSP) provision, higher
EPO utilization relative to the comparable 1997 period which reflected
relatively low EPO utilization and increased laboratory testing revenues. The
treatment increase was a result of base business growth and the impact of 1997
and 1998 acquisitions. The laboratory testing revenue increase was primarily due
to the full nine month revenue impact of Spectra Laboratories acquired by FMCH
in June 1997, partially offset by the decreased number of patients of other
dialysis providers serviced by FMCH during the third quarter of 1998 as
competitors consolidate lab activity.
Dialysis Services operating earnings for the first nine months of 1998
increased by 28% ($54 million) over the comparable period of 1997 primarily due
to the increase in treatment volume, the beneficial impact of the extension of
the MSP provision and higher EPO utilization.
DIALYSIS PRODUCTS
Dialysis Products net revenues for the first nine months of 1998
increased by 8% ($39 million) over the comparable period of 1997. This is due to
increased sales of dialyzers ($20 million), machines ($9 million), concentrates
($5 million), peritoneal products ($2 million), and other products ($3 million).
Dialysis Products operating earnings for the first nine months of 1998
increased by 32% ($18 million) over the comparable period of 1997. This is
primarily due to revenue growth and improvements in gross margin resulting from
manufacturing efficiencies from increased production volume.
OTHER EXPENSES
FMCH's other expenses for the first nine months of 1998 increased by
26% ($49 million) over the comparable period of 1997. General corporate expenses
increased by $23 million primarily due to foreign exchange gains ($18 million)
realized in 1997, and increased insurance and legal expenses ($6 million).
Research and development expenses for the first nine months of 1998 increased by
$1 million over the comparable period of 1997. Interest expense for the first
nine months of 1998 increased by $25 million over the comparable period of 1997
mainly due to an increase in debt to finance acquisitions.
INCOME TAX RATE
The effective tax rate from continuing operations for the first nine
months of 1998 (55.8%) is higher than the rate for the comparable period of 1997
(54.1%), due primarily to a 1997 rate reduction related to the loss carryover of
FUSA offset by various other items.
DISCONTINUED OPERATIONS
On June 1, 1998, the Company classified its Non Renal Diagnostic
Services and Homecare divisions as discontinued operations. The Company sold its
Non Renal Diagnostic Services division and its Homecare division on, June 26,
1998 and July 29, 1998 respectively. A net after tax loss of $97 million has
been recorded on the sale of these businesses. The discontinued operations
revenues for its Non Renal Diagnostic Services and Homecare divisions was $121
million for the first nine months of 1998 with a net after tax loss of $9
million.
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<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
FMCH's cash requirements, including, to a limited extent, acquisitions,
have historically been funded by cash generated from operations. Cash generated
from continued operations was $100 million and $93 million for the first nine
months of 1998 and 1997, respectively. The increase is primarily due to the
Company's improved profit levels.
FMCH made acquisitions of net assets totaling $175 million and $416
million, during the first nine months of 1998 and 1997, respectively. FMCH made
capital expenditures for internal expansion, improvements, new furnishings and
equipment of $51 million and $95 million during the first three months of 1998
and 1997, respectively. The Company intends to capitalize on the continuing
shift in the U.S. from physician-owned and hospital-based dialysis clinics to
multi-center providers by acquiring existing dialysis centers and the
establishment of new or expanded centers and, accordingly, will require
significant capital resources to pursue its growth strategy in the dialysis
marketplace. FMCH may also make other strategic acquisitions in the future.
During the first nine months of 1998, FMCH funded its acquisitions and
capital expenditures primarily through proceeds from external short and
long-term debt and the proceeds from the receivable financing facility. In
addition, acquisitions were also funded through the issuance of $42 million of
investment securities by Fresenius Medical Care Finance, S.A., a Luxembourg
subsidiary of FMC ("FMC Finance"). In exchange for such financing, a $42 million
intercompany account was established between FMC Finance and FMCH.
Effective July 1, 1995, FMCH ceased to recognize the incremental
revenue provided under HCFA's initial instruction under OBRA 93, although it
continued to bill private third-party payors for these amounts through December
31, 1995. FMCH began billing Medicare as the primary payor for the dual eligible
ESRD patients affected by OBRA 93 effective January 1, 1996. If HCFA's revised
instruction under OBRA 93 is permanently enjoined on a prospective basis, or if
such revised instruction is sustained but given an effective date of later than
June 30, 1995, FMCH may be able to rebill such services to third-party payors
and, as a result, FMCH's future results of operations and financial position
would be favorably affected by the incremental revenue that FMCH would
recognize. For further discussion see Note 6 to Unaudited Consolidated Financial
Statements, Commitments and Contingencies", Omnibus Budget Reconciliation Act of
1993".
FMCH believes that its existing credit facilities, cash generated from
operations and other current sources of financing are sufficient to meet its
foreseeable needs. If existing sources of funds are not sufficient to provide
liquidity, FMCH may need to sell assets or obtain debt or equity financing from
additional external sources. There can be no assurance that FMCH will be able to
do so on satisfactory terms, if at all.
DIVESTITURES
FMCH sold its Non Renal Diagnostic Services and Homecare divisions on
June 26, 1998 and July 29, 1998, respectively. The combined proceeds of the
sales were approximately $100 million in cash and notes.
IMPACT OF INFLATION
A substantial portion of FMCH's net revenue is subject to reimbursement
rates which are regulated by the federal government and do not automatically
adjust for inflation. Non-governmental payors also are exerting downward
pressure on reimbursement levels. Increased operating costs that are subject to
inflation, such as labor and supply costs, without a compensating increase in
reimbursement rates, may adversely affect FMCH's business and results of
operations, possibly materially.
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<PAGE> 27
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of that hedge
in the statement of operations. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has not yet
determined if the adoption of SFAS 133 will have a material impact on the
consolidated financial statements.
In April 1998, Statement of Position No. 98-5, Reporting on the Costs
of Start-up Activities ("SOP 98-5"), was issued by the Accounting Standards
Executive Committee (AcSEC) of the AICPA. SOP 98-5 requires that the costs of
start-up activities, including organization costs, which have been previously
capitalized, should be expensed as incurred. Unless adopted earlier, SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Management does not believe that the adoption of this statement will have
a material impact on the Company's consolidated financial position, results of
operations or cash flows.
YEAR 2000 ISSUES
The "Year 2000 problem" is the result of computer programs using two
digits rather than four to define the applicable years. Such software may
recognize a date using "00" as the year 1900 rather than the year 2000. These
programs are present in software applications running on desktop computers and
network servers. These programs are also present in microchips and
microcontrollers incorporated into equipment. Certain of the Company's computer
hardware and software, building infrastructure components (e.g., alarm systems,
HVAC systems, etc.) and medical devices that are date sensitive may contain
programs with the Year 2000 problem. If uncorrected, the problem could result in
computer system and program failures or equipment and medical device
malfunctions or miscalculations that could result in a disruption of business
operations or affect patient treatment. If the Company, its significant
customers, reimbursement sources or suppliers fail to make necessary
modifications and conversions on a timely basis, the Year 2000 problem could
have a material adverse effect on the Company's operations and financial
results. The Company believes that its competitors face a similar risk.
The Company has been working on identifying and addressing potential
Year 2000 risks since March 1997. In an effort to more comprehensively monitor
and assess its progress in addressing Year 2000 issues, the Company established
a Year 2000 Steering Committee in August 1998. The committee is comprised of
senior company executives who meet regularly and provide status updates to the
Company's management committee on a regular basis.
Regarding information technology ("IT") systems, the Company has
inventoried substantially all IT systems (e.g., clinical, supply chain
management, financial, etc.) and has assessed Year 2000 compliance for those
systems. The Company has developed specific plans and timetables to remediate or
replace critical non-compliant systems. The Company's current target is to
resolve Year 2000 compliance issues (including testing to validate Year 2000
compliance) for all critical systems by September 30, 1999. The Company is in
the process of implementing an integrated financial/manufacturing information
system which is Year 2000 compliant. The Company continually upgrades software
and hardware to promote efficiencies and standardization throughout the Company
and ensures that all upgrades are Year 2000 compliant.
Regarding non-IT equipment that may be dependent upon embedded software
(e.g., medical, manufacturing/distribution, etc.), the Company has inventoried
and assessed Year 2000 compliance for most of this equipment. The Company plans
to have assessed Year 2000 compliance for all of its non-IT equipment by
December 31, 1998. For medical equipment, the Company has developed specific
plans to remediate Year 2000 non-compliance and is in the process of completing
this remediation. For manufacturing/distribution equipment, the Company is in
the process of developing specific plans to remediate Year 2000 non-compliance
for this equipment. The Company's current target is to resolve Year 2000
compliance issues (including testing to validate Year 2000 compliance) for all
non-IT equipment by September 30, 1999.
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<PAGE> 28
Although there can be no assurance that the Company will successfully
complete implementation of its remediation efforts for IT systems and non-IT
equipment by the dates critical for Year 2000 compliance, the Company's Year
2000 program is currently progressing in accordance with the Company's
completion timetables.
The Company relies heavily on third parties in operating its business.
In addition to its reliance on systems and non-IT equipment vendors to verify
Year 2000 compliance of their products, the Company also depends on 1) fiscal
intermediaries which process claims and make payments for their Medicare and
Medicaid programs, 2) insurance companies, HMOs, and other private payors, 3)
utilities which provide electricity, water, natural gas, and telephone services,
and 4) vendors of medical supplies and pharmaceuticals used in patient care. The
Company is in the process of identifying and contacting all significant third
parties to seek assurances that the third parties' services and products will
not be interrupted or malfunction due to the Year 2000 problem. The Company
intends to contact all significant third parties by December 31, 1998. Failure
of significant third parties to resolve their Year 2000 issues could have a
material adverse effect on the Company's results of operations and ability to
provide health care service and manufacture products.
Costs related to the Year 2000 issue are funded through operating cash
flows. The Company expects to spend a total of approximately $4 million in
remediation and replacement efforts, including new software and hardware, costs
to modify existing software, and consultant fees. The Company estimates
remaining costs to be approximately $3 million. IT expenditures for Year 2000
are covered as part of the normal IT budget (the Year 2000 efforts are taking
priority over other discretionary IT projects). Non-IT expenditures for Year
2000 are similarly being covered as part of the normal non-IT budget. The
Company presently believes that the incremental cost of achieving Year 2000
compliant systems and equipment will not be material to the Company's financial
condition, liquidity, or results of operation.
Time and cost estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to: 1) the
availability and cost of trained personnel, 2) the ability to locate and correct
all relevant computer code and systems, and 3) remediation success of the
Company's customers and suppliers.
Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in its
internally manufactured medical devices, its internal manufacturing and
distribution processes, and its internal information processing. However, if
certain critical third party providers, such as those supplying electricity or
water, experience difficulties resulting in disruption of service to the
Company, a shutdown of the Company's operations at individual facilities could
occur for the duration of the disruption.
At present, the Company has not developed contingency plans but intends
to determine whether to develop any such plan by March 1999. The Company will
continue to track its progress and will develop contingency plans if new risks
are identified or the Company's remediation/replacement efforts do not progress
satisfactorily.
CONTINGENCIES
FMCH is the subject of investigations by several federal agencies and
authorities, is a plaintiff in litigation against the federal government with
respect to the implementation of OBRA 93 and coverage for IDPN therapy, and is
seeking to change a proposed revision to IDPN coverage policies. An adverse
outcome in any of these matters, beyond the reserves which have established,
could have a material adverse effect on FMCH's business, financial condition and
results of operations.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in greater detail below, most aspects of NMC's U.S.
businesses are the subject of criminal or civil 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 as well as other federal
health care benefit 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. In addition, as discussed below, NMC has 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 not known to the Company. Fresenius Medical Care and FMCH have
guaranteed NMC's obligations relating to or arising out of the OIG Investigation
and the qui tam proceedings, and indemnified Grace Chemicals for any such
liabilities.
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 operations.
OIG INVESTIGATION
In October 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.
In connection with the OIG Investigation, the Company continues to
receive additional subpoenas directed to NMC or the Company to obtain
supplemental information and documents regarding the above-noted issues, or to
clarify the scope of the original subpoenas.
The Company is cooperating with the OIG Investigation. The Company
believes that the government continues to review and evaluate the voluminous
information the Company has provided. As indicated above, the government
continues, from time to time, to seek supplementing and/or clarifying
information from the Company. The Company expects that this process will
continue while the government completes its evaluation of the issues.
The OIG Investigation covers the following areas: (a) NMC's dialysis
services business, principally relating to its Medical Director contracts and
compensation; (b) 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; (c) 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 a 1997 review of dialysis facilities' standing orders; and
(d) Homecare and, in particular, information concerning IDPN billing practices
including various services, equipment and supplies and payments made to third
parties as compensation for administering IDPN therapy.
The government has indicated that the areas identified above 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. 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, eight and possibly other
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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.
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, the suspension of payments or exclusion of the Company or one or
more of its subsidiaries from the Medicare program and other federal programs,
and changes in billing and other 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 Merger, any potential resulting monetary liability has been
retained by NMC, and the Company has indemnified Grace Chemicals against all
potential liability arising from or relating to the OIG Investigation. The
Company has provided the U.S. government with a guarantee of payment of the
obligations, if any, arising from the OIG Investigation. In support of this
guarantee, the Company has delivered to the U.S. government a standby letter of
credit in the amount of $150 million.
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 statutes, 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.
To comply with Stark II if Designated Health Services are involved,
Medical Director 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. Since January 1, 1995, DSD has compensated its Medical
Directors on a fixed compensation arrangement intended to comply with the
requirements of Stark II. In renegotiating its Medical Director compensation
arrangements in connection with Stark II, DSD took and continues to take 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 is not a determinative measure of fair
market value. Although the Company believes that the compensation paid to its
Medical Directors is generally reflective of fair market value, there can be no
assurances that the government will agree with this position or that the Company
ultimately will be able to defend its position successfully. Because of the wide
variation in local market factors and in the profit percentage contractually
negotiated between DSD and its Medical Directors prior to January 1, 1995, there
is a wide variation in the amounts that have been paid to Medical Directors.
As a result, 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
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has made with one or more Medical Directors and claim that those specific
arrangements were or are unlawful.
The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them to order unnecessary
ancillary services and items. NMC has asserted to the government that the rate
of utilization of ancillary services and items by its Medical Directors is
reasonable and that it did not provide illegal inducements to Medical Directors
to order ancillary services and items.
CREDIT BALANCES
In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare patients. Medicare intermediaries commonly direct such providers to
notify them of the overpayment and not remit such amounts to the intermediary by
check or otherwise unless specifically requested to do so. In 1992, HCFA adopted
a regulation requiring certain Medicare providers, including dialysis centers,
to file a quarterly form listing unrecouped overpayments with the Medicare
intermediary responsible for reimbursing the provider. The first such filing was
required to be made as of June 30, 1992 for the period beginning with the
initial date that the provider participated in the Medicare program and ending
on June 30, 1992.
The government is investigating whether DSD intentionally understated
the Medicare credit balance reflected on its books and records for the period
ending June 30, 1992 by reversing entries out of its credit balance account and
taking overpayments into income in anticipation of the institution of the new
filing requirement. DSD's policy was to notify Medicare intermediaries in
writing of overpayments upon receipt and to maintain unrecouped Medicare
overpayments as credit balances on the books and records of DSD for four years;
overpayments not recouped by Medicare within four years would be reversed from
the credit balance account and would be available to be taken into income. NMC
asserts that Medicare overpayments that have not been recouped by Medicare
within four years are not subject to recovery under applicable regulations 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
has inquired 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 OBRA 93 amendments to the secondary payor provisions of
the Medicare Act. 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 provided 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 practice of providing loans or grants for the payment of supplemental
medical insurance premiums by NMC was one of the subjects of review by the
government as part of the OIG investigation.
The Government, however, advised the Company orally that it is no
longer pursuing this issue. Furthermore, as a result of the passage of HIPPA,
the Company terminated making such payments on behalf of its patients. Instead,
the Company, together with other representatives of the industry, obtained an
advisory opinion from the OIG, whereby, consistent with specified conditions,
the Company and other similarly situated providers may make contributions to a
non-profit organization that has volunteered to make these payments on behalf of
indigent ESRD patients, including patients of the Company.
OVERPAYMENTS FOR HOME DIALYSIS SERVICES
NMC acquired HIC, an in-center and home dialysis service provider, in
1993. At the time of the acquisition, HIC was the subject of a claim by HCFA
that HIC had received payments for home dialysis services in excess of the
Medicare reasonable charge
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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 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, 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.
On June 7, 1996, LifeChem voluntarily disclosed an additional billing
problem to the government that had resulted in LifeChem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
LifeChem advised the government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the Composite Rate and that were not
eligible for separate reimbursement. LifeChem also advised the government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, LifeChem advised the government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also
advised the government that certain records suggested 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. 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
statutes.
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
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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, internal and
external audits and investigations relating to LifeChem's billing and testing.
Subsequently, the government served an investigative subpoena for documents
concerning the Company's 1997 review of dialysis facilities' standing orders,
and responsive documents were provided.
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 "if 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.
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,
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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. After 1993, the
rate of approval for Medicare reimbursement for IDPN claims submitted by
Homecare for new patients, and by the infusion industry in general, fell to
approximately 9%. NMC contends that the reduction in rates of approval occurred
because HCFA and its carriers implemented an unauthorized change in coverage
policy without giving notice to providers. While NMC continued to offer IDPN to
patients pursuant to the prescription of the patients' treating physicians and
to submit claims for Medicare reimbursement when it believed the requirements
stated in HCFA's published regulations were satisfied, other providers 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 provided IDPN increased as a result.
The government is investigating the utilization rate of IDPN therapy
among NMC patients, whether NMC submitted IDPN claims to Medicare for patients
who were not eligible for coverage, and whether documentation of eligibility was
adequate. 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 patients' treating physician in
accordance with the requirements published by HCFA and its carrier agents. There
can be no assurance that the government will accept NMC's view or that the
government will not claim that Homecare submitted IDPN claims for individuals
who were not eligible for coverage or with inadequate documentation of
eligibility.
In addition, the government is investigating whether, in certain
circumstances, documentation of eligibility was false or inaccurate. With
respect to some claims, the Company has determined that false or inaccurate
documentation was submitted, deliberately or otherwise. The Company understands
that the government recently has utilized a grand jury to investigate this
matter.
QUI TAM ACTIONS
The Company and NMC have become aware that eight qui tam actions have
been filed in various jurisdictions. Each of these actions is under seal and in
each action, pursuant to court order the seal has been modified to permit the
Company, NMC and other affiliated defendants to disclose the complaint to any
relevant investors, financial institutions and/or underwriters, their successors
and assigns and their respective counsel and to disclose the allegations in the
complaints in their respective SEC and NYSE periodically required filings.
The first qui tam action was filed in the United States District Court
for the Southern District of Florida in 1996, amended on July 8, 1996 and
disclosed to the Company on July 10, 1996. It alleges, among other things, that
Grace Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO and that as a
result of this allegedly wrongful conduct, the United States suffered actual
damages in excess of $200 million. 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 Merger
constitutes a fraudulent conveyance that will render NMC unable to satisfy the
claims asserted in the Amended Complaint.
The second qui tam action was filed in the United States District Court
for the Middle District of Florida in 1995 and disclosed to the Company on or
before November 7, 1996. It alleges, among other things, that NMC and certain
NMC subsidiaries
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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 in excess of $10
million including applicable fines.
The third qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in February 1996 and was disclosed to
the Company in November 1996. It 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 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. On June 28, 1997, in response to relator's motion to dismiss and the
United States' declination to intervene, the District Court ordered the
complaint dismissed without prejudice.
The fourth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in May 1995 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax violated
the False Claims Act in connection with its submission of claims to the Medicare
program for diagnostic tests and induced overutilization of such tests in the
medical community through improper marketing practices also in violation of the
False Claims Act.
The fifth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in August 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax and NMC
Diagnostic Services induced overutilization of diagnostic tests by several named
and unnamed physician defendants in the local medical community, through
improper marketing practices and fee arrangements, in violation of the False
Claims Act.
The sixth qui tam action was filed in the United States District Court
for the Eastern District of Pennsylvania in November 1996 and was disclosed to
the Company in August 1997. It alleges, among other things, that NMC, DSI and
Biotrax violated the False Claims Act in connection with the submission of
claims to the Medicare program by improperly upcoding and otherwise billing for
various diagnostic tests.
The seventh qui tam action was filed in the United States District
Court for the District of Delaware in January 1997 and was disclosed to the
Company in September 1997. It alleges, among other things, that NMC and Biotrax
violated the False Claims Act in connection with the submission of claims to the
Medicare program for diagnostic tests, and induced overutilization of such tests
through improper marketing practices which provided impermissible incentives to
health care providers to order these tests.
The eighth qui tam action was filed in the United States District Court
for the District of New Jersey in February 1997 and was disclosed to the Company
in September 1997. It alleges, among other things, that DSI and NMC violated the
False Claims Act in connection with the submission of claims to the Medicare
program for reimbursement for diagnostic tests, by causing unnamed physicians to
overutilize these tests though a variety of fee arrangements and other
impermissible inducements.
Each of the qui tam complaints 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 any
of the qui tam actions could have a material adverse affect 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 qui tam action filed in the Southern District of Florida
(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
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executed by Fresenius Medical Care, the Company 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 Merger,
Fresenius Medical Care, the Company 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. Under the terms
of the Merger, any potential resulting monetary liability has been retained by
NMC, and the Company has indemnified Grace Chemicals against all potential
liability arising from or relating to the OIG Investigation.
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 under the OIG Agreements and (b) breach of such provisions by the United
States cannot and will not be raised by Fresenius Medical Care to excuse
performance under the OIG Agreements.
The foregoing describes the material terms of the OIG Agreements,
copies of which were previously filed with the Commission and 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 located 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 material will also
be made available by mail from the Public Reference Branch of the Commission at
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.
DIAGNOSTICS SUBPOENA
In October 1996, Biotrax and NMC Diagnostics, Inc., both of which are
subsidiaries of NMC, received an investigative 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 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 is making extensive
document production in response to the subpoena. The outcome of this
investigation, its duration, and its effect, if any, on NMC or the Company
cannot be predicted at this time. The Company recently divested its Non Renal
Diagnostic business. See "Management Discussion and Analysis of Financial
Condition and Results of Operations - Divestitures."
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. There has been no communication from the
government since a January 1995 document production and the outcome of this
investigation and its effect, if any, on NMC cannot be predicted at this time.
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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. In February, 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 has produced documents in response to a June 1996
subpoena 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 government investigators and the Company have narrowed the issues with
respect to which the government has previously expressed concerns in order to
resolve this investigation. However, the outcome and impact, if any, of these
discussions and potential resolution 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. 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. The Consent Decree was
lifted in January 1997. In February 1997, the Company closed its Dublin, Ireland
facility.
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.
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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.
COMMERCIAL INSURER LITIGATION
In December 1997, the Company, NMC, and certain named NMC subsidiaries,
as well as Grace Chemicals, were served with a civil complaint filed by Aetna
Life Insurance Company in the U.S. District Court for the Southern District of
New York (Aetna Life Insurance Company v. National Medical Care, Inc. et al,
97-Civ-9310). Based in large part on information contained in prior securities
filings, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. The
complaint seeks unspecified damages and costs. Grace Chemicals has sought
indemnification from the Company pursuant to the terms of an indemnification
agreement between Grace Chemicals and the Company for any liability, costs and
expenses that Grace may incur as a result of the lawsuit. The Company has moved
to dismiss the complaint on the grounds that it does not state a claim against
the Company, NMC or their affiliates. This action is at an early stage and its
outcome and impact on the Company cannot be predicted at this time. However, the
Company, NMC and its subsidiaries believe that they have substantial defenses to
the claims asserted, and intend to vigorously defend the lawsuit. It is also
possible that one or more other private payors may claim that NMC received
excess payments and similarly, may seek reimbursement and other damages from
NMC. An adverse result could have a material adverse effect on the Company's
business, financial condition or results of operations.
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 is
upheld, NMC may be required to refund the payments received from employer health
plans for
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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 then began 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. 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, and
NMC filed significant discovery requests concerning how HCFA developed the April
1995 rule. In December of 1996, NMC moved for partial summary judgment seeking a
declaration from the Court that HCFA's retroactive application of the April 1995
rule was legally invalid. HCFA cross-moved for summary judgment on the grounds
that the April 1995 rule was validly applied prospectively. In January 1998, the
court granted NMC's motion for partial summary judgment and entered a
declaratory judgment in favor of NMC, holding HCFA's retroactive application of
the April 1995 rule legally invalid. Based on its finding, the Court also
ordered that HCFA is permanently enjoined from enforcing and applying the April
1995 rule retroactively against NMC and granted NMC's outstanding discovery
motions. The Court took no action on HCFA's motion for summary judgment pending
completion of the outstanding discovery. The Court's favorable rulings provide a
stronger legal basis for NMC to collect outstanding amounts from commercial
payors on the retroactive portion of the case during the first half of 1998.
HCFA elected not to appeal from the Court's June 1995 and January 1998 orders
and has agreed to a schedule for providing discovery under the Court's January
1998 order. HCFA may, however, appeal all rulings at the conclusion of the
litigation. If HCFA should successfully appeal so that the revised
interpretation would be applied retroactively, FMCH's business, financial
position and results of operations would be materially adversely affected.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In April 1996, the Company (then called W.R. Grace & Co.) received a
formal order of investigation issued by the Commission directing an
investigation into, among other things, whether Grace violated the federal
securities laws by filing periodic reports with the Commission that contained
false and misleading financial information. Pursuant to this formal order of
investigation, the Company has produced documents pursuant to subpoenas from the
Southeast Regional Office of the Commission relating to reserves (net of
applicable taxes) established by the Company and NMC during the period from
January 1, 1990 to the date of the subpoena (the "Covered Period") and certain
corporate records and personnel material. The Company believes that all
financial statements filed by the Company with the Commission during the Covered
Period, including the financial statements of NMC included in the NMC Form 10
filed with the Commission on September 25, 1995, and the consolidated financial
statements of Grace filed in Grace's Annual Report on Form 10-K for the year
ended December 31, 1995 (all of which financial statements, other than unaudited
quarterly financial statements, were covered by unqualified opinions issued by
Price Waterhouse LLP, independent certified public accountants), have been
fairly stated, in all material respects, in conformity with U.S. GAAP. The
Company and NMC have been cooperating with the Commission. While there can be no
assurance, FMCH believes that the outcome of this investigation will have no
material adverse effect on the business, financial condition and results of
operations of the Company.
IDPN COVERAGE ISSUES
NMC administers IDPN therapy to chronic dialysis patients who suffer
from severe gastrointestinal malfunctions. After 1993, Medicare claims
processors sharply reduced the number of IDPN claims approved for payment as
compared to prior periods. NMC believes that the reduction in IDPN claims
represented an unauthorized policy coverage change. Accordingly, NMC and other
IDPN providers pursued 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)). Subsequently, the
District Court affirmed a prior report of the magistrate judge dismissing NMC's
complaint, without considering any substantive claims, on the grounds that the
underlying cause of action should be submitted fully to
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the administrative review processes available under the Medicare Act. NMC
decided not to appeal the Court's decision, but rather, to pursue the claims
through the available administrative processes.
Although NMC management believes that those IDPN claims were 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 $150 million as of September 30, 1998.
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.
NMC's IDPN receivables are included in the net assets of the Company's
discontinued operations. However, these receivables have not been sold and will
remain classified as discontinued operations until they have been settled.
SHAREHOLDER LITIGATION
In 1995, nine purported class action lawsuits were brought against the
Company (prior to the Merger, when it was Grace) and certain of its then
officers and directors in various federal courts. These lawsuits were
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 the Company
during the period from March 13, 1995 through October 17, 1995, generally allege
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. The Murphy Action sought
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
the Company (prior to the Merger, when it was known as Grace), certain of its
then 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 was 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 was stayed in favor of the Bennett
Action, which was consolidated, for discovery purposes only, with the Murphy
Action described above. The complaint in the Bennett Action sought unspecified
damages, attorneys' and experts' fees and costs and such other relief as the
court deems proper.
In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against the Company (prior to the Merger, when
it was known as Grace) and certain of Grace's then 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 sought injunctive relief ordering defendants to carry out their
fiduciary duties and preventing or rescinding the Merger 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.
Grace Chemicals indemnified the Company and its affiliates for any
losses related to these lawsuits, which were recently settled without the
contribution of any payment in connection with the settlements by the Company or
any of its affiliates.
OTHER LITIGATION AND POTENTIAL 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. The Company and NMC and their subsidiaries have been,
and the Company can be expected to continue from time to time to be, subject to
such suits due to the nature of the Company's business. 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
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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 the 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. The Company, NMC
and their subsidiaries operate a large number and wide variety of facilities
throughout the U.S. In such a decentralized system it is often difficult to
maintain the desired level of oversight and control over the thousands of
individuals employed by many affiliate companies. The Company relies upon its
management structure, regulatory and legal resources, and the effective
operation of its compliance program to direct, manage and monitor the activities
of these employees. However, on occasion, the Company, NMC and their
subsidiaries have identified instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings while employed by an
affiliated company. 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 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).
Exhibit 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).
Exhibit 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).
Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care
Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of
the New York Business Corporation Law dated March 23, 1988
(incorporated herein by reference to the Form 8-K of the
Company filed on May 9, 1988).
Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace &
Co.) under Section 805 of the New York Business Corporation
Law dated May 25, 1988 (changing the name to W. R. Grace &
Co., incorporated herein by reference to the Form 8-K of the
Company filed on May 9, 1988).
Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace &
Co.) under Section 805 of the New York Business Corporation
Law dated September 27, 1996 (incorporated herein by reference
to the Form 8-K of the Company filed with the Commission on
October 15, 1996).
Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace &
Co.) under Section 805 of the New York Business Corporation
Law dated September 27, 1996 (changing the name to Fresenius
National Medical Care Holdings, Inc., incorporated herein by
reference to the Form 8-K of the Company filed with the
Commission on October 15, 1996).
Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation
of Fresenius Medical Care Holdings, Inc. under Section 805 of
the New York Business Corporation Law dated June 12, 1997
(changing name to Fresenius Medical Care Holdings, Inc.,
incorporated herein by reference to the Form 10-Q of the
Company filed with the Commission on August 14, 1997).
Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care
Holdings, Inc. (incorporated herein by reference to the Form
10-Q of the Company filed with the Commission on August 14,
1997).
Exhibit 4.1 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).
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Exhibit 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).
Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to
the Credit Agreement dated as of September 27, 1996,
incorporated herein by reference to the Form 10-K of
Registrant filed with the Commission on March 31, 1997).
Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the 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, N.A.,
Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
previously amended (incorporated herein by reference to the
Form 10-Q of the Registrant filed with the Commission on
November 14, 1997).
Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the 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, N.A.,
Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
previously amended (incorporated herein by reference to the
Form 10-Q of Registrant filed with Commission on November 14,
1997).
Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the 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, N.A.,
Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
previously amended (incorporated herein by reference to the
Form 10-K of Registrant filed with Commission on March 23,
1998).
Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated
December 12, 1997 to the 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, N.A., Dresdner Bank AG
and NationsBank, N.A. as Managing Agents (incorporated herein
by reference to the Form 10-K of Registrant filed with
Commission on March 23, 1998).
Exhibit 4.8 Amendment No. 6 dated effective June 30, 1998 to the 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, N.A.,
Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
previously amended.
Exhibit 4.9 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended
effective as of August 3, 1998 (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on May 14, 1998).
Exhibit 4.10 Senior Subordinated Indenture dated November 27, 1996, among
Fresenius Medical Care AG, State Street Bank and Trust
Company, as successor to Fleet National Bank, as Trustee and
the Subsidiary Guarantors named therein (incorporated herein
by reference to the Form 10-K of Registrant filed with the
Commission on March 31, 1997).
Exhibit 4.11 Senior Subordinated Indenture dated as of February 19, 1998,
among Fresenius Medical Care AG, State Street Bank and Trust
Company as Trustee and Fresenius Medical Care Holdings, Inc.,
and Fresenius Medical Care AG, as Guarantors with respect to
the issuance of 7 7/8% Senior Subordinated Notes due 2008
(incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on March 23, 1998).
Exhibit 4.12 Senior Subordinated Indenture dated as of February 19, 1998
among FMC Trust Finance S.a.r.l. Luxembourg, as Insurer, State
Street Bank and Trust Company as Trustee and Fresenius Medical
Care Holdings, Inc., and Fresenius Medical Care AG, as
Guarantors with respect to the issuance of 7 3/8% Senior
Subordinated Notes due 2008 (incorporated herein by reference
to the Form 10-K of Registrant filed with Commission on March
23, 1998).
43
<PAGE> 44
Exhibit 10.1 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).
Exhibit 10.2 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).
Exhibit 10.3 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).
Exhibit 10.4 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).
Exhibit 10.5 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).
Exhibit 10.6 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).
Exhibit 10.7 Receivables Purchase Agreement dated August 28, 1997 between
National Medical Care, Inc. and NMC Funding Corporation
(incorporated herein by reference to the Form 10-Q of the
Registrant filed with the Commission on November 14, 1997).
Exhibit 10.8 Amendment dated as of September 28, 1998 to the Receivables
Purchase Agreement dated as of August 28, 1997, by and between
NMC Funding Corporation, as Purchaser and National Medical
Care, Inc., as Seller.
Exhibit 10.9 Transfer and Administration Agreement dated August 28, 1997
among NMC Funding Corporation, National Medical Care, Inc.,
Enterprise Funding Corporation, the Bank Investors listed
therein and NationsBank, N.A., as agent (incorporated herein
by reference to the Form 10-Q of the Registrant filed with the
Commission on November 14, 1997).
Exhibit 10.10 Amendment No. 1 dated as of February 27, 1998 to Transfer and
Administration Agreement dated as of August 28, 1997 among NMC
Funding Corporation, National Medical Care, Inc., Enterprise
Funding Corporation, the Bank Investors listed herein and
NationsBank, N.A., as agent (incorporated herein by reference
to the Form 10-K of Registrant filed with Commission on March
23, 1998).
Exhibit 10.11 Amendment No. 2 dated as of August 25, 1998 to Transfer and
Administration Agreement dated us of August 28, 1997 among NMC
Funding Corporation as Transferor, National Medical Care,
Inc., as Collection Agent, Enterprise Funding Corporation, and
Nations Bank, N.A. as agent for Enterprise Funding Corporation
and the Bank Investors.
Exhibit 10.12 Amendment No. 3 dated as of September 28, 1998 to Transfer and
Administration Agreement dated as of August 28, 1997 among NMC
Funding Corporation as Transferor, National Medical Care,
Inc., as Collection Agent, Enterprise Funding Corporation, and
Nations Bank, N.A. as agent for Enterprise Funding Corporation
and the Bank Investors.
Exhibit 10.13 Employment agreement dated January 1, 1992 by and between Ben
J. Lipps and Fresenius USA, Inc. (incorporated herein by
reference to the Annual Report on Form 10-K of Fresenius USA,
Inc., for the year ended December 31, 1992).
44
<PAGE> 45
Exhibit 10.14 Modification to FUSA Employment Agreement effective as of
January 1, 1998 by and between Ben J. Lipps and Fresenius
Medical Care AG (incorporated herein by reference to the Form
10-Q of Registrant filed with Commission on May 14, 1998).
Exhibit 10.15 Employment Agreement dated July 1, 1997 by and between Jerry
A. Schneider and the Company (incorporated herein by
reference to the Form 10-Q of Registrant filed with Commission
on May 14, 1998).
Exhibit 10.16 Addendum to Employment Agreement dated as of September 18,
1997 by and between Jerry A. Schneider and the Company
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on May 14, 1998).
Exhibit 10.17 Separation Agreement dated as of July 21, 1998 by and between
Geoffrey W. Swett and National Medical Care, Inc.
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On July 16, 1998, FMCH filed a report on Form 8-K with respect to
FMCH's divestiture of its Non Renal Diagnostic Services and Homecare
divisions.
On August 5, 1998, FMCH filed a report on Form 8-K showing certain
restated financial data of FMC, the parent corporation of the
registrant, on a quarterly basis for 1996 and 1997 and the first
quarter of 1998. These quarterly statements detailed results of
operations between FMC's core and divested non - core businesses.
45
<PAGE> 46
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fresenius Medical Care Holdings, Inc.
DATE: November 12, 1998 /s/ Ben J. Lipps
----------------- ------------------------------------------
NAME: Ben J. Lipps
TITLE: President (Chief Executive Officer)
DATE: November 12, 1998 /s/ Jerry A. Schneider
----------------- ------------------------------------------
NAME: Jerry Schneider
TITLE: Chief Financial Officer
46
<PAGE> 1
EXHIBIT 4.8
AMENDMENT NO. 6
THIS AMENDMENT NO. 6, dated as of June 30, 1998 (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 Lenders identified therein, and NationsBank, N.A., as
Paying Agent;
WHEREAS, the Company has requested the consent of the Paying Agent and
Lenders to (i) the assumption by FMC Trust Finance S.a.r.l. Luxembourg, a
limited liability company organized under the laws of Luxembourg ("FMC TRUST
FINANCE"), or a successor thereof, of the obligations of Holdings with respect
to the 9% Senior Subordinated Notes due December 1, 2006 (the "1996 SUBORDINATED
NOTES") issued to evidence the loans made to Holdings of the proceeds from the
issuance by the FMC Trust of the preferred securities referred to in the
definition of "Refinancing Securities" and the common securities of the FMC
Trust contemplated by clause (xvi) of the definition of Permitted Investments,
(ii) the guaranty by Holdings of the obligations of FMC Trust Finance or its
successor under the 1996 Subordinated Notes and (iii) certain related changes to
the terms of the 1996 Subordinated Notes, the FMC Trust and the related
documentation, which assumption, guaranty and other changes have already been
approved by the holders of the Refinancing Securities;
WHEREAS, the Company has requested certain other changes to the Credit
Agreement more fully set forth herein;
WHEREAS, the requested consents and modifications described herein
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:
<PAGE> 2
A. The Credit Agreement is amended and modified in the following respects:
1. The Managing Agents and Required Lenders hereby consent to the
modification of the Refinancing Securities to permit (i) the assumption by FMC
Trust Finance S.a.r.l. Luxembourg, a limited liability company organized under
the laws of Luxembourg and a wholly-owned subsidiary of Holdings, of the
obligations of Holdings with respect to the 1996 Subordinated Notes, (ii) the
guaranty by Holdings of the obligations under the 1996 Subordinated Notes, (iii)
the adoption of provisions which, subject to the provisions of the Credit
Agreement, would permit Holdings or any wholly-owned subsidiary of Holdings
(other than the Company and its Subsidiaries) to assume the obligations of the
note issuer thereunder, and (iv) certain related changes to the terms of the
1996 Subordinated Notes, the FMC Trust and the related documentation, a
description of which is attached as EXHIBIT A attached hereto, or such other
form not materially adverse to the interests of the Lenders, and waive
compliance with any provisions of the Credit Agreement to the extent that such
modification would conflict with such provisions.
2. In Section 1.1,
(a) The following definitions are hereby amended or added to read
as follows:
"REFINANCING SECURITIES" means (i) the $360,000,000
Aggregate Liquidation Amount of 9% Trust Preferred Securities
Due 2006 issued by the FMC Trust pursuant to its Amended and
Restated Declaration of Trust dated as of November 27, 1996,
as it may be amended, restated or modified as permitted by
Section 8.9, and (ii) the 1996 Subordinated Notes.
"1996 SUBORDINATED NOTES" means the 9% Senior
Subordinated Notes due December 1, 2006 issued to evidence the
loans made to Holdings of the proceeds from the issuance by
the FMC Trust of its 9% Trust Preferred Securities Due 2006
and the common securities of the FMC Trust issued to Holdings,
pursuant to the Senior Subordinated Indenture, dated as of
November 27, 1996 among Holdings, the Subsidiary Guarantors
therein defined, and State Street Bank and Trust Company, as
successor trustee to Fleet National Bank, as it may be
amended, supplemented or otherwise modified to permit the
assumption of the obligations of the note issuer thereunder by
a wholly-owned Subsidiary of Holdings (other than the Company
and its Subsidiaries) or Holdings and as permitted by Section
8.9, as such Notes may be assumed by any Subsidiary of
Holdings.
(b) The definition of "CONSOLIDATED FIXED CHARGES" is hereby
amended by inserting the following at the end thereof:
2
<PAGE> 3
"; it being understood and agreed that any payment in
respect of any Permitted Genu(beta)schein Transaction during
such period shall not be a Consolidated Fixed Charge
notwithstanding classification or reclassification of the
investment securitization issued in connection with such
Permitted Genu(beta)schein Transaction as indebtedness under
GAAP."
(c) The second proviso to the definition of "MATERIAL SUBSIDIARY"
is hereby amended as follows:
(i) by deleting the words "the subordinated notes
given by Holdings to the FMC Trust in connection with the
Refinancing Securities" in clause (i) thereof and inserting a
reference to the "1996 Subordinated Notes" in place thereof;
and
(ii) by deleting clause (ii) thereof and substituting
the following therefor:
"(ii) for purposes of determining whether any special
purpose wholly-owned Subsidiary of Holdings that issues or
assumes Refinancing Securities, Additional Subdebt and/or
Additional Subdebt Securities is a Material Subsidiary
hereunder, the proceeds of such Refinancing Securities and/or
Additional Subdebt Securities shall not be considered as
assets for purposes hereof, to the extent that such proceeds
have been lent or contributed to another member of the
Consolidated Group, and any interest in respect of any such
loan shall not be considered for the purposes of determining
Consolidated EBITDA under this definition."
(d) The definition of "PERMITTED INVESTMENTS" is hereby amended as
follows:
(i) by deleting the words "the loan by the FMC Trust
to Holdings of the proceeds of the Refinancing Securities (as
described in the description of Refinancing Securities in
SCHEDULE 1.1)" from clause (xvi) thereof and inserting a
reference to "the 1996 Subordinated Notes" in their place; and
(ii) by deleting clause (xvii) thereof and
substituting therefor the following:
"(xvii) Investments by Holdings and its Subsidiaries
(other than the Company or its Subsidiaries) in FMC Finance or
any wholly-owned Subsidiary of Holdings that issues or assumes
Refinancing Securities, Additional Subdebt and/or Additional
Subdebt Securities;"
(e) Section 8.10(b) is hereby amended by inserting the following
sentence at the end thereof:
3
<PAGE> 4
"In addition, Holdings shall not make or permit its
Subsidiaries to make payments in connection with any put or
call option relating to investment securities issued under any
Permitted Genu(beta)schein Transaction; provided that Holdings
and its Subsidiaries (other than FUSA, the Company and their
Subsidiaries) may make such payments in an aggregate amount of
up to $75 million so long as no Default or Event of Default
shall exist before or after giving effect thereto."
3. The Paying Agent, with the consent and at the discretion of
the Required Lenders, hereby consents to the Amendment by and between Holdings
and State Street Bank and Trust Company, as successor trustee and collateral
agent to Fleet National Bank, to the Pledge and Security Agreement dated as of
November 27, 1996 by and between Holdings and Fleet National Bank, in
substantially the form annexed hereto as EXHIBIT B, or such other form not less
favorable in any material respect to the Lenders.
4. Section 7.9(a) is hereby amended by adding the words "minus
(v) any loss (calculated as the difference between the book value of the
disposed assets and the net purchase price of such assets) resulting from the
disposal of the Company's homecare and diagnostic businesses" at the end of the
first sentence thereof.
5. Section 8.1(f) is hereby amended by (i) adding the words
"Holdings and" before the words "Foreign Subsidiaries" in the first line thereof
and (ii) adding the words "and no more than $50,000,000 of such Funded Debt may
be incurred, created or assumed by Holdings (except as a Guaranty Obligation)"
at the end of clause (iii) of the proviso.
6. In clause (A) of the proviso to Section 8.4(c)(vi) the
reference to "two and one half percent (2 1/2%)" is amended and increased to
read "five percent (5%)".
7. In connection with the sale of the Company's homecare and
diagnostic businesses:
(i) NMC Homecare, Inc. is hereby released from its obligations
under the guaranty.
(ii) losses from or on account of operations, discontinuation of
operations and/or disposal of assets on account of the sale of the Company's
homecare and diagnostic business, net of related tax effects, to the extent not
considered extraordinary items, shall be excluded from Consolidated Net Income
for purposes of determining the Consolidated Leverage Ratio and the Consolidated
Fixed Charge Coverage Ratio.
8. The Lenders hereby waive compliance with the provisions of the
Credit Agreement as in effect before the execution and delivery of this
Amendment No. 6 to the extent, and only to the extent, that any transaction or
action of any member of the Consolidated Group would have been permitted by the
provisions of the Credit Agreement as amended hereby.
4
<PAGE> 5
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.
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]
5
<PAGE> 6
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.
BORROWERS: NATIONAL MEDICAL CARE, INC.,
a Delaware corporation
By /s/ Ben Lipps
------------------------------------
Ben J. Lipps
President
FRESENIUS MEDICAL CARE AG
By /s/ Hans-Ulrich Sutter
------------------------------------
Hans-Ulrich Sutter
Managing Board Member
By /s/ Ben Lipps
------------------------------------
Ben J. Lipps
Managing Board Member
NMC DO BRASIL LTDA.,
a Brazil corporation
By /s/ Joao Padrisui
------------------------------------
Joao Padrisini
Manager
NATIONAL MEDICAL CARE OF SPAIN, S.A.,
a Spanish corporation
By /s/ Manuel Jose Huete Mendez
------------------------------------
Manuel Jose Huete Mendez
Vice President
NATIONAL MEDICAL CARE OF TAIWAN, INC.,
a Delaware corporation
By /s/ Thomas Mechtersheimer
------------------------------------
Thomas Mechtersheimer
Director
6
<PAGE> 7
NMC CENTRO MEDICO NACIONAL, LDA.,
a Portuguese corporation
By /s/ John Allen
--------------------------------------------
John Allen
Manager
NMC DE ARGENTINA, S.A.,
an Argentine corporation
By /s/ Guido Yagupsky
--------------------------------------------
Guido Yagupsky
Vice President
FRESENIUS USA, INC.,
a Massachusetts corporation
By /s/ Ben Lipps
--------------------------------------------
Ben J. Lipps
President
FRESENIUS MEDICAL CARE DEUTSCHLAND GmbH,
a German corporation
By /s/ Emanuelle Gatti /s/ Hans-Ulrich Sutter
-------------------------------------------
Emanuelle Gatti Hans-Ulrich Sutter
Managing Board Members
FRESENIUS MEDICAL CARE GROUPE FRANCE
(formerly known as Fresenius Groupe
France S.A.), a French corporation
By /s/ Hans-Ulrich Sutter /s/ Emanuelle Gatti
-------------------------------------------
Hans-Ulrich Sutter Emanuelle Gatti
Managing Board Members
FRESENIUS MEDICAL CARE HOLDING, S.p.A.,
an Italian corporation
By /s/ Hans-Ulrich Sutter /s/ Emanuelle Gatti
-------------------------------------------
Hans-Ulrich Sutter Emanuelle Gatti
Managing Board Members
7
<PAGE> 8
FRESENIUS MEDICAL CARE ESPANA S.A.,
a Spanish corporation
By /s/ Emanuelle Gatti
-------------------------------------------
Emanuelle Gatti
Officer
FRESENIUS MEDICAL CARE MAGYAROSZA KfG,
a Hungarian corporation
By /s/ N. Erhard
-------------------------------------------
N. Erhard
Board Member
GUARANTORS: FRESENIUS MEDICAL CARE HOLDINGS, INC.,
a New York corporation formerly known as WRG-NY
By /s/ Ben Lipps
-------------------------------------------
Ben J. Lipps
President
NATIONAL MEDICAL CARE, INC.,
a Delaware corporation
By /s/ Ben Lipps
-------------------------------------------
Ben J. Lipps
President
BIO-MEDICAL APPLICATIONS MANAGEMENT CO., INC.,
a Delaware corporation
By /s/ Ben Lipps
-------------------------------------------
Ben J. Lipps
President
NMC HOMECARE, INC.,
a Delaware corporation
By /s/ Ben Lipps
-------------------------------------------
Ben J. Lipps
President
8
<PAGE> 9
LIFECHEM, INC.,
a Delaware corporation
By /s/ Ben Lipps
-------------------------------------------
Ben J. Lipps
President
FRESENIUS MEDICAL CARE AG,
a German corporation
By /s/ Emanuelle Gatti /s/ Hans-Ulrich Sutter
-------------------------------------------
Emanuelle Gatti Hans-Ulrich Sutter
Managing Board Members
FRESENIUS USA, INC.,
a Massachusetts corporation
By /s/ Ben Lipps
-------------------------------------------
Ben J. Lipps
President
FRESENIUS MEDICAL CARE DEUTSCHLAND
GmbH, a German corporation
By /s/ Emanuelle Gatti /s/ Hans-Ulrich Sutter
-------------------------------------------
Emanuelle Gatti Hans-Ulrich Sutter
Board Members
FRESENIUS MEDICAL CARE GROUPE FRANCE,
a French corporation (formerly known as
Fresenius Groupe France S.A.)
By /s/ Hans-Ulrich Sutter /s/ Emanuelle Gatti
-------------------------------------------
Hans-Ulrich Sutter Emanuelle Gatti
Board Members
FRESENIUS SECURITIES, INC.,
a California corporation
By /s/ Ben Lipps
-------------------------------------------
Ben J. Lipps
President
9
<PAGE> 10
PAYING AGENT: NATIONSBANK, N.A.,
as Paying Agent for and on behalf of the Lenders
By /s/ Ashley M. Crabtree
-------------------------------------------
Ashley M. Crabtree
Senior Vice President
10
<PAGE> 11
CONSENT TO AMENDMENT NO. 6
NationsBank, N.A., as Paying Agent
101 N. Tryon Street, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attn: Cindy Harmon, 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. 6 dated June 30, 1998 (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, and agree that Company and the other Credit
Parties may rely on such authorization.
Sincerely,
---------------------------------
[Name of Lender]
By:
------------------------------
Name:
Title:
11
<PAGE> 12
EXHIBIT A
Description of Transactions Relating to the 1996 Subordinated Notes
12
<PAGE> 13
EXHIBIT B
Form of Amendment to Pledge and Security Agreement
13
<PAGE> 1
EXHIBIT 10.8
AMENDMENT
Dated as of September 28, 1998
to
RECEIVABLES PURCHASE AGREEMENT
Dated as of August 28, 1997
THIS AMENDMENT (this "Amendment") dated as of September 28,
1998 is entered into by and between NMC FUNDING CORPORATION, a Delaware
corporation, as Purchaser (the "Purchaser") and NATIONAL MEDICAL CARE, INC., a
Delaware corporation, as Seller (the "Seller").
PRELIMINARY STATEMENT
A. The Purchaser and the Seller are parties to that
certain Receivables Purchase Agreement dated as of August 28, 1997 (as amended
or otherwise modified prior to the date hereof, the "RPA"). Capitalized terms
used herein and not otherwise defined shall have the meanings ascribed to them
in the RPA.
B. The Purchaser and the Seller have agreed to amend the
RPA on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises set forth
above, and other good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Amendments to the RPA. Subject to the satisfaction
of the conditions precedent set forth in Section 2 below, the RPA is amended as
follows:
1.1. The following new definitions are added to Section
1.1 of the RPA in appropriate alphabetical order:
"Receivable Systems" has the meaning specified in Section 3.1(z).
"Year 2000 Compliant" has the meaning specified in Section 3.1(z).
1.2. Section 3.1 of the RPA is amended to add, immediately
after paragraph (y), the following new paragraph (z):
<PAGE> 2
"(z) Year 2000 Compliance. The Seller has (i) initiated a review and
assessment of all areas within its and each of its Subsidiaries' business and
operations (including those affected by suppliers, vendors and customers) that
could be adversely affected by the 'Year 2000 Problem' (that is, the risk that
computer applications used by the Seller or any of its Subsidiaries (or
suppliers, vendors and customers) may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) initiated the development of a plan and timeline
for addressing the Year 2000 Problem on a timely basis, and (iii) to date,
implemented that plan in accordance with that timetable. The Seller believes
that all computer applications (including those of its suppliers, vendors and
customers) that are material to its or any of its Subsidiaries' business and
operations are reasonably expected on a timely basis to be able to perform
properly date-sensitive functions for all dates before and after January 1, 2000
(that is, be 'Year 2000 Compliant'), except to the extent that a failure to do
so could not reasonably be expected (a) to have a Material Adverse Effect on the
Seller or on the transaction documented under this Agreement, or (b) to result
in a Termination Event.
The Seller (i) has initiated a review and assessment of all computer
applications (including, but not limited to those of the Seller, any
Transferring Affiliate and any of their respective suppliers, vendors, customers
or third party servicers), which are related to or involved in the origination,
collection, management or servicing of the Receivables (the 'Receivable
Systems') and (ii) believes that such Receivable Systems are Year 2000 Compliant
or will be Year 2000 Compliant on or before April 1, 1999 and thereafter.
The Seller believes that the costs of all assessment, remediation,
testing and integration related to the Seller's plan for becoming Year 2000
Compliant will not have a material adverse effect on the financial condition or
operations of the Seller."
1.3. Section 5.1 of the RPA is amended to add, immediately
following paragraph (m), the following new paragraphs (n) and (o):
"(n) Year 2000 Compliance: Reporting. The Seller will promptly notify
the Agent in the event the Seller discovers or determines that any computer
application (including those of its suppliers, vendors and customers) (i) that
is necessary for the origination, collection, management, or servicing of the
Receivables will not be Year 2000 Compliant on or before April 1, 1999 and
thereafter, or (ii) that is otherwise material to its or any of its
Subsidiaries' business and operations will not be Year 2000 Compliant on a
timely basis, except to the extent that, in the case of (ii) above, such failure
could not reasonably be expected (a) to have a Material Adverse Effect on the
Seller or on the transaction documented under this Agreement, or (b) to result
in a Termination Event.
Further, the Seller will deliver simultaneously with any quarterly or
annual financial statements or reports to be delivered under the Agreement, a
certificate signed by an officer of the Seller that no material event, problems
or conditions have occurred
<PAGE> 3
which in the opinion of management would (i) prevent or materially delay the
Seller's plan to become Year 2000 Compliant or (ii) cause Seller's or be likely
to cause the representations and warranties or covenants with respect to being
or becoming Year 2000 Compliant to no longer be true.
(o) YEAR 2000 COMPLIANCE: IMPLEMENTATION: The Seller will
cause (i) all computer applications (including those of its suppliers,
vendors and customers) that are material to its or any of its
Subsidiaries' business and operations to be Year 2000 Compliant on a
timely basis, except to the extent that a failure to do so could not
reasonably be expected (a) to have a Material Adverse Effect on the
Seller or on the transaction documented under this Agreement, or (b) to
result in a Termination Event; and (ii) all Receivable Systems to be
Year 2000 Compliant at all times on and after April 1, 1999. The Seller
will deliver a certificate to the Seller and the Agent, signed by the
chief information officer of the Seller, certifying compliance with the
foregoing covenant by no later than April 1, 1999."
1.4. Section 8.1 of the RPA is amended (a) to replace the period
appearing at the end of clause (xviii) with a semicolon followed by the word
"or" and (b) to add the following new clause (xix):
"(xix) any failure of the computer applications of the Seller
or any Transferring Affiliate(including those of suppliers, vendors and
customers of the Seller or any Transferring Affiliate and the
Receivables Systems) to be Year 2000 Compliant at any time."
SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become
effective and be deemed effective as of the date hereof upon the receipt by the
Agent of each of the following:
(i) counterparts of this Amendment duly executed by the
Purchaser and the Seller; and
(ii) a reaffirmation of the Parent Agreement,
substantially in the form of Exhibit A attached hereto, duly executed by each of
FMC and FMCH.
SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE
SELLER.
3.1 Upon the effectiveness of this Amendment, the Seller
hereby reaffirms (subject to the modifications to Exhibit F to the RPA set forth
in the Certificate of even date herewith executed by the Seller) all covenants,
representations and warranties made by it in the RPA and agrees that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Amendment.
<PAGE> 4
3.2 The Seller hereby represents and warrants that (i)
this Amendment constitutes the legal, valid and binding obligation of such
party, enforceable against it in accordance with its terms and (ii) upon the
effectiveness of this Amendment, no Seller Default or Potential Seller Default
shall exist under the RPA.
SECTION 4. REFERENCE TO AND EFFECT ON THE RPA.
4.1 Upon the effectiveness of this Amendment, each
reference in the RPA to "this Agreement," "hereunder," "hereof," "herein,"
"hereby" or words of like import shall mean and be a reference to the RPA as
amended hereby, and each reference to the RPA in any other document, instrument
and agreement executed and/or delivered in connection with the RPA shall mean
and be a reference to the RPA as amended hereby.
4.2 Except as specifically amended hereby, the RPA and
all other documents, instruments and agreements executed and/or delivered in
connection therewith shall remain in full force and effect and are hereby
ratified and confirmed.
4.3 The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of the
Purchaser or any of its assignees under the RPA or any other document,
instrument, or agreement executed in connection therewith, nor constitute a
waiver of any provision contained therein.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF
LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same instrument.
SECTION 7. HEADINGS. Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
as of the date first written above.
NMC FUNDING CORPORATION,
as Purchaser
By: /s/ James V. Luther
------------------------------------
James V. Luther
Assistant Treasurer
NATIONAL MEDICAL CARE, INC.,
as Seller
By: /s/ James V. Luther
------------------------------------
James V. Luther
Assistant Treasurer
<PAGE> 6
EXHIBIT A
FORM OF REAFFIRMATION OF PARENT AGREEMENT
REAFFIRMATION OF PARENT AGREEMENT
September 28, 1998
NMC Funding Corporation
Two Ledgemont Center
95 Hayden Avenue
Lexington, Massachusetts 02173
NationsBank, N.A.,
as Agent under the
Transfer and Administration
Agreement referred to below
NationsBank Corporate Center--10th Floor
Charlotte, North Carolina 28255
Each of the undersigned, FRESENIUS MEDICAL CARE AG and
FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the
execution of that certain Amendment No. 3 dated as of September 28, 1998 (the
"TAA AMENDMENT") to the Transfer and Administration Agreement, dated as of
August 28, 1997, among Enterprise Funding Corporation, NMC Funding Corporation,
National Medical Care, Inc., the "Bank Investors" parties thereto and
NationsBank, N.A., as agent, (ii) acknowledges, and consents to, the execution
of that certain Amendment dated as of September 28, 1998 (the "RPA AMENDMENT")
to the Receivables Purchase Agreement, dated as of August 28, 1997, between NMC
Funding Corporation and National Medical Care, Inc., (iii) reaffirms all of its
obligations under that certain Parent Agreement dated as of August 28, 1997 made
by the undersigned and (iv) acknowledges and agrees that, after giving effect to
the TAA Amendment and the RPA Amendment, such Parent Agreement remains in full
force and effect and such Parent Agreement is hereby ratified and confirmed.
<PAGE> 7
FRESENIUS MEDICAL CARE AG
By:
----------------------------------
Title:
FRESENIUS MEDICAL CARE
HOLDINGS, INC.
By:
----------------------------------
Title:
<PAGE> 1
EXHIBIT 10.11
AMENDMENT NO. 2
Dated as of August 25, 1998
to
TRANSFER AND ADMINISTRATION AGREEMENT
Dated as of August 28, 1997
THIS AMENDMENT NO. 2 (this "AMENDMENT") dated as of August 25, 1998 is
entered into by and among NMC FUNDING CORPORATION, a Delaware corporation, as
Transferor (in such capacity, the "TRANSFEROR"), NATIONAL MEDICAL CARE, INC., a
Delaware corporation, as the initial "COLLECTION AGENT", ENTERPRISE FUNDING
CORPORATION, a Delaware corporation (the "COMPANY"), and NATIONSBANK, N.A., a
national banking association ("NATIONSBANK"), as agent for the Company and the
Bank Investors (in such capacity, the "AGENT") and as a Bank Investor.
PRELIMINARY STATEMENT
A. The Company, the Transferor, the Collection Agent and
NationsBank, in its capacity as the Agent and as a Bank Investor, are parties to
that certain Transfer and Administration Agreement dated as of August 28, 1997
(as amended or otherwise modified prior to the date hereof, the "TAA").
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the TAA.
B. The Company, the Transferor, the Collection Agent and
NationsBank, as Agent and as a Bank Investor, have agreed to amend the TAA on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises set forth
above, and other good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE TAA. Subject to the satisfaction
of the conditions precedent set forth in Section 2 below, Section 1.1 the TAA is
amended as follows:
<PAGE> 2
1.1. The definition of "COMMITMENT TERMINATION DATE" is
amended to change the date set forth therein from "August 27, 1998" to
"September 28, 1998".
1.2. The definition of "TERMINATION DATE" is amended to
change the date set forth in clause (viii) thereof from "August 27,
1998" to "September 28, 1998".
SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become
effective and be deemed effective as of the date hereof upon the receipt by the
Agent of each of the following:
(i) counterparts of this Amendment duly executed by the
Company, the Transferor, the Collection Agent, the Bank Investor and the Agent;
and
(ii) a reaffirmation of the Parent Agreement,
substantially in the form of Exhibit A attached hereto, duly executed by each of
FMC and FMCH.
SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE
TRANSFEROR AND THE COLLECTION Agent.
3.1 Upon the effectiveness of this Amendment, each of the
Transferor and the Collection Agent hereby reaffirms all covenants,
representations and warranties made by it in the TAA and agrees that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Amendment.
3.2 Each of the Transferor and the Collection Agent
hereby represents and warrants that (i) this Amendment constitutes the legal,
valid and binding obligation of such party, enforceable against it in accordance
with its terms and (ii) upon the effectiveness of this Amendment, no Termination
Event or Potential Termination Event shall exist under the TAA.
SECTION 4. REFERENCE TO AND EFFECT ON THE TAA.
4.1 Upon the effectiveness of this Amendment, each
reference in the TAA to "this Agreement," "hereunder," "hereof," "herein,"
"hereby" or words of like import shall mean and be a reference to the TAA as
amended hereby, and each reference to the TAA in any other document, instrument
and agreement executed and/or delivered in connection with the TAA shall mean
and be a reference to the TAA as amended hereby.
<PAGE> 3
4.2 Except as specifically amended hereby, the TAA and
all other documents, instruments and agreements executed and/or delivered in
connection therewith shall remain in full force and effect and are hereby
ratified and confirmed.
4.3 The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of the
Company, the Bank Investor or the Agent under the TAA or any other document,
instrument, or agreement executed in connection therewith, nor constitute a
waiver of any provision contained therein.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF
LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same instrument.
SECTION 7. HEADINGS. Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stephen Newman
----------------------------------------
Stephen Newman
Vice President
NMC FUNDING CORPORATION,
as Transferor
By: /s/ James V. Luther
----------------------------------------
James V. Luther
Assistant Treasurer
NATIONAL MEDICAL CARE, INC.,
as Collection Agent
By: /s/ James V. Luther
----------------------------------------
James V. Luther
Assistant Treasurer
NATIONSBANK, N.A., as Agent
and as a Bank Investor
By: /s/ Elliott T. Lemon
----------------------------------------
Elliott T. Lemon
Vice President
<PAGE> 5
EXHIBIT A
FORM OF REAFFIRMATION OF PARENT AGREEMENT
REAFFIRMATION OF PARENT AGREEMENT
August 25, 1998
NMC Funding Corporation
Two Ledgemont Center
95 Hayden Avenue
Lexington, Massachusetts 02173
NationsBank, N.A.,
as Agent under the
Transfer and Administration
Agreement referred to below
NationsBank Corporate Center--10th Floor
Charlotte, North Carolina 28255
Each of the undersigned, FRESENIUS MEDICAL CARE AG and
FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the
execution of that certain Amendment No. 2 dated as of August 25, 1998 (the
"AMENDMENT") to the Transfer and Administration Agreement, dated as of August
28, 1997, among Enterprise Funding Corporation, NMC Funding Corporation,
National Medical Care, Inc., the "Bank Investors" parties thereto and
NationsBank, N.A., as agent (as amended, the "TAA"), (ii) reaffirms all of its
obligations under that certain Parent Agreement dated as of August 28, 1997 made
by the undersigned and (iii) acknowledges and agrees that, after giving effect
to the Amendment, such Parent Agreement remains in full force and effect and
such Parent Agreement is hereby ratified and confirmed.
<PAGE> 6
FRESENIUS MEDICAL CARE AG
By:
---------------------------------------
Title:
FRESENIUS MEDICAL CARE
HOLDINGS, INC.
By:
---------------------------------------
Title:
<PAGE> 1
EXHIBIT 10.12
AMENDMENT NO. 3
Dated as of September 28, 1998
to
TRANSFER AND ADMINISTRATION AGREEMENT
Dated as of August 28, 1997
THIS AMENDMENT NO. 3 (this "AMENDMENT") dated as of September
28, 1998 is entered into by and among NMC FUNDING CORPORATION, a Delaware
corporation, as Transferor (the "TRANSFEROR"), NATIONAL MEDICAL CARE, INC., a
Delaware corporation, as the initial "COLLECTION AGENT", ENTERPRISE FUNDING
CORPORATION, a Delaware corporation (the "COMPANY"), and NATIONSBANK, N.A., a
national banking association ("NATIONSBANK"), as agent for the Company and the
Bank Investors (in such capacity, the "AGENT") and as a Bank Investor.
PRELIMINARY STATEMENT
A. The Company, the Transferor, the Collection Agent and
NationsBank, in its capacity as the Agent and as a Bank Investor, are parties to
that certain Transfer and Administration Agreement dated as of August 28, 1997
(as amended or otherwise modified prior to the date hereof, the "TAA").
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the TAA.
B. The Company, the Transferor, the Collection Agent and
NationsBank, as Agent and as a Bank Investor, have agreed to amend the TAA on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises set forth
above, and other good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE TAA. Subject to the satisfaction
of the conditions precedent set forth in Section 2 below, the TAA is amended as
follows:
1.1. The definition of "COMMITMENT TERMINATION DATE" set
forth in Section 1.1 of the TAA is amended to change the date set forth
therein from "September 28, 1998" to "September 27, 1999".
<PAGE> 2
1.2. The definition of "TERMINATION DATE" set forth in
Section 1.1 of the TAA is amended to change the date set forth in
clause (viii) thereof from "September 28, 1998" to "September 27,
1999".
1.3. The following new definitions are added to Section
1.1 of the TAA in appropriate alphabetical order:
"RECEIVABLE SYSTEMS" has the meaning specified in
Section 3.1(aa).
"YEAR 2000 COMPLIANT" has the meaning specified in
Section 3.1(aa).
1.4. Section 3.1 of the TAA is amended to add, immediately
after paragraph (z), the following new paragraph (aa):
"(aa) YEAR 2000 COMPLIANCE. The Transferor has (i)
initiated a review and assessment of all areas within its and
each of its Subsidiaries' business and operations (including
those affected by suppliers, vendors and customers) that could
be adversely affected by the 'Year 2000 Problem' (that is, the
risk that computer applications used by the Transferor or any
of its Subsidiaries (or suppliers, vendors and customers) may
be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after
December 31, 1999), (ii) initiated the development of a plan
and timeline for addressing the Year 2000 Problem on a timely
basis, and (iii) to date, implemented that plan in accordance
with that timetable. The Transferor believes that all computer
applications (including those of its suppliers, vendors and
customers) that are material to its or any of its
Subsidiaries' business and operations are reasonably expected
on a timely basis to be able to perform properly
date-sensitive functions for all dates before and after
January 1, 2000 (that is, be 'Year 2000 Compliant'), except to
the extent that a failure to do so could not reasonably be
expected (a) to have a Material Adverse Effect on the
Transferor or on the transaction documented under this
Agreement, or (b) to result in a Termination Event.
The Transferor (i) has initiated a review and assessment of
all computer applications (including, but not limited to,
those of the Transferor, the Collection Agent, the Seller, any
Transferring Affiliate and any of their respective suppliers,
vendors, customers or third party servicers), which are
related to or involved in the origination, collection,
management or servicing of the Receivables (the 'Receivable
Systems') and (ii) believes that such Receivable Systems are
Year 2000 Compliant or will be Year 2000 Compliant on or
before April 1, 1999 and thereafter.
<PAGE> 3
The Company believes that the costs of all assessment,
remediation, testing and integration related to the
Transferor's plan for becoming Year 2000 Compliant will not
have a material adverse effect on the financial condition or
operations of the Transferor."
1.5. Section 3.3 of the TAA is amended to add, immediately
after paragraph (k), the following new paragraph (l):
"(l) YEAR 2000 COMPLIANCE. The Collection Agent has
(i) initiated a review and assessment of all areas within its,
the Seller's and each Transferring Affiliate's business and
operations (including those affected by suppliers, vendors and
customers) that could be adversely affected by the 'Year 2000
Problem' (that is, the risk that computer applications used by
the Collection Agent, the Seller or any Transferring Affiliate
(or suppliers, vendors and customers) may be unable to
recognize and perform properly date-sensitive functions
involving certain dates prior to and any date after December
31, 1999), (ii) initiated the development of a plan and
timeline for addressing the Year 2000 Problem on a timely
basis, and (iii) to date, implemented that plan in accordance
with that timetable. The Collection Agent believes that all
computer applications (including those of its suppliers,
vendors and customers) that are material to its, the Seller's
or any Transferring Affiliate's business and operations are
reasonably expected on a timely basis to be Year 2000
Compliant, except to the extent that a failure to do so could
not reasonably be expected (a) to have a Material Adverse
Effect on the Collection Agent, the Seller or any Transferring
Affiliate or on the transactions contemplated by the
Transaction Documents, or (b) to result in a Termination
Event.
The Collection Agent (i) has initiated a review and assessment
of all Receivable Systems and (ii) believes that such
Receivable Systems are Year 2000 Compliant or will be Year
2000 Compliant on or before April 1, 1999 and thereafter.
The Collection Agent believes that the costs of all
assessment, remediation, testing and integration related to
the Collection Agent's plan for becoming, and causing the
Seller and each Transferring Affiliate to become, Year 2000
Compliant will not have a material adverse effect on the
financial condition or operations of the Collection Agent, the
Seller or any Transferring Affiliate."
1.6. Section 5.1 of the TAA is amended to add, immediately
following paragraph (n), the following new paragraphs (o) and (p):
"(o) YEAR 2000 COMPLIANCE: REPORTING. The Transferor
will promptly notify the Agent in the event the Transferor
discovers or
<PAGE> 4
determines that any computer application (including those of
its suppliers, vendors and customers) (i) that is necessary
for the origination, collection, management, or servicing of
the Receivables will not be Year 2000 Compliant on or before
April 1, 1999 and thereafter, or (ii) that is otherwise
material to its or any of its Subsidiaries' business and
operations will not be Year 2000 Compliant on a timely basis,
except to the extent that, in the case of (ii) above, such
failure could not reasonably be expected (a) to have a
Material Adverse Effect on the Transferor or on the
transaction documented under this Agreement, or (b) to result
in a Termination Event.
Further, the Transferor will deliver simultaneously with any
quarterly or annual financial statements or reports to be
delivered under the Agreement, a certificate signed by an
officer of the Transferor that no material event, problems or
conditions have occurred which in the opinion of management
would (i) prevent or materially delay the Transferor's plan to
become Year 2000 Compliant or (ii) cause or be likely to cause
the Transferor's representations and warranties or covenants
with respect to being or becoming Year 2000 Compliant to no
longer be true.
(p) YEAR 2000 COMPLIANCE: IMPLEMENTATION: The
Transferor will cause (i) all computer applications (including
those of its suppliers, vendors and customers) that are
material to its or any of its Subsidiaries' business and
operations to be Year 2000 Compliant on a timely basis, except
to the extent that a failure to do so could not reasonably be
expected (a) to have a Material Adverse Effect on the
Transferor or on the transaction documented under this
Agreement, or (b) to result in a Termination Event; and (ii)
all Receivable Systems to be Year 2000 Compliant at all times
on and after April 1, 1999. The Transferor will deliver a
certificate to the Agent, signed by the chief information
officer of the Transferor, certifying compliance with the
foregoing covenant by no later than April 1, 1999."
1.7. Section 5.3 of the TAA is amended to add, immediately
following paragraph (h), the following new paragraphs (i) and (j):
"(i) YEAR 2000 COMPLIANCE: REPORTING. The Collection
Agent will promptly notify the Agent in the event the
Collection Agent discovers or determines that any computer
application (including those of its suppliers, vendors and
customers) (i) that is necessary for the origination,
collection, management, or servicing of the Receivables by the
Collection Agent, the Seller or any Transferring Affiliate
will not be Year 2000 Compliant on or before January 1, 1999
and thereafter, or (ii) that is otherwise material to its or
the Seller's or any Transferring Affiliate's business and
operations will not be Year 2000 Compliant on a timely basis,
except to the extent
<PAGE> 5
that, in the case of (ii) above, such failure could not
reasonably be expected (a) to have a Material Adverse Effect
on the Collection Agent, the Seller or any Transferring
Affiliate or on the transactions contemplated under the
Transaction Documents, or (b) to result in a Termination
Event.
Further, the Collection Agent will deliver simultaneously with
any quarterly or annual financial statements or reports to be
delivered under the Agreement, a certificate signed by an
officer of the Collection Agent that no material event,
problems or conditions have occurred which in the opinion of
management would (i) prevent or materially delay the
Collection Agent's plan to become, and to cause the Seller and
each Transferring Affiliate to become, Year 2000 Compliant or
(ii) cause or be likely to cause the Collection Agent's
representations and warranties or covenants with respect to
the Collection Agent, the Seller and each Transferring
Affiliate being or becoming Year 2000 Compliant to no longer
be true.
(j) YEAR 2000 COMPLIANCE: IMPLEMENTATION: The
Collection Agent will cause (i) all computer applications
(including those of its suppliers, vendors and customers) that
are material to its or any of its Subsidiaries' business and
operations to be Year 2000 Compliant on a timely basis, except
to the extent that a failure to do so could not reasonably be
expected (a) to have a Material Adverse Effect on the
Collection Agent or on the transaction documented under this
Agreement, or (b) to result in a Termination Event; and (ii)
all Receivable Systems to be Year 2000 Compliant at all times
on and after April 1, 1999. The Collection Agent will deliver
a certificate to the Agent, signed by the chief information
officer of the Collection Agent, certifying compliance with
the foregoing covenant by no later than April 1, 1999."
1.8. Section 8.1 of the TAA is amended (a) to replace the
period appearing at the end of clause (xx) with a semicolon followed by
the word "or" and (b) to add the following new clause (xxi):
"(xxi) any failure of the computer applications of
the Transferor, the Seller, the Collection Agent or any
Transferring Affiliate (including those of suppliers, vendors
and customers and the Receivables Systems) to be Year 2000
Compliant at any time."
SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become
effective and be deemed effective as of the date hereof upon the receipt by the
Agent of each of the following:
(i) counterparts of this Amendment duly executed by the
Company, the Transferor, the Collection Agent, the Bank Investor and the Agent;
<PAGE> 6
(ii) counterparts of an Amendment, in substantially the
form of Exhibit A attached hereto, to the Receivables Purchase Agreement, duly
executed by each of the Seller and the Transferor; and
(iii) a reaffirmation of the Parent Agreement,
substantially in the form of Exhibit B attached hereto, duly executed by each of
FMC and FMCH.
SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE
TRANSFEROR AND THE COLLECTION Agent.
3.1 Upon the effectiveness of this Amendment, each of the
Transferor and the Collection Agent hereby reaffirms (subject to the
modifications to Exhibit H to the TAA set forth in the Certificate of even date
herewith executed by the Transferor and the Collection Agent) all covenants,
representations and warranties made by it in the TAA and agrees that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Amendment.
3.2 Each of the Transferor and the Collection Agent
hereby represents and warrants that (i) this Amendment constitutes the legal,
valid and binding obligation of such party, enforceable against it in accordance
with its terms and (ii) upon the effectiveness of this Amendment, no Termination
Event or Potential Termination Event shall exist under the TAA.
SECTION 4. REFERENCE TO AND EFFECT ON THE TAA; CONSENT TO
AMENDMENT OF RECEIVABLES PURCHASE AGREEMENT.
4.1 Upon the effectiveness of this Amendment, each
reference in the TAA to "this Agreement," "hereunder," "hereof," "herein,"
"hereby" or words of like import shall mean and be a reference to the TAA as
amended hereby, and each reference to the TAA in any other document, instrument
and agreement executed and/or delivered in connection with the TAA shall mean
and be a reference to the TAA as amended hereby.
4.2 Except as specifically amended hereby, the TAA and
all other documents, instruments and agreements executed and/or delivered in
connection therewith shall remain in full force and effect and are hereby
ratified and confirmed.
4.3 The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of the
Company, the Bank Investor or the Agent under the TAA or any other document,
instrument, or agreement executed in connection therewith, nor constitute a
waiver of any provision contained therein.
<PAGE> 7
4.4 The Company and NationsBank, as a Bank Investor and
as Agent, hereby consent to the execution by the Transferor of an Amendment to
the Receivables Purchase Agreement in substantially the form attached as Exhibit
A.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF
LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same instrument.
SECTION 7. HEADINGS. Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose.
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stewart Cutler
---------------------------------------
Stewart Cutler
Vice President
NMC FUNDING CORPORATION,
as Transferor
By: /s/ James V. Luther
---------------------------------------
James V. Luther
Assistant Treasurer
NATIONAL MEDICAL CARE, INC.,
as Collection Agent
By: /s/ James V. Luther
---------------------------------------
James V. Luther
Assistant Treasurer
NATIONSBANK, N.A.,
as Agent and as a Bank Investor
By: /s/ Elliott T. Lemon
---------------------------------------
Elliott T. Lemon
Vice President
Signature Page
Amendment No. 3
<PAGE> 9
EXHIBIT A
FORM OF AMENDMENT TO
RECEIVABLES PURCHASE AGREEMENT
(Attached)
<PAGE> 10
AMENDMENT
Dated as of September 28, 1998
to
RECEIVABLES PURCHASE AGREEMENT
Dated as of August 28, 1997
THIS AMENDMENT (this "AMENDMENT") dated as of September 28,
1998 is entered into by and between NMC FUNDING CORPORATION, a Delaware
corporation, as Purchaser (the "PURCHASER") and NATIONAL MEDICAL CARE, INC., a
Delaware corporation, as Seller (the "SELLER").
PRELIMINARY STATEMENT
A. The Purchaser and the Seller are parties to that
certain Receivables Purchase Agreement dated as of August 28, 1997 (as amended
or otherwise modified prior to the date hereof, the "RPA"). Capitalized terms
used herein and not otherwise defined shall have the meanings ascribed to them
in the RPA.
B. The Purchaser and the Seller have agreed to amend the
RPA on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises set forth
above, and other good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE RPA. Subject to the satisfaction
of the conditions precedent set forth in Section 2 below, the RPA is amended as
follows:
1.1. The following new definitions are added to Section
1.1 of the RPA in appropriate alphabetical order:
"RECEIVABLE SYSTEMS" has the meaning specified in Section
3.1(z).
"YEAR 2000 COMPLIANT" has the meaning specified in Section
3.1(z).
<PAGE> 11
1.2. Section 3.1 of the RPA is amended to add,
immediately after paragraph (y), the following new paragraph (z):
"(z) YEAR 2000 COMPLIANCE. The Seller has (i) initiated a
review and assessment of all areas within its and each of its
Subsidiaries' business and operations (including those affected by
suppliers, vendors and customers) that could be adversely affected by
the 'Year 2000 Problem' (that is, the risk that computer applications
used by the Seller or any of its Subsidiaries (or suppliers, vendors
and customers) may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) initiated the development of a plan and
timeline for addressing the Year 2000 Problem on a timely basis, and
(iii) to date, implemented that plan in accordance with that timetable.
The Seller believes that all computer applications (including those of
its suppliers, vendors and customers) that are material to its or any
of its Subsidiaries' business and operations are reasonably expected on
a timely basis to be able to perform properly date-sensitive functions
for all dates before and after January 1, 2000 (that is, be 'Year 2000
Compliant'), except to the extent that a failure to do so could not
reasonably be expected (a) to have a Material Adverse Effect on the
Seller or on the transaction documented under this Agreement, or (b) to
result in a Termination Event.
The Seller (i) has initiated a review and assessment of all computer
applications (including, but not limited to those of the Seller, any
Transferring Affiliate and any of their respective suppliers, vendors,
customers or third party servicers), which are related to or involved
in the origination, collection, management or servicing of the
Receivables (the 'Receivable Systems') and (ii) believes that such
Receivable Systems are Year 2000 Compliant or will be Year 2000
Compliant on or before April 1, 1999 and thereafter.
The Seller believes that the costs of all assessment, remediation,
testing and integration related to the Seller's plan for becoming Year
2000 Compliant will not have a material adverse effect on the financial
condition or operations of the Seller."
1.3. Section 5.1 of the RPA is amended to add, immediately
following paragraph (m), the following new paragraphs (n) and (o):
"(n) YEAR 2000 COMPLIANCE: REPORTING. The Seller will promptly
notify the Agent in the event the Seller discovers or determines that
any computer application (including those of its suppliers, vendors and
customers) (i) that is necessary for the origination, collection,
management, or servicing of the Receivables will not be Year 2000
Compliant on or before April 1, 1999 and thereafter, or (ii) that is
otherwise material to its or any of its Subsidiaries' business and
operations will not be Year 2000 Compliant on a timely basis, except to
the extent that, in the case of (ii) above, such failure could not
<PAGE> 12
reasonably be expected (a) to have a Material Adverse Effect on the
Seller or on the transaction documented under this Agreement, or (b) to
result in a Termination Event.
Further, the Seller will deliver simultaneously with any quarterly or
annual financial statements or reports to be delivered under the
Agreement, a certificate signed by an officer of the Seller that no
material event, problems or conditions have occurred which in the
opinion of management would (i) prevent or materially delay the
Seller's plan to become Year 2000 Compliant or (ii) cause or be likely
to cause the Seller's representations and warranties or covenants with
respect to being or becoming Year 2000 Compliant to no longer be true.
(o) YEAR 2000 COMPLIANCE: IMPLEMENTATION: The Seller will
cause (i) all computer applications (including those of its suppliers,
vendors and customers) that are material to its or any of its
Subsidiaries' business and operations to be Year 2000 Compliant on a
timely basis, except to the extent that a failure to do so could not
reasonably be expected (a) to have a Material Adverse Effect on the
Seller or on the transaction documented under this Agreement, or (b) to
result in a Termination Event; and (ii) all Receivable Systems to be
Year 2000 Compliant at all times on and after April 1, 1999. The Seller
will deliver a certificate to the Seller and the Agent, signed by the
chief information officer of the Seller, certifying compliance with the
foregoing covenant by no later than April 1, 1999."
1.4. Section 8.1 of the RPA is amended (a) to replace the period
appearing at the end of clause (xviii) with a semicolon followed by the word
"or" and (b) to add the following new clause (xix):
"(xix) any failure of the computer applications of the Seller
or any Transferring Affiliate(including those of suppliers, vendors and
customers of the Seller or any Transferring Affiliate and the
Receivables Systems) to be Year 2000 Compliant at any time."
SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become
effective and be deemed effective as of the date hereof upon the receipt by the
Agent of each of the following:
(i) counterparts of this Amendment duly executed by the
Purchaser and the Seller; and
(ii) a reaffirmation of the Parent Agreement,
substantially in the form of Exhibit A attached hereto, duly executed by each of
FMC and FMCH.
SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE
SELLER.
<PAGE> 13
3.1 Upon the effectiveness of this Amendment, the Seller
hereby reaffirms (subject to the modifications to Exhibit F to the RPA set forth
in the Certificate of even date herewith executed by the Seller) all covenants,
representations and warranties made by it in the RPA and agrees that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Amendment.
3.2 The Seller hereby represents and warrants that (i)
this Amendment constitutes the legal, valid and binding obligation of such
party, enforceable against it in accordance with its terms and (ii) upon the
effectiveness of this Amendment, no Seller Default or Potential Seller Default
shall exist under the RPA.
SECTION 4. REFERENCE TO AND EFFECT ON THE RPA.
4.1 Upon the effectiveness of this Amendment, each
reference in the RPA to "this Agreement," "hereunder," "hereof," "herein,"
"hereby" or words of like import shall mean and be a reference to the RPA as
amended hereby, and each reference to the RPA in any other document, instrument
and agreement executed and/or delivered in connection with the RPA shall mean
and be a reference to the RPA as amended hereby.
4.2 Except as specifically amended hereby, the RPA and
all other documents, instruments and agreements executed and/or delivered in
connection therewith shall remain in full force and effect and are hereby
ratified and confirmed.
4.3 The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of the
Purchaser or any of its assignees under the RPA or any other document,
instrument, or agreement executed in connection therewith, nor constitute a
waiver of any provision contained therein.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF
LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same instrument.
SECTION 7. HEADINGS. Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
as of the date first written above.
NMC FUNDING CORPORATION,
as Purchaser
By: /s/ James V. Luther
----------------------------------------
James V. Luther
NATIONAL MEDICAL CARE, INC.,
as Seller
By: /s/ James V. Luther
----------------------------------------
James V. Luther
<PAGE> 15
EXHIBIT A
FORM OF REAFFIRMATION OF PARENT AGREEMENT
REAFFIRMATION OF PARENT AGREEMENT
September 28, 1998
NMC Funding Corporation
Two Ledgemont Center
95 Hayden Avenue
Lexington, Massachusetts 02173
NationsBank, N.A.,
as Agent under the
Transfer and Administration
Agreement referred to below
NationsBank Corporate Center--10th Floor
Charlotte, North Carolina 28255
Each of the undersigned, FRESENIUS MEDICAL CARE AG and
FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the
execution of that certain Amendment No. 3 dated as of September 28, 1998 (the
"TAA AMENDMENT") to the Transfer and Administration Agreement, dated as of
August 28, 1997, among Enterprise Funding Corporation, NMC Funding Corporation,
National Medical Care, Inc., the "Bank Investors" parties thereto and
NationsBank, N.A., as agent, (ii) acknowledges, and consents to, the execution
of that certain Amendment dated as of September 28, 1998 (the "RPA AMENDMENT")
to the Receivables Purchase Agreement, dated as of August 28, 1997, between NMC
Funding Corporation and National Medical Care, Inc., (iii) reaffirms all of its
obligations under that certain Parent Agreement dated as of August 28, 1997 made
by the undersigned and (iv) acknowledges and agrees that, after giving effect to
the TAA Amendment and the RPA Amendment, such Parent Agreement remains in full
force and effect and such Parent Agreement is hereby ratified and confirmed.
<PAGE> 16
FRESENIUS MEDICAL CARE AG
By:
----------------------------------
Title:
FRESENIUS MEDICAL CARE
HOLDINGS, INC.
By:
----------------------------------
Title:
<PAGE> 17
EXHIBIT B
FORM OF REAFFIRMATION OF PARENT AGREEMENT
REAFFIRMATION OF PARENT AGREEMENT
September 28, 1998
NMC Funding Corporation
Two Ledgemont Center
95 Hayden Avenue
Lexington, Massachusetts 02173
NationsBank, N.A.,
as Agent under the
Transfer and Administration
Agreement referred to below
NationsBank Corporate Center--10th Floor
Charlotte, North Carolina 28255
Each of the undersigned, FRESENIUS MEDICAL CARE AG and
FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the
execution of that certain Amendment No. 3 dated as of September 28, 1998 (the
"TAA AMENDMENT") to the Transfer and Administration Agreement, dated as of
August 28, 1997, among Enterprise Funding Corporation, NMC Funding Corporation,
National Medical Care, Inc., the "Bank Investors" parties thereto and
NationsBank, N.A., as agent, (ii) acknowledges, and consents to, the execution
of that certain Amendment dated as of September 28, 1998 (the "RPA AMENDMENT")
to the Receivables Purchase Agreement, dated as of August 28, 1997, between NMC
Funding Corporation and National Medical Care, Inc., (iii) reaffirms all of its
obligations under that certain Parent Agreement dated as of August 28, 1997 made
by the undersigned and (iv) acknowledges and agrees that, after giving effect to
the TAA Amendment and the RPA Amendment, such Parent Agreement remains in full
force and effect and such Parent Agreement is hereby ratified and confirmed.
<PAGE> 18
FRESENIUS MEDICAL CARE AG
By:
----------------------------------
Title:
FRESENIUS MEDICAL CARE
HOLDINGS, INC.
By:
----------------------------------
Title:
<PAGE> 1
EXHIBIT 10.17
SEPARATION AGREEMENT
This Agreement, by and between National Medical Care, Inc., d/b/a Fresenius
Medical Care North America ("FMC"), a corporation having its principal place of
business at Two Ledgemont Center, 95 Hayden Avenue, Lexington, MA 02173 and
Geoffrey W. Swett ("Swett"), an individual residing at 42 Kings Way, Waltham,
Massachusetts 02154.
The parties agree as follows:
1. TERMINATION OF EMPLOYMENT. Swett's employment as President of Fresenius
Dialysis Services Division and Executive Vice President of FMC shall
terminate effective June 22, 1998. From that date, Swett will continue
to be employed as a consultant to the Chief Executive Officer of FMC
assisting in the transition of the Dialysis Services Division until the
July 31, 1998 termination of Swett's employment with FMC.
2. GUARANTEED SALARY CONTINUATION. Swett will continue to be paid
bi-weekly for a period of fifty two (52) weeks, beginning August 1,
1998 and ending July 31, 1999 ("Guaranteed Salary Continuation
Period").
3. CONTINGENT ADDITIONAL SALARY CONTINUATION. Despite his good faith best
efforts to do so, if Swett has not secured full-time employment by the
end of the Guaranteed Salary Continuation Period, FMC will provide him
with additional salary continuation for up to an additional fifty two
(52) week period or until he finds full-time employment, whichever
occurs first, provided he continues to make good faith best efforts to
do so. If Swett obtains full-time employment at any time during this
additional fifty two (52) week period, he will promptly notify FMC of
that fact and the date of his initial employment with his new employer,
and FMC's obligation to pay such additional salary continuation shall
cease as of such initial employment date, such salary obligation being
pro-rated on a daily basis.
4. MANAGEMENT BONUS PLAN PROGRAM. Swett will be eligible for a pro-rata
award, based upon his months of service in 1998, under the 1998
Management Bonus Plan. If funding is available for the Plan, Swett will
be paid at fifty-eight percent (58%) of the bonus payment he would have
received as an active, full-time employee of FMC. Payment will be made
on the same date as payment to active FMC executives.
5. PAID-TIME-OFF PAY. Swett will receive a lump sum payment for his
accrued but unused accrued Paid-Time-Off on or promptly after July 31,
1998.
6. BENEFITS.
MEDICAL AND DENTAL COVERAGE: For as long as Swett is receiving
Guaranteed Salary Continuation or Contingent Additional Salary
Continuation Payments, he is eligible to
<PAGE> 2
continue any coverage under FMC's medical and dental plans on the same
basis and to the same extent as currently covered and as may be
available to similarly situated employees in the event that
<PAGE> 3
changes are subsequently made to such plans. At the end of the
Guaranteed Salary Continuation Period or Contingent Additional Salary
Continuation Period, he may elect to continue these health and dental
benefits under COBRA. FMC will send Swett the documents necessary to
elect to do so under separate cover near the end of his Salary
Continuation Period.
LIFE INSURANCE: Swett's life insurance benefits will continue during
the Guaranteed Salary Continuation or Contingent Additional Salary
Continuation Period. Any conversion of life insurance at the end of
that period may be arranged through the Corporate Human Resources
Department.
Payment by FMC for medical, dental and life insurance benefits will
continue through the period of Guaranteed Salary Continuation or
Contingent Additional Salary Continuation on the same basis as though
Swett were still employed.
LONG AND SHORT TERM DISABILITY BENEFITS: Swett's long and short term
disability benefits will cease as of July 31, 1998.
401(k) PLAN: Contributions to FMC's 401(k) Plan may be withdrawn from
the plan following Swett's termination of employment in accordance with
Internal Revenue Service regulations. Swett may not make contributions
to the Plan during the Guaranteed Salary Continuation Period or
Contingent Additional Salary Continuation Period. Swett is 100 percent
vested in matching company contributions made to the plan on his behalf
Corporate Human Resources will provide Swett with information on how to
withdraw his funds from the Plan.
PENSION PLAN: Swett will stop accruing benefit service under the
Pension Plan and the Supplemental Executive Retirement Plan effective
July 31, 1998. He is fully vested in both Plans. He will receive a
separate letter including a benefit calculation after that date.
DEFERRED COMPENSATION PLAN. Swett's account balance under the Deferred
Compensation Plan will be paid to him within thirty (30) days of July
31, 1998.
7. FRESENIUS MEDICAL CARE. AG 1998 STOCK INCENTIVE PLAN. Pending approval
of the Fresenius Medical Care AG Management Board, 13,889 of Swett's
stock options for Preference Shares, equivalent to approximately 41,667
ADS's, will be vested July 31, 1998. Swett will have one (1) year from
that date to exercise these options. Should he fail to exercise these
options, they will be forfeited at the end of the one (1) year period.
8. OUTPLACEMENT. FMC will provide Swett with executive-level outplacement
at Manchester Partners or a reasonably comparable firm of his choosing.
9. REFERENCE. Prior to July 31, 1998, FMC will provide Swett with a
mutually acceptable letter of reference.
<PAGE> 4
10. UNEMPLOYMENT BENEFITS. If Swett is unemployed at the end of the period
of Guaranteed Salary Continuation and Contingent Additional Salary, FMC
agrees it will not protest any claim he may file for unemployment
compensation.
11. COMPANY PROGRAM. Swett affirms that he will return all Company
property, including but not limited to, all keys, files and computer
hardware, software and data, in his possession.
12. RELEASE. As a material inducement to FMC to enter into this agreement,
and in consideration of the Guaranteed Salary Continuation and the
Contingent Additional Salary Continuation Payments and benefits and
other consideration to be provided by FMC to Swett, all as is provided
in the Agreement, Swett hereby irrevocably and unconditionally
releases, acquits and forever discharges FMC, its parents, subsidiaries
and affiliates, successors and assigns, officers, employees, directors,
and representatives, and all persons related thereto, from any and all
charges, complaints, claims, liabilities, obligations, promises,
agreements, controversies, damages, actions, causes or action, suits,
rights, demands, costs, losses, debts and expenses (including
attorney's fees and costs actually incurred), of any nature whatsoever,
known or unknown, which he has, or might claim to have, against any of
them and which arises out of or is related to the termination of his
employment with FMC. This Release includes but is not limited to, all
such claims under applicable state or federal law, including without
limitation, any claims under the Age Discrimination in Employment Act,
29 U.S.C.ss.621, et seq.
13. CONFIDENTIALITY-DISCLOSURE/NONDISPARAGEMENT. Swett acknowledges his
continuing obligation under the Non-Disclosure/Non-Competition
Agreement dated September 15, 1992 and further acknowledges that the
non-competition obligation remains in effect for one year after he
stops receiving guaranteed salary continuation or contingent additional
salary continuation. Swett and FMC also agree not to disclose anything
about this Agreement except to those who have a reasonable need to know
about it. FMC and Swett agree not to say or do anything which would
disparage or present unfairly the other, and as to FMC would include,
its employees, officers, directors, agents, or affiliates.
14. COOPERATION AND ASSISTANCE Swett and FMC acknowledge that Swett may
have information and knowledge which may be useful to FMC in connection
with certain legal, regulatory, and corporate administrative
proceedings, including but not limited to, various litigation matters,
certain regulatory submissions, resignation activities with respect to
officerships and directorships, and the Office of the Inspector General
investigation. As a material inducement to FMC to enter into this
Agreement, and in consideration of the Guaranteed Salary Continuation
and the Contingent Additional Salary Continuation Payments and benefits
and other consideration to be provided by FMC to Swett, all as provided
in the Agreement, Swett acknowledges and confirms that he shall, during
the periods of Guaranteed Salary Continuation and Contingent Additional
Salary Continuation, cooperate fully with FMC in connection with any
such proceeding. Swett and FMC acknowledge that, as used in this
paragraph, full cooperation shall mean that Swett will, at the request
of FMC, make available to FMC all time, information and assistance
reasonably requested of him in connection with these proceedings and,
further
<PAGE> 5
that Swett shall maintain the confidentiality of information and
communications he shares with FMC in connection with providing such
assistance consistent with the attorney-client privilege, and the
provisions of paragraph 12 of this Agreement and the governing law.
15. CONSULTING. During the Guaranteed Salary Continuation or Contingent
Additional Salary Continuation period, Swett may from time to time be
requested to consult on operating matters, by the CEO of FMC. For such
time requested by the CEO and such services performed, Swett will be
compensated at a rate of $200 per hour plus out-of-pocket expenses. All
such services
<PAGE> 6
are to be presented for payment monthly, invoice to include description
of services performed, dates and hours. Invoices submitted to the Vice
President of Human Resources and approved by the CEO will be paid
within thirty (30) days of receipt.
16. REVIEW PERIOD. Swett understands that he has twenty-one (21) days to
review this Agreement, and has the right to retain counsel to review it
and to represent him in his discussions with FMC if he wishes to do so.
After he executes it, he has seven (7) days to revoke the Agreement, so
it will not be effective until seven (7) days have expired after he
signs the Agreement and returns it to FMC.
17. ENTIRE AGREEMENT, GOVERNING LAW. This Agreement sets forth the entire
agreement of the parties with respect to the subject matter hereof and
shall be governed by the law of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties have executed this Separation Agreement to take
effect as a sealed instrument, as of the 21st of July, 1998.
FRESENIUS MEDICAL CARE NORTH AMERICA
/s/ Ben Lipps /s/ Geoffrey W. Swett
------------------------- -----------------------------
Ben J. Lipps Geoffrey W. Swett
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 11
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
------ ----- ------- ------
<S> <C> <C> <C> <C>
The weighted average number of shares of
Common Stock were as follows..................... 90,000 90,000 90,000 90,000
====== ====== ======= ======
Income used in the computation of earnings per share were as follows:
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net Earnings - Continuing Operations ................ $14,165 $9,807 $36,715 $27,587
Dividends paid on preferred stocks .................. (130) (130) (390) (390)
------- ------ ------- -------
Income used in per share computation
of earnings ..................................... $14,035 $9,677 $36,325 $27,197
======= ====== ======= =======
Basic and fully dilutive earnings per
share - Continuing Operations .................... $ 0.16 $ 0.11 $ 0.41 $ 0.30
======= ====== ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000042872
<NAME> FRESENIUS MEDICAL CARE HOLDINGS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,797
<SECURITIES> 0
<RECEIVABLES> 189,882
<ALLOWANCES> 0
<INVENTORY> 172,677
<CURRENT-ASSETS> 782,471
<PP&E> 501,859
<DEPRECIATION> 66,524
<TOTAL-ASSETS> 4,629,480
<CURRENT-LIABILITIES> 437,037
<BONDS> 0
0
16,318
<COMMON> 90,000
<OTHER-SE> 1,843,650
<TOTAL-LIABILITY-AND-EQUITY> 4,629,480
<SALES> 114,600
<TOTAL-REVENUES> 655,652
<CGS> 76,539
<TOTAL-COSTS> 411,973
<OTHER-EXPENSES> 139,454
<LOSS-PROVISION> 16,308
<INTEREST-EXPENSE> 54,880
<INCOME-PRETAX> 33,037
<INCOME-TAX> 18,872
<INCOME-CONTINUING> 14,165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,165
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000042872
<NAME> FRESNIUS MEDICAL CARE HOLDINGS, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,797
<SECURITIES> 0
<RECEIVABLES> 189,882
<ALLOWANCES> 0
<INVENTORY> 172,677
<CURRENT-ASSETS> 782,471
<PP&E> 501,859
<DEPRECIATION> 66,524
<TOTAL-ASSETS> 4,629,480
<CURRENT-LIABILITIES> 437,037
<BONDS> 0
0
16,318
<COMMON> 90,000
<OTHER-SE> 1,843,650
<TOTAL-LIABILITY-AND-EQUITY> 4,629,480
<SALES> 353,291
<TOTAL-REVENUES> 1,903,980
<CGS> 238,898
<TOTAL-COSTS> 1,197,731
<OTHER-EXPENSES> 417,872
<LOSS-PROVISION> 50,187
<INTEREST-EXPENSE> 155,059
<INCOME-PRETAX> 83,131
<INCOME-TAX> 46,416
<INCOME-CONTINUING> 36,715
<DISCONTINUED> (105,897)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,182)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> 0
</TABLE>
