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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____ TO _____ .
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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
TWO LEDGEMONT CENTER, 95 HAYDEN AVE., LEXINGTON, MA 02420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: 781-402-9000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Class D Special Dividend Preferred Stock, par value $.10 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405). $11,132,750 March 5, 1999.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of March 9, 1999, 90,000,000 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Information Statement with respect to its 1998 Annual
Meeting of Stockholders, to be filed on or before April 30, 1999. (Part III)
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1. Business ..................................................................................4
Item 2. Properties .................................................................................32
Item 3. Legal Proceedings .................................................................................34
Item 4. Submission of Matters to a Vote of Security Holders................................................51
PART II .................................................................................51
Item 5. Market Price for Registrant's Common Equity and Related Stockholder Matters........................51
Item 6. Selected Financial Data............................................................................52
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............53
Item 7A. Quantitative and Qualitative Disclosures About Market Risks........................................61
Item 8. Consolidated Financial Statements and Supplementary Data...........................................61
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...............62
PART III .................................................................................62
Item 10. Directors and Executive Officers of the Registrant ................................................62
Item 11. Executive Compensation.............................................................................62
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................62
Item 13. Certain Relationships and Related Transactions.....................................................62
PART IV .................................................................................62
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K......................62
</TABLE>
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ITEM 1. BUSINESS
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 Fresenius Medical Care Holdings, Inc.
(collectively with all its direct and indirect subsidiaries, the "Company"),
government reimbursement, future plans and management's expectations regarding
future performance. Actual results could differ materially from those contained
in these forward-looking statements due to certain factors including, without
limitation, changes in business, economic and competitive conditions, regulatory
reforms, foreign exchange rate fluctuations, uncertainties in litigation or
investigative proceedings, and the availability of financing. These and other
risks and uncertainties, which are more fully described elsewhere in this 1998
Form 10-K and in the Company's reports filed from time to time with the
Securities and Exchange Commission (the "Commission") could cause the Company's
results to differ materially from the results that have been or may be projected
by or on behalf of the Company.
The Company, a New York corporation, 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 ("Fresenius USA" or "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,
which accounted for 82% and 18% of 1998 net revenues, respectively.
- KIDNEY DIALYSIS AND OTHER SERVICES. The Company is the
largest private provider in the U.S. of kidney dialysis
and related services. At December 31, 1998, the Company
operated 782 outpatient dialysis facilities in the U.S.
(including Puerto Rico), treating approximately 58,600
chronic patients. The company treats approximately 24%
of the dialysis patients in the U.S., and believes its
next largest competitor treats approximately 13% of U.S.
dialysis patients. Additionally, the Company provides
inpatient dialysis services under contract to hospitals
in the U.S.
- DIALYSIS PRODUCTS. The Company manufactures a
comprehensive line of dialysis products, including
hemodialysis machines, peritoneal dialysis systems and
disposable products. The Company manufactures innovative
and technologically advanced products, including the
Fresenius Polysulfone(TM) dialyzer, which the Company
believes is the best-performing, mass-produced dialyzer
on the market, and Delflex(R) peritoneal solutions with
Safe-Lock(R) connectors.
Effective June 1, 1998 the Company classified its non renal diagnostic
services business ("Non Renal Diagnostic Services") and homecare business
("Homecare") as discontinued operations. The Company disposed of these
businesses on June 26, 1998 and July 29, 1998 respectively. In connection with
the sale of Homecare, the Company retained the assets and the operations
associated with the delivery of IDPN. Additionally, the Company has retained
liabilities which could result from the government's investigation into, among
other issues, historical practices of the non-renal diagnostic service and
homecare businesses and has indemnified the respective buyers in respect of
certain liabilities with respect thereto. See "Legal Proceedings -- OIG
Investigation." See "Notes to Consolidated Financial Statements -- Note 8
'Discontinued Operations.'"
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THE MERGER
The Merger, which was effective September 30, 1996, resulted from the
culmination of the following transactions: (1) NMC, which was a subsidiary of
W. R. Grace & Co. -- Conn. ("Grace Chemicals"), a wholly-owned subsidiary of
Grace New York, borrowed $2,300,000 and paid a cash dividend of approximately
$2,100,000 to Grace Chemicals; (2) the stock of NMC was transferred to Grace
New York, so that NMC and Grace Chemicals became sibling subsidiaries of Grace
New York; (3) the stock of Grace Chemicals was transferred to a newly formed
Delaware subsidiary of Grace New York ("New Grace") and the shares of New Grace
were spun-off to the Grace New York shareholders in a pro rata distribution;
(4) Grace New York was recapitalized such that each Grace New York shareholder
received one share of Class D Preferred Stock of Grace New York (the "Class D
Preferred Stock") for each share of Grace New York common stock held; and (5)
Grace New York, with NMC as its sole business, merged with a wholly-owned
subsidiary of Fresenius Medical Care AG ("FMC"), and Fresenius AG's worldwide
dialysis business (including its controlling interest in FUSA) ("FWD") was
contributed as separate subsidiaries of FMC with the result that 44.8% of the
ordinary shares of FMC were exchanged for the common stock held by Grace New
York common shareholders in the merger transaction and the balance of the
ordinary shares of FMC were received by Fresenius AG and the shareholders of
FUSA, in consideration of the contribution of FWD to FMC. All of the Grace New
York (now the Company) common stock is held by FMC, while the Class D Preferred
Stock (which entitles its shareholders to a contingent dividend based on the
consolidated performance of FMC in the years 1997-2001) and other previously
issued classes of the Company preferred stock remain outstanding.
On June 12, 1997, the Company changed its name from Fresenius National
Medical Care Holdings, Inc. to Fresenius Medical Care Holdings, Inc.
The Company's principal executive office is located at Two Ledgemont
Center, 95 Hayden Avenue, Lexington, MA 02420-9192. Its telephone number is
(781) 402-9000.
RENAL INDUSTRY OVERVIEW
END-STAGE RENAL DISEASE
End-stage renal disease ("ESRD") is the state of advanced chronic kidney
disease that is characterized by the irreversible loss of kidney function and
requires routine dialysis treatment or kidney transplantation to sustain life. A
normally functioning human kidney removes waste products and excess water from
the blood, preventing toxin buildup, eventual poisoning of the body and water
overload. Chronic kidney disease can be caused by a number of conditions,
primarily nephritis, inherited diseases, hypertension and diabetes. Nearly 60%
of all people with ESRD acquire the disease as a complication of one or more of
these primary conditions.
Based on the most recent information published by the Health Care
Financing Administration ("HCFA") of the Department of Health and Human Services
("HHS"), the number of patients in the U.S. who received chronic dialysis grew
from approximately 66,000 in 1982 to approximately 230,190 at December 31, 1997
or at a compound annual rate of 7.5%. The Company believes that, over the next
five to ten years, the number of patients suffering from ESRD in the U.S. will
continue to grow at approximately the same rate. The Company attributes the
continuing growth in the number of dialysis patients principally to the aging of
the general population and better treatment and survival of patients with
hypertension, diabetes and other illnesses that lead to ESRD. Moreover, improved
technology has enabled older patients and those who previously could not
tolerate dialysis due to other illnesses to benefit from this life-prolonging
treatment.
There are currently only two methods for the treatment of ESRD: dialysis
and kidney transplantation. Transplants are limited by the scarcity of
compatible kidneys. Approximately 12,200 patients received kidney transplants in
the U.S. during 1997. Therefore, most patients suffering from ESRD must rely on
dialysis, which is the removal of toxic waste products and excess fluids from
the body by artificial means. There are two major dialysis modalities commonly
used today, hemodialysis and peritoneal dialysis. Generally, the method of
treatment used by an ESRD patient is chosen by the physician in consultation
with the patient, and is based on the patient's medical conditions and needs.
According to HCFA data, as of December 31, 1997, there were more than
3,400 Medicare-certified ESRD treatment centers in the U.S. Ownership of these
centers was fragmented. The Company estimates that at that time, the ten largest
multi-facility providers accounted for approximately 1,800 facilities (56% of
facilities) and 136,000 patients (59% of patients). Freestanding facilities
(many privately owned by physicians) and hospital-affiliated facilities were the
sites of treatment for the remaining 23% and 21% of patients, respectively.
There was substantial further consolidation in the market in 1998 leading
the Company to estimate that the top ten multi-center providers accounted for
approximately 155,500 patients, or 63% of the estimated market at December 31,
1998 (percentage market share is an estimate as HCFA data specifying 100% of
total market size are not yet available for 1998).
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According to HCFA, as of December 31, 1997, approximately 86% of dialysis
patients in the U.S. received in-center treatment (virtually all hemodialysis)
and approximately 14% were treated at home. Of those treated at home, more than
94% received peritoneal dialysis.
TREATMENT OPTIONS FOR ESRD
Hemodialysis. Hemodialysis removes waste products and excess fluids from
the blood extracorporeally. In hemodialysis, the blood flows outside the body by
means of plastic tubes known as bloodlines into a specially designed filter, a
dialyzer, which functions as an artificial kidney by separating waste products
and excess water from the blood by diffusion and ultrafiltration. Dialysis
solution carries away the waste products and excess water, and the cleansed
blood is returned to the patient. The movement of the blood and dialysis
solution is controlled by a hemodialysis machine, which pumps blood, adds
anti-coagulants, regulates the purification process and controls the mixing of
dialysis solution and the rate of its flow through the system. This machine may
also monitor and record the patient's vital signs.
According to HCFA, as of December 31, 1997, hemodialysis patients
represented 87% of all dialysis patients in the U.S. Hemodialysis treatments are
generally administered to a patient three times per week and typically last from
two and one-half to four hours or longer. The majority of hemodialysis patients
are referred to outpatient dialysis centers, such as those operated by the
Company, where hemodialysis treatments are performed with the assistance of a
nurse or dialysis technician under the general supervision of a physician.
Hemodialysis is the only form of treatment (other than transplantation)
currently available to patients who have very low residual or nonexistent renal
function and are inadequately dialyzed using peritoneal dialysis.
Peritoneal Dialysis. Peritoneal dialysis removes waste products and excess
fluids from the blood by use of the peritoneum, the membrane lining covering the
internal organs located in the abdominal area. Most peritoneal dialysis
treatments are selfadministered by patients in their own homes and workplaces,
either by a treatment known as continuous ambulatory peritoneal dialysis
("CAPD") or by a treatment introduced by Fresenius USA in 1980 known as
continuous cycling peritoneal dialysis ("CCPD"). In both of these treatments,
the patient has a catheter surgically implanted to provide access to the
peritoneal cavity. Using this catheter, a sterile dialysis solution is
introduced into the peritoneal cavity and the peritoneum operates as the
dialyzing membrane. A typical CAPD peritoneal dialysis program involves the
introduction and disposal of solution four times a day. With CCPD a machine is
used to "cycle" solution to and from the patient's peritoneum during sleep.
In both CAPD and CCPD the patient undergoes dialysis daily, and typically
does not experience the buildup of toxins and fluids experienced by hemodialysis
patients on the days they are not treated. In addition, because the patient is
not required to make frequent visits to a hemodialysis clinic, and because the
solution exchanges can be accomplished at convenient (although more frequent)
times, a patient on peritoneal dialysis may experience much less disruption to
his or her life than a patient on hemodialysis. Certain aspects of peritoneal
dialysis, however, limit its use as a long-term therapy for some patients.
First, certain patients cannot effect sterile connections of the peritoneal
dialysis tubing to the catheter, leading to excessive episodes of peritonitis, a
bacterial infection of the peritoneum which can result in serious adverse health
consequences, including death. Second, treatment by current forms of peritoneal
dialysis may not be as effective in removing wastes and fluids as hemodialysis;
therefore, patients using peritoneal dialysis must have some residual renal
function (which may deteriorate over time) or the amount of therapy must be
increased. As residual renal function decreases, peritoneal dialysis is less
effective. Therefore, in general, ESRD patients require hemodialysis treatments
for some period during the term of their disease.
STRATEGY
The Company's strategy is in alignment with the Fresenius Medical Care's
strategy and is used interchangeably below. The Company's objective
is to capitalize on the continued rapid growth of the dialysis industry and its
leading position in the market. The U.S. dialysis patient population is
estimated to be growing at approximately 7.5% annually, driven primarily by the
aging of the population and better treatment and survival of patients with
illnesses that lead to ESRD, including diabetes and hypertension
The Company's dialysis services and product sales businesses
have grown faster than the market in terms of revenues over the past five years,
and FMC believes that it is well positioned to continue this growth by focusing
on the following strategies:
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- Provide High Standards of Patient Care. The Company believes that
its reputation for providing the highest standards of patient care
is a competitive advantage in an environment increasingly focused on
cost containment and quality outcomes. The Company believes that
NMC's proprietary Patient Statistical Profile ("PSP") database,
which contains clinical and demographic data on approximately 60,000
dialysis patients, is the most comprehensive body of information
about dialysis patients in the world. The Company believes that this
database provides a unique advantage in continuing to improve
dialysis treatment outcomes, reduce mortality rates and improve the
quality and effectiveness of dialysis products, all of which are
becoming increasingly important to patients, physicians and payors.
- Expand Presence in the U.S. Over the past several years, the Company
has significantly expanded its U.S. provider operations through the
acquisition by the Company of existing dialysis clinics and the
development of new clinics. In 1998, the Company acquired 24 clinics
and opened 52 new clinics. As a result, the Company now has an
established presence in each of its targeted markets in the U.S.
Prospectively, the Company expects to enhance its presence in the
U.S. by focusing its expansion on the acquisition of individual or
small groups of clinics, expansion of existing clinics, and opening
of new clinics, rather than on large acquisitions.
- Increase Revenues from Expanded and Enhanced Patient Services. One
of the Company's objectives is to continue to expand its role within
the broad spectrum of services provided to dialysis patients. The
Company has begun to implement this strategy by providing expanded
and enhanced patient services, including increased ancillary
services, such as laboratory and diagnostic services, to both its
own clinics and those operated by third parties. The Company
estimates that its Spectra Renal Management business unit provides
laboratory services for 38% of the dialysis patients in the United
States. The Company has developed treatment plans using disease
state management methodologies that it believes will be attractive
to managed care payors, formed Optimal Renal Care, LLC, a joint
venture with Permanente Medical Group of Southern California, a
subsidiary of Kaiser Permanente which has the largest dialysis
patient population of any managed care organization, and has formed
Renaissance Health Care as a joint venture with certain of the
Company's nephrologists.
- Continue to Offer Complete Dialysis Product Lines. The Company
offers broad and competitive hemodialysis and peritoneal
dialysis product lines. These product lines enjoy broad market
acceptance and enable customers to purchase all of their dialysis
machines, systems and disposable products from a single source.
Approximately 81% of Fresenius Medical Care's product revenues for
the twelve months ended December 31, 1998 were from sales of
disposable products.
- Extend Position as a Technology Innovator. The Company is
committed to being a technology leader in both hemodialysis and
peritoneal dialysis products. FMC has an approximate 232 member
research and development team focused on developing dialysis systems
that are safer, more effective and easier to use and that can be
easily customized to meet the differing needs of customers around
the world. The Company believes that its extensive
expertise in patient treatment and clinical data will further
enhance its ability to develop more effective products and treatment
methodologies.
- Enhance Manufacturing Technologies and Efficiencies. Over the past
several years, the Company has reduced manufacturing costs per unit
through development of proprietary manufacturing technologies that
have streamlined and automated its production processes. Fresenius
Medical Care intends to further improve its proprietary, highly
automated manufacturing systems to continue to reduce product
manufacturing costs, concurrently achieving a high level of quality
control and reliability.
The Company believes that its core strategic principles, particularly its
commitment to maintaining clinical quality, ensuring cost management and control
and developing superior cost-effective products, are key elements in sustaining
a competitive advantage in a health care environment increasingly focused on
cost containment and quality outcomes. The Company believes that its strengths
in clinical data systems, its professional affiliations with a broad network of
providers and institutions, its physician relationships, its extensive
geographic coverage in dialysis services and products and its ongoing internal
development of an integrated approach to care should result in attractive
partnering opportunities with managed-care enterprises. The Company believes
that its strategy, based on its extensive clinical information database and
large dialysis center and physician network, may enable the Company to improve
overall ESRD patient care and therefore contain hospitalization and other ESRD
treatment costs.
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For a description of other elements of the Company's strategy see
"--Dialysis Services" and "--Dialysis Products Business." For additional
information in respect to the Company's industry sections, see Notes to
Consolidated Financial Statements - Note 18, "Industry Segments and Information
about Foreign Operations."
DIALYSIS SERVICES
OVERVIEW
The Company is the largest provider in the U.S. of kidney dialysis and
related services to patients suffering from chronic kidney disease. The Company
also provides clinical laboratory testing and renal diagnostic services for
dialysis patients in the U.S. and Puerto Rico (Company owned and non-Company
owned clinics). Such diagnostic services include electrocardiograms, Doppler
flow testing, nerve conduction velocity, and other tests.
The Company's provider business is primarily operated through the Dialysis
Services business unit ("Dialysis Services".) The clinical laboratory testing
and renal diagnostic services are primarily provided by Spectra Renal Management
("SRM")
DIALYSIS SERVICES
As of December 31, 1998, the Company owned or managed 782 dialysis centers
in the U.S. The centers are generally concentrated in areas of high population
density and their surrounding areas. In 1998, the Company acquired 24 existing
centers, developed 52 new centers and consolidated or sold 9 centers. The number
of patients treated at the Company's centers has increased from approximately
53,366 at December 31, 1997 to approximately 58,627 at December 31, 1998.
At the Company's centers, hemodialysis treatments are provided at
individual "stations" through the use of dialysis machines. A registered nurse
or dialysis technician attaches the necessary tubing to the patient and monitors
the dialysis equipment and the patient's vital signs. The capacity of a center
is a function of the number of stations and such factors as the type of
treatment, patient requirements, length of time per treatment and local
operating practices and ordinances regulating hours of operation. Most of the
Company's centers operate two or three patient shifts per day.
Each of the Company's dialysis centers is under the general supervision of
a medical director ("Medical Director") and, in some cases, one or more
Associate Medical Directors, who are physicians. See "--Physician and Other
Relationships." Each dialysis center also has an administrator who supervises
the day-to-day operations of the facility and the staff. The staff typically
consists of registered nurses, licensed practical nurses, patient care
technicians, a social worker, a registered dietician, a unit clerk and
biomedical technicians.
The Company engages in systematic efforts to measure, maintain and improve
the quality of the services that it delivers at its dialysis centers. Each
center collects and analyzes quality assurance and patient data, which in turn
is regularly reviewed by Dialysis Services and corporate management. At each
center, a quality assurance committee is responsible for reviewing quality of
care reports generated by the Company's PSP system, setting goals for quality
enhancement and monitoring the progress of quality assurance initiatives. The
Company believes that it enjoys a reputation of providing high quality care to
dialysis patients.
The Company provides various ancillary medications and services to ESRD
patients in the U.S. at its dialysis centers, the most significant of which is
the administration of Erythropoietin ("EPO"), a bioengineered protein that
stimulates the production of red blood cells. EPO is used to treat anemia, a
medical complication frequently experienced by ESRD patients, and is
administered to most of the Company's patients. Revenues from EPO accounted for
approximately 26% of Dialysis Services' U.S. net revenues for the twelve months
ended December 31, 1998 and materially contribute to Dialysis Services'
operating earnings. EPO is produced by a single source manufacturer, Amgen Inc.,
and any interruption of supply could materially adversely affect the Company's
business and results of operations. The Company has entered into a contract with
Amgen Inc. covering the period from January 1999 to December 1999 with price
guarantees and volume and outcome based discounts.
Other ancillary services provided to ESRD patients in the U.S. include the
administration of Calcijex(R) (calcium), INFED(R) (iron) and hepatitis vaccine
and blood transfusions; the provision of interdialytic parenteral nutrition
("IDPN"), in which nutrients are added to the patient's blood during
hemodialysis; the provision, through Spectra Renal Management, of clinical
laboratory testing; the provision of electrocardiograms; nerve conduction
studies to test the degree of deterioration of nerves; and Doppler flow testing
of the effectiveness of the patient's vascular access for dialysis. These tests
and other ancillary services are provided by specific prescription of the
patient's attending physician.
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The Company employs a centralized approach with respect to certain
administrative functions common to its operations. For example, the Company has
standardized operating and billing procedures which are contained in proprietary
manuals used by each dialysis center. The Company believes that the
centralization and standardization of these functions enhance its ability to
perform services on a cost-effective basis.
The Company's centers also offer services for home dialysis patients, the
majority of whom are treated with peritoneal dialysis. For such patients, the
Company's dialysis centers provide certain materials, training and patient
support services, including clinical monitoring, supply of EPO, follow-up
assistance and arrangements for the delivery of the supplies to the patient's
residence. See "--Regulatory and Legal Matters--Reimbursement" and
"--Legal Proceedings" for a discussion of billing for such products and
services.
The manner in which each center conducts its business is dependent, in
large part, upon applicable laws, rules and regulations of the jurisdiction in
which the center is located, as well as the Company's clinical policies.
However, a patient's attending physician (who may be the center's Medical
Director or an unaffiliated physician with staff privileges at the center) has
medical discretion as to the particular treatment modality and medications to be
prescribed for that patient. Similarly, the attending physician has discretion
in selecting the particular medical products prescribed, although equipment,
regardless of brand, is typically purchased by the center in consultation with
the medical director through the Company's central purchasing operations.
The Company also provides dialysis services under contract to hospitals in
the U.S. on an "as needed" basis for patients suffering from acute kidney
failure and for ESRD patients who are hospitalized. The Company services these
patients either at their bedside, using portable dialysis equipment, or at a
dialysis site maintained by the hospital. Contracts with hospitals provide for
payment at negotiated rates that are higher than the Medicare reimbursement
rates for chronic in-center treatments.
ACQUISITIONS
The Company's growth in revenues and operating earnings in prior years has
resulted, in significant part, from its ability to effect acquisitions of health
care businesses, particularly dialysis centers, on reasonable terms. In the
U.S., doctors may be motivated to sell their centers to obtain relief from
day-to-day administrative responsibilities and changing governmental
regulations, to focus on patient care and to realize a return on their
investment. While price is typically the key factor in securing acquisitions,
the Company believes that it will be an attractive acquiror or partner to many
dialysis center owners due to its reputation for patient treatment, its
proprietary PSP database (which contains clinical and demographic data on
approximately 60,000 dialysis patients), its comprehensive clinical and
administrative systems, manuals and policies, its
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ability to provide ancillary services to dialysis centers and patients and its
reputation for technologically advanced products. The Company believes that
these factors will also be advantages when opening new centers.
The U.S. health care industry has experienced significant consolidation in
recent years, particularly in the dialysis service sectors in which the Company
competes, resulting, in some cases, in increased costs of acquisitions in these
sectors. The entrance into the acquisition arena by new, smaller public dialysis
companies, which have made acquisitions using their stock as consideration, has
accelerated the increase in costs of acquisitions. Moreover, because of the
ongoing consolidation in the dialysis services industry, the availability of
acquisitions may decrease. The Company's ability to make acquisitions also will
depend, in part, on the Company's available financial resources and the
limitations imposed under two credit facilities (collectively, "the NMC Credit
Facilities"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The inability of the Company to continue to effect
acquisitions in the provider business on reasonable terms could have an adverse
impact on growth in its business and on its results of operations.
The Company regularly evaluates and explores opportunities with various
other health care companies and other businesses regarding acquisitions and
joint business ventures. In 1998, the Company completed new acquisitions and
acquisitions of previously managed clinics totalling 24 dialysis facilities in
the U.S. providing care to approximately 3200 patients. These acquisitions and
agreements expand the Company's presence in selected key areas of the United
States.
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SOURCES OF DIALYSIS SERVICES NET REVENUES
The following table provides information for the periods indicated
regarding the percentage of the Company's U.S. dialysis treatment services net
revenues provided by (a) the Medicare ESRD program, (b) private/alternative
payors, such as commercial insurance and private funds, (c) Medicaid and other
government sources and (d) hospitals.
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
----- ----- -----
Medicare ESRD program ....... 57.0% 64.5% 63.0%
Private/alternative payors .. 33.8 25.8 28.1
Medicaid and other government
sources ..................... 4.1 4.6 4.0
Hospitals ................... 5.1 5.1 4.9
----- ----- -----
Total ....................... 100.0% 100.0% 100.0%
===== ===== =====
Under the Medicare ESRD program, Medicare reimburses dialysis providers
for the treatment of certain individuals who are diagnosed as having ESRD,
regardless of age or financial circumstances. When Medicare assumes
responsibility as the primary payor, it pays for dialysis and certain specified
related services at 80% of the payment methodology commonly referred to as the
composite rate method ("Composite Rate"). In addition, subject to various
restrictions and co-payment limitations, Medicare pays separately for certain
dialysis-related diagnostic and therapeutic services not included in the
Composite Rate. A secondary payor, usually a Medicare supplemental insurer, a
state Medicaid program or, to a lesser extent, the patient or the patient's
private insurer, is responsible for paying any co-payment (typically 20%), other
approved services not paid by Medicare and the annual deductible. Most of the
states in which the Company currently operates dialysis centers provide Medicaid
benefits to qualified recipients to supplement their Medicare entitlement.
Prior to the time at which Medicare becomes the primary payor, most
dialysis treatments are paid for by another third-party payor, such as the
patient's private insurer, or by the patient. ESRD patients under age 65 who are
covered by an employer health plan must wait 33 months (consisting of a
three-month entitlement waiting period and an additional 30-month "coordination
of benefits period") before Medicare becomes the primary payor. During this
33-month period, the employer health plan is responsible for payment as primary
payor at its negotiated rate or, in the absence of such a rate, at the Company's
usual and customary rates (which generally are higher than the rates paid by
governmental payors, such as Medicare), and Medicare is the secondary payor. See
"--Regulatory and Legal Matters--Reimbursement"
A significant portion of the Company's revenues for dialysis services are
derived from reimbursement provided by non-governmental third-party payors. A
substantial portion of third-party health insurance in the U.S. is now furnished
through some type of managed care plan, including health maintenance
organizations ("HMOs"). Managed care plans are increasing their market share
overall, and in the Medicare population in particular. This trend may accelerate
as a result of the merger and consolidation of providers and payors in the
health care industry, as well as the discussions among members of Congress and
the executive branch regarding ways to increase the number of Medicare and
Medicaid beneficiaries served through managed care plans. The Company estimates
that approximately 10% of Dialysis Services' net revenues for the twelve months
ended December 31, 1998 was attributable to managed care plans.
Non-governmental payors generally reimburse for dialysis treatments at
higher rates than governmental payors such as Medicare. However, managed care
plans are becoming more aggressive in selectively contracting with a smaller
number of providers willing to furnish services for lower rates and subject to a
variety of service restrictions. For example, managed care plans and traditional
indemnity third-party payors increasingly are demanding alternative fee
structures, such as capitation arrangements whereby a provider receives a fixed
payment per month per enrollee and bears the risk of loss if the costs of
treating such enrollee exceed the capitation payment. These market forces are
creating downward pressure on the reimbursements the Company receives for its
services and products.
The Company's ability to secure favorable rates with indemnity and managed
care plans has largely been due to the relatively small number of ESRD patients
which any single HMO has enrolled. By regulation, ESRD patients have been
prohibited from joining an HMO unless they are otherwise eligible for Medicare
coverage, due to age or disability, and are members of a managed care plan when
they first experience kidney failure. HCFA has a pilot evaluation underway for
treatment of Medicare ESRD patients by managed care companies under capitated
contracts, with three organizations. If successful, this pilot program could
result in the elimination of the pre-existing condition requiring ESRD patients
to enroll in managed care organizations. As Medicare HMO enrollments increase
and the number of ESRD patients in managed care plans also increases, managed
care plans' leverage to negotiate lower rates may become greater. In addition,
the HMO may have contracted with another provider, or may have tighter
utilization controls with respect to certain ancillary services typically
provided by the Company to ESRD patients, which could limit the Company's future
payments for such services.
11
<PAGE> 12
HCFA has initiated the ESRD demonstration projects that are likely to be
conducted over the next three to four years and that will seek to evaluate the
feasibility of "privatizing" the Medicare ESRD program. The Company believes
that the elimination of "pre-existing conditions" exclusions would greatly
facilitate the enrollment of ESRD patients into managed care plans. The
likelihood and timing of this decision is impossible to predict. Should such
legislation pass, the Company believes it would likely increase the number of
patients enrolled in managed care plans, and might also cause these plans to
look closer at "carving out" ESRD care to ESRD companies such as the Company's
joint ventures (Optimal Renal Care and Renaissance Health Care).
The Company has formed two joint ventures seeking to contract "at risk"
with managed care organizations for the care of ESRD patients. Renaissance
Health Care, Inc. is a 50/50 joint venture between the Company and participating
nephrologists throughout the U.S. Optimal Renal Care, LLC is a 50/50 joint
venture between Permanente Medical Group of Southern California, a subsidiary of
Kaiser Permanente, and the Company.
As managed care programs expand market share and gain greater bargaining
power vis-a-vis health care providers, there will be increasing pressure to
reduce the amounts paid for services and products furnished by the Company.
These trends would be accelerated if future changes to the Medicare ESRD program
require private payors to assume a greater percentage of the cost of care given
to dialysis patients. The Company is presently seeking to expand the portion of
its revenues attributable to non-governmental private payors. However, the
Company believes that the historically higher rates of reimbursement paid by
non-governmental payors may not be maintained at such levels. If substantially
more patients of the Company join managed care plans or such plans reduce
reimbursements to the Company, the Company's business and results of operations
could be adversely affected, possibly materially. See "--Regulatory and Legal
Matters--Reimbursement," "--Anti-Kickback Statutes, False Claims Act, Stark Law
and Fraud and Abuse Laws--Changes in the Health Care Industry."
PHYSICIAN AND OTHER RELATIONSHIPS
The Company believes that its success in establishing and maintaining
dialysis centers, in the U.S. depends in significant part upon its ability to
obtain the acceptance of and referrals from local physicians, hospitals and
managed care plans. A dialysis patient generally seeks treatment at a center
that is convenient to the patient and at which the patient's nephrologist has
staff privileges. Virtually all of the Company's clinics maintain open staff
privileges for local nephrologists. The Company's ability to provide quality
dialysis care and otherwise to meet the needs of local physicians is central to
its ability to attract nephrologists to the Company's centers and to receive
referrals from such physicians. See "--Anti- kickback Statutes, False Claims
Act, Stark Law and Fraud and Abuse Laws."
The conditions for coverage under the Medicare ESRD program require that
treatment at a dialysis center be under the general supervision of a Medical
Director. Generally, the Medical Director must be board certified or board
eligible in internal medicine and have at least 12 months of training or
experience in the care of patients at ESRD centers. Virtually all of the
Company's Medical Directors maintain their own active private practices.
The Company has written agreements with the physicians who serve as
Medical Directors (and Associate Medical Directors) at its centers. The Medical
Director agreements entered into by the Company generally have terms of three
years, although some have terms of as long as five to ten years. The
compensation of Medical Directors and other physicians under contract with the
Company is individually negotiated and generally depends upon competitive
factors in the local market, the physician's professional qualifications,
experience and responsibilities and the size of and services provided by the
center. Until January 1, 1995, Medical Director compensation typically included
a component based on some measure of the financial performance of the clinics
under the supervision of that Medical Director. See "-- Legal Proceedings--OIG
Investigation." Since 1995, the Company has entered into new agreements, or
amended existing agreements, for substantially all of its Medical Directors.
Under the new arrangements, the aggregate compensation of the Medical Directors
and other physicians under contract is fixed in advance for a period of one year
or more and is based in part on various efficiency and quality incentives. The
Company believes that compensation is paid at fair market value.
Virtually all of the Medical Director agreements, as well as the typical
contract under which the Company acquires existing dialysis centers, include
noncompetition covenants covering specified activities within specified
geographic areas for specified periods of time, although they do not prohibit
the physicians from providing direct patient care services at other locations
and, consistent with law, do not require a physician to refer patients to the
Company or particular centers or to buy or use specific medical products. In
certain states, non-competition covenants may not be enforceable.
12
<PAGE> 13
COMPETITION
Dialysis Services. The dialysis services industry is highly competitive.
Ownership of dialysis centers in the U.S. is fragmented, with a large number of
operators owning 10 or fewer centers and a small number of larger providers, the
largest of which is the Company. In urban areas, where many of the Company's
dialysis centers are located, there frequently are many competing centers in
proximity to the Company's centers. The Company experiences direct competition
from time to time from former Medical Directors or referring physicians who
establish their own centers. Furthermore, a number of health care providers,
some of which have significant operations or resources, may decide to enter the
dialysis business in the future.
Because in most cases the prices of dialysis services in the U.S. are
directly or indirectly regulated by Medicare, competition for patients is based
primarily on quality and accessibility of service and the ability to obtain
referrals from physicians and hospitals. However, the growth of managed care has
placed greater emphasis on service costs for patients insured by nongovernmental
payors. The Company believes that it competes effectively in all of these areas.
In particular, based upon the Company's knowledge and understanding of other
providers of dialysis treatments, as well as from information obtained from
publicly available sources, the Company believes that it is among the most
cost-efficient providers of kidney dialysis services. In addition, as a result
of its large size relative to most other dialysis service providers, the Company
enjoys economies of scale in areas such as purchasing, billing, collections and
data processing.
Competition in the dialysis industry is particularly intense with respect
to the acquisition of existing dialysis centers, which has resulted in an
increase in the cost of such acquisitions, and in enlisting and retaining
qualified physicians to act as Medical Directors.
LABORATORY AND RENAL DIAGNOSTIC SERVICES
The Company provides clinical laboratory testing and renal diagnostic
services through its business unit known as Spectra Renal Management ("SRM").
SRM was created as a result of the acquisition of Spectra Laboratories, Inc.
("Spectra") in June of 1997 and its combination with the Company's existing
laboratory business at the time ("LifeChem") and its renal diagnostic testing
business. SRM is the leading U.S. dialysis clinical laboratory providing blood,
urine and other bodily fluid testing services to assist physicians in
determining whether a dialysis patient's therapy regimen, diet and medicines
remain optimal. SRM oversees the operation of three laboratories, one in New
Jersey (operated by LifeChem), one in Southern California (operated by
LifeChem), and one in Northern California (Spectra). Spectra and LifeChem
are operated as separate subsidiaries of the Company.
In 1998, SRM performed approximately 38 million tests for more than 87,000
dialysis patients across the United States. SRM also provided testing services
to clinical research projects and others. The Company plans to expand SRM into
related markets such as hospital dialysis units and physician office practices,
particularly nephrologists.
LifeChem's clinical laboratory results have been a critical element in the
development of the Company's proprietary PSP database, which contains clinical,
laboratory and demographic data on approximately 60,000 dialysis patients. The
Company uses PSP to assist physicians in providing quality care to dialysis
patients. In addition, PSP is a key resource in ongoing research, both within
the Company and at outside research institutions, to decrease mortality rates
among dialysis patients and improve their quality of life. See "-- Regulatory
and Legal Matters--Reimbursement" for a description of certain billing
problems relating to LifeChem and "--Legal Proceedings--LifeChem."
SRM oversees the delivery of IDPN therapy to ESRD clinics.
Competition. SRM competes in the U.S. with large nationwide laboratories,
dedicated dialysis laboratories and numerous local and regional laboratories,
including hospital laboratories. In the laboratory services market, companies
compete on the basis of performance, including quality of laboratory testing,
timeliness of reporting test results and cost-effectiveness. The Company
believes that SRM's services are competitive in these areas. In addition to
laboratory services, SRM competes in the imaging diagnostic market. While the
main competition is local hospitals, SRM is competitive based upon the quality
and accessibility of the service.
13
<PAGE> 14
DIALYSIS PRODUCTS BUSINESS
The Company manufactures and distributes equipment and disposable products
for the treatment of kidney failure by hemodialysis and by peritoneal dialysis.
Such products include hemodialysis machines, peritoneal dialysis cyclers and
related equipment, dialyzers, peritoneal dialysis solutions in flexible plastic
bags, hemodialysis concentrates and solutions, granulate mixes, bloodlines, and
disposable tubing assemblies and equipment for water treatment in dialysis
centers. Other products manufactured by third parties and distributed by the
Company include dialyzers, special blood access needles, heparin (used to
prevent blood clotting) and commodity supplies such as bandages, clamps and
syringes.
OVERVIEW
The following table shows, actual net revenues for 1998 and 1997 and pro
forma net revenues for 1996, of the Company's products business related to
hemodialysis products, peritoneal dialysis products and other activities,
principally technical service:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- ---------------------
TOTAL % OF TOTAL % OF TOTAL % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Hemodialysis
Products $280,899 62% $241,985 58% $294,645 66%
Peritoneal Dialysis
Products 119,988 27 127,275 30 137,020 31
Other 49,921 11 51,941 12 13,777 3
-------- --- -------- --- -------- ---
Total $450,808 100% $421,201 100% $444,934 100%
======== === ======== === ======== ===
</TABLE>
14
<PAGE> 15
HEMODIALYSIS PRODUCTS
The Company believes that Fresenius Medical Care is a leader in the
hemodialysis product field and continually strives to extend and improve the
capabilities of its hemodialysis systems to offer an advanced treatment mode at
reasonable cost. In North America, the Company, through its Dialysis Products
business unit ("Dialysis Products") offers a comprehensive hemodialysis product
line, consisting of hemodialysis machines, modular accessories for dialysis
machines, polysulfone and cuprophane dialyzers, bloodlines, dialysis solutions
and concentrates, fistula needles, connectors, data management systems,
machines and supplies for the reuse of dialyzers and other similar supplies.
Dialysis Machines. Through Fresenius USA, the Company assembles, tests and
calibrates hemodialysis machines and sells these machines in the U.S., Canada
and Mexico. Components for these machines are provided by Fresenius Medical Care
and other vendors. Hemodialysis machines manufactured by the Company provide a
unique volumetric dialysate balancing and ultrafiltration control system. This
system, first developed and introduced by Fresenius AG in 1977, provides for the
safe and more efficient use of highly permeable dialyzers. The Company also
provides machine upgrade kits to allow for advanced therapy modes, thus offering
the customer maximum performance with highly permeable polysulfone dialyzers.
The Company's hemodialysis machines are capable of operating with dialyzers
manufactured by all manufacturers, and are compatible with a wide variety of
bloodlines and dialysis concentrates. Fresenius USA has extended the Fresenius
Series 2008 hemodialysis machine for the North American market through the
development of the model 2008H, which combines the reliable hydraulic system of
the Series 2008 with electronic systems developed by Fresenius USA. Dialysis
machines sold by the Company employ the same modular design as those of
Fresenius Medical Care, but are tailored to local markets. Modular design also
permits the Company to offer dialysis centers a broad range of options to meet
specific patient or regional treatment requirements. The display panel can also
be adapted using different modules to meet local language requirements.
Dialyzers. All dialyzers manufactured by the Company use hollow fiber
polysulfone membranes, a synthetic material. The Company believes that the
Fresenius Polysulfone(TM) dialyzer is the best-performing mass-produced dialyzer
on the market. Fresenius Medical Care is the leading worldwide producer of
polysulfone dialyzers. While competitors currently sell polysulfone membranes in
the market, Fresenius Medical Care developed and is the only manufacturer with
more than 13 years' experience in applying the technology required to mass
produce polysulfone membranes. The Company believes that polysulfone has
superior performance characteristics compared to other materials used in
dialyzers, including a higher biocompatibility and greater clearing capacities
for uremic toxins. The Company's Fresenius Polysulfone(TM) dialyzer line
consists of a complete range of permeability (high, medium and low flux) to
allow tailoring of the dialysis therapy to the individual patient. Fresenius
Polysulfone(TM) dialyzers are also available in an "NR" Series for acute
dialysis.
The Company also sells dialyzer reprocessing and rinse machines
manufactured by Fresenius USA for Seratronics, Inc. ("Seratronics"). These
machines cleanse dialyzers after dialysis, permitting multiple usage for the
same patient before disposal of the dialyzer. The Seratronics machines
facilitate the reuse of disposable dialyzers and, therefore, permit hemodialysis
providers to reduce operating costs. The reuse business of Seratronics is
managed by the Company through Fresenius USA.
Other Hemodialysis Products. The Company manufactures and distributes
arterial, venous, single needle and pediatric bloodlines. The Company produces
both liquid and dry dialysate concentrates. Liquid dialysate concentrate is
mixed with purified water by the hemodialysis machine to produce dialysis
solution, which is used in hemodialysis treatment to remove the waste products
and excess water from the patient's blood. Dry acid concentrate, developed more
recently, requires less storage space. The Company also produces dialysis
solutions in bags, including solutions for priming and rinsing hemodialysis
bloodlines, as well as connection systems for central concentrate supplies and
devices for mixing dialysis solutions and supplying them to hemodialysis
machines. Other distributed products include solutions for priming bloodlines,
disinfecting and decalcifying hemodialysis machines, fistula needles,
hemodialysis catheters, and products for acute renal treatment.
Fresenius USA has developed the Fresenius Data System FDS08(TM) ("FDS08")
computerized treatment monitoring and documentation system. The FDS08 can
automatically monitor and record machine and treatment information from as many
as 32 hemodialysis machines. The FDS08 is a PC-based system which has found many
applications for improving record keeping and increasing staff efficiency. The
FDS08 system has been used to pioneer new therapies such as remote monitoring of
patients during nightly home hemodialysis, which enables a patient to be
dialyzed at home while a staff caregiver monitors the machine performance via a
modem link. Additionally the FDS08 system can be linked to Fresenius USA's new
Hypercare(TM) Medical Records System which is presently in beta site testing.
The Hypercare(TM) Medical Records System is a fully-integrated medical records
system which can record and analyze trends in medical outcome factors in
hemodialysis patients.
15
<PAGE> 16
PERITONEAL DIALYSIS PRODUCTS
The Company offers a full line of products for peritoneal dialysis
patients. Peritoneal dialysis products manufactured by the Company include
peritoneal dialysis solutions in bags, peritoneal dialysis cycling machines for
CCPD and disposable products for both CAPD and CCPD, such as tubing, sterile
solutions and sterile kits to prepare patients for dialysis. The Company also
distributes (primarily to its own dialysis centers) other manufacturers'
peritoneal dialysis products.
Peritoneal Dialysis Systems. The Company manufactures a range of
peritoneal dialysis solutions. The Company believes that its peritoneal solution
products with Safe-Lock(R) connection systems offer significant advantages for
CAPD and CCPD home patients, including ease of use and greater protection
against touch contamination than other peritoneal dialysis systems presently
available. The Safe-Lock(R) standard system involves the connection procedure of
introducing and draining the dialysis solution into and from the abdominal
cavity through the use of the same bag for introduction and drainage. To use
Safe-Lock(R) products, a catheter that has been surgically implanted in the
patient is fitted with one part of the Safe-Lock(R) connector, and the
peritoneal dialysis solution bag and tubing are fitted with the other part of
the Safe-Lock(R) connector. The Company also manufactures disposable double bag
systems utilizing a special drainage bag and a snap-off Y-shaped piece that is
connected to the Safe-Lock(R) connector at the catheter. These double bag
systems further reduce possible entry of contaminants during peritoneal
dialysis. The Company's Inpersol(R) line of peritoneal dialysis products
acquired by Fresenius USA from Abbott Laboratories in 1993 (the "Abbott
Acquisition") is interchangeable and competitive with the peritoneal dialysis
products offered by Baxter, the Company's major competitor in this field.
Therefore, the addition of the Inpersol(R) product line to the Company's other
products enables the Company to expand the potential customer base for which it
competes, because the Company now supplies peritoneal dialysis products usable
by all peritoneal dialysis patients in the U.S.
Cyclers. While there are two main forms of peritoneal dialysis therapy,
the Company believes that CCPD therapy offers patients benefits over CAPD
therapy for patients who need more therapy due to body size, ultrafiltration
loss or any other reason. In a standard CAPD program, a patient typically
undergoes four manual two-liter exchanges of peritoneal dialysis solution over a
24-hour period, with treatment occurring seven days per week. CAPD must be
performed by the patient when he or she is awake. With CCPD therapy, peritoneal
dialysis cyclers provide automated dialysis solution exchange. The cycler
delivers a prescribed volume of dialysis solution into the peritoneal cavity
through an implanted catheter, allows the solution to dwell for a specified
time, and completes the process by draining the solution. Cycling may be
performed by patients at home throughout the night while sleeping. CCPD delivers
more effective therapy than CAPD due to the supine position of the patient
during the night, higher volume exchanges and preferable cycle management. The
Company's cycling equipment incorporates microprocessor technology, that can be
easily programmed by the patient, hospital or clinic staff to perform specific
prescribed therapy for a given patient. Since all components are monitored and
programmable, these machines allow the physician to prescribe any of a number of
current therapy procedures. With nighttime cycling, the patient has complete
daytime freedom, wearing only the surgically-implanted catheter and capping
device. In addition, the Company believes that CCPD reduces the risk of
peritonitis due to less frequent handling of the catheter.
Fresenius USA introduced the first CCPD machine in 1980 and, in 1994,
introduced a new variant on CCPD therapy, PD-Plus(TM) that is offered by the
Company in other parts of the world. Normally, a CCPD patient undergoes five or
six two-liter solution exchanges at night, and carries no solution during the
day. PD-Plus(TM) therapy provides a more tailored therapy using a simpler
nighttime cycler, and, where necessary, one exchange during the day. Compared
with typical CCPD therapy, the Company believes that PD-Plus(TM) therapy is less
costly and easier to administer. In addition, compared with CAPD therapy, the
Company believes that PD-Plus(TM) therapy improves toxin removal by more than
40% and therefore is attractive to patients and physicians alike. By increasing
the effectiveness of peritoneal dialysis treatments, at an acceptable increase
in cost over CAPD therapy, PD-Plus(TM) therapy may also effectively prolong the
time period during which a patient will be able to remain on peritoneal dialysis
before requiring hemodialysis. PD-Plus(TM) therapy, as developed by Fresenius
USA, can only be performed using the Fresenius Freedom Cycler and special tubing
using Safe-Lock(R) connectors.
Other Peritoneal Dialysis Products. The Company also manufactures and
distributes pediatric treatment systems for administration of low volumes of
dialysis solutions, assist devices to facilitate automated bag exchange for
handicapped patients, catheters, catheter implantation instruments, silicon
glue, Pack-PD(TM) (a computer program which analyzes patient and peritoneal
characteristics to present a range of treatment options for individual
therapies), disinfectants, bag heating plates, adapters, and products to assist
and enhance connector sterility. The Company also provides scientific and
patient information products, including support materials, such as brochures,
slides, videos, instructional posters and training manuals.
Fresenius Medical Care has recently developed a new CAPD system,
comprising tubing, connectors and a peritoneal dialysis double bag, together
with the process technology for the manufacture of the system. The Fresenius
Stay-Safe(TM)
16
<PAGE> 17
peritoneal dialysis system utilizes a single switching mechanism that replaces
the three tubing clamps to control drainage of solution, flushing of tubes that
connect solution bags to catheters, the introduction of new solution, and the
tight closure of the line. The control device also further reduces the
possibility of catheter contamination during connection and disconnection by
sealing the catheter access and surrounding the catheter adapter with a
disinfectant solution.
New Peritoneal Dialysis Products. Fresenius USA has recently introduced
the IQcard(TM) system which has been developed to monitor patient compliance in
Automated Peritoneal Dialysis Therapy. The IQcard is used with the Freedom(TM)
Cycler PD+ to monitor the delivered dose of APD Therapy and record a full
treatment history for each patient. It is estimated that patient non-compliance
with prescribed Peritoneal Dialysis Therapy varies from 11% to 80%. Lack of
compliance may be the most significant cause of inadequate dialysis and poor
clinical outcomes. With IQcard, the physician has a tool for assessing patient
compliance and make adjustments to the prescription as necessary to meet therapy
goals.
In March 1996, Fresenius USA received approval by the U.S. Food and Drug
Administration ("FDA") of its new Premier twin bag CAPD system. This system
comprises a single product, the Delflex(R) solution bag and the tubing and
drainage set necessary for CAPD exchanges. The Premier twin bag system also
utilizes Safe-Lock(R) connectors and, because fewer connections are required,
may help to reduce patient complications associated with peritoneal dialysis
therapy. The Premier twin bag system also includes new fill volumes which offer
the physician the ability to prescribe larger dosages without requiring the
patient to do more exchanges during the day. Fresenius USA began limited
marketing of the Premier twin bag system during July 1996. Additionally, in
December 1997, Fresenius Medical Care submitted to the FDA a file for review of
a more advanced Premier twin bag system that utilizes additional features beyond
those approved in March 1996. This application is still pending.
MARKETING, DISTRIBUTION AND SERVICE
Most of the Company's products are sold to hospitals, clinics and
specialized treatment centers. With its comprehensive product line and years of
experience in dialysis, the Company believes that it has been able to establish
and maintain very close relationships with its clinic customer base on a global
basis. Close interaction among the Company's sales force and research and
development personnel enables concepts and ideas that develop in the field to be
considered and integrated into product development. The Company maintains a
direct sales force of trained salespersons engaged in the sale of both
hemodialysis and peritoneal dialysis products. This sales force engages in
direct promotional efforts, including visits to physicians, clinical
specialists, hospitals, clinics and dialysis centers, and represents the Company
at industry trade shows. The Company also sponsors medical conferences and
scientific symposia as a means for disseminating product information. The sales
force is assisted by clinical nurses who provide clinical support, training and
assistance to customers. The Company also utilizes outside distributors to
provide sales coverage in countries not serviced by its internal sales force.
Fresenius USA's products are distributed in Canada through a wholly-owned
subsidiary and in Mexico through distributors. Inpersol(R) products are not
distributed by Fresenius USA in Canada or Mexico, where Abbott retains exclusive
rights to those products.
All of the Company's machines are shipped from its facilities in Walnut
Creek, California. Fresenius USA's dialyzers and certain hemodialysis disposable
products are shipped to regional distribution centers from Fresenius USA's
facilities in Ogden, Utah. Certain other hemodialysis equipment is shipped from
McAllen, Texas/Reynosa, Mexico to the Company's regional distribution centers.
Fresenius USA's disposable peritoneal dialysis products are shipped from its
facility in Ogden, Utah or from Abbott facilities to regional distribution
centers, and, from these regional distribution centers the products are
delivered directly to the customer, in most cases the patient, by Company
drivers. The drivers store deliveries in the location desired by the patient
rotate disposable products so that the oldest products are used first, and
generally provide continuity of contact between Fresenius USA and patients who
use Fresenius USA's peritoneal dialysis products. Products of the Renal Products
Division of the Company are distributed through 25 warehouse facilities in the
U.S. At the time of the Abbott Acquisition by Fresenius USA, Abbott Laboratories
had agreements with numerous hospitals pursuant to which these hospitals could
order the full line of Abbott Laboratories products, including renal dialysis
products, from Abbott Laboratories. Abbott Laboratories agreed to act as
Fresenius USA's distributor for the continued sale of Inpersol(R) products to
hospitals through the third quarter of 1998. Fresenius USA undertook its own
distribution effective October 1, 1998.
The Company offers customer service, training and education, and technical
support such as field service, spare parts, repair shops, maintenance, and
warranty regulation. The Company also provides training sessions on the
Company's equipment. The Company provides supportive literature on the benefits
of its core business products. The Company's management believes its service
organizations have a reputation for reliability and high quality service.
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<PAGE> 18
MANUFACTURING OPERATIONS
The Company assembles equipment, including hemodialysis machines, dialyzer
reuse devices and peritoneal dialysis cyclers, at its facility in Walnut Creek,
California. Components of the Company's hemodialysis machines are supplied by
Fresenius Medical Care as well as other suppliers, and the Company has
experienced no difficulties in obtaining sufficient quantities of such
components. In connection with the sale and installation of the machines,
Company technicians and engineers calibrate the machines and add computer
software for record keeping and monitoring.
The Company owns a 344,000 square-foot facility in Ogden, Utah for the
manufacture of disposable products, including polysulfone dialyzers and
peritoneal dialysis solutions. This facility uses automated equipment for the
production of polysulfone dialyzers and sterile solutions in flexible plastic
containers. The design of the Company's Ogden facility is based on the design of
a Fresenius Medical Care facility in St. Wendel, Germany, and was constructed in
consultation with Fresenius AG. The Company, through Fresenius USA, also
purchases dialyzers and polysulfone bundles from Fresenius Medical Care. The
Company believes that it is the principal manufacturer of polysulfone dialyzers
in the U.S. While the Company obtains the film used in the manufacture of its
plastic bags from one supplier located in The Netherlands, the Company believes
that there are readily available alternative sources of supply for which the FDA
could grant expedited approval. The Company also intends to manufacture its own
plastic film for peritoneal dialysis solution bags.
The Company also manufactures dialysis products at 7 additional plants in
the U.S.. Bloodlines and PD sets are produced at facilities in Reynosa, Mexico,
and McAllen, Texas, and concentrates are produced at three facilities in the
U.S..
Each step in the manufacture of the Company's products, from the initial
processing of raw materials through the final packaging of the completed
product, is carried out under controlled quality assurance procedures required
by law and under Good Manufacturing Practices ("GMP"), as well as under
comprehensive quality management systems, such as the internationally recognized
ISO 9000-9004 and CE Mark standards, which are mandated by regulatory
authorities in the countries in which the Company operates.
Incoming raw materials for solutions are subjected to various physical,
chemical and biological analyses to assure quality and consistency. During the
production cycle, sampling and testing are performed in accordance with
established quality assurance procedures. Pressure, temperature and time for
various processes are monitored to assure consistency of semifinished goods.
Environmental conditions are monitored to assure that particulate and
bacteriological levels do not exceed specified maximums. Sampling and testing
are done in accordance with physical and chemical procedures required to ensure
sterility, safety and potency of finished products. The Company maintains
continuing quality control and GMP education and training programs for its
employees. See "-- Regulatory and Legal Matters."
SOURCES OF SUPPLY
Raw materials essential to the Company's dialysis products business are
purchased worldwide from numerous suppliers and no serious shortages or delays
in obtaining raw materials have been encountered. To assure continuous high
quality, Fresenius Medical Care has single supplier agreements for many of its
polymers, including polysulfone, polyvinylpyrrolidone, and polyurethane for
dialyzer production, and for certain other raw materials. Wherever single
supplier agreements exist, the Company believes alternative suppliers are
available. However, use of raw materials obtained from alternative suppliers
could cause costs to rise due to necessary adjustments in the production process
or interruptions in supply.
One of the Company's subsidiaries, Fresenius USA, obtains bloodlines under
an agreement with Medisystems Corporation, whose principal source of bloodlines
is a single FDA-approved plant located in Thailand. The agreement has an
eight-year term ending in September 1999 and an additional multi year agreement
is being negotiated. Fresenius USA is required to make minimum annual purchase
commitments (currently approximately 15.0 million bloodline sets) through
September 1999. The current agreement includes guaranteed price provisions,
subject to permitted increases reflecting cost increases beyond the supplier's
control.
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RESEARCH AND DEVELOPMENT
Current research and development activities of the Company are primarily
conducted through Fresenius Medical Care and are strongly focused on the
development of new products, technologies and treatment concepts to optimize the
quality of treatment for dialysis patients, and on process technology for the
manufacture of the Company's products. Research and development is conducted
through the Fresenius Medical Care's Innovation & Technology Group which is
divided into hemodialysis and peritoneal dialysis segments. These units work
closely with the respective marketing and medical departments in each dialysis
segment.
Fresenius Medical Care intends to continue to maintain its central
research and development operations for disposable products, including dialyzers
and peritoneal solutions, at its St. Wendel facility and for durable products at
its facilities in Schweinfurt and Bad Homburg, Germany. It expects that as its
dialysis products business continues to expand internationally, research and
development activities by its international operations, including the Company,
will rely primarily on the research and development activities conducted at St.
Wendel, Schweinfurt, and Bad Homburg, with local activities focusing on
cooperative efforts with those facilities to develop new products and product
modifications for local markets. The Company's product development staff works
closely with the Fresenius Medical Care research and development group in this
regard. Fresenius Medical Care employs approximately 232 persons in research and
development (including medical doctors, engineers, technicians and research
scientists), and conducts its activities at three locations in Germany (at the
St. Wendel facility, the Schweinfurt facility and the Bad Homburg facility), and
in Walnut Creek, California and Ogden, Utah. Fresenius Medical Care's research
and development expenses were $31 million in 1998.
The Company seeks to maintain its profile in scientific circles through
articles in scientific and medical journals, participation in academic symposia,
relationships with scientists and physicians in relevant fields and the
organization of scientific meetings and workshops. The Company also establishes
scientific advisory boards and works with medical and other consultants.
PATENTS, TRADEMARKS AND LICENSES
In connection with the Merger, Fresenius Medical Care and its subsidiaries
acquired or licensed all intellectual property rights of Fresenius AG relating
to Fresenius Worldwide Dialysis.
As the owner of or licensee under patents and trademarks throughout the
world, Fresenius Medical Care holds rights under more than 800 patents and
patent applications relating to dialysis technology in major markets. Patented
technologies that relate to dialyzers include Fresenius Worldwide Dialysis'
polysulfone hollow fiber, Fresenius Worldwide Dialysis' in-line sterilization
method, and sterile closures for in-line sterilized medical devices. For
dialysis machines, patents include the process for volumetric mixing of
concentrate with water, the location for a filter device for sterile filtering
dialysate in the dialysis machine circuit, and conductivity sensor devices and a
mathematical algorithm for using such devices. Pending patents include the
safety concept for the control of the ultrafiltration rate in a dialysis machine
used for high flux dialysis and the connector system for the Fresenius Worldwide
Dialysis' biBag(TM) bicarbonate concentrate powder container.
For peritoneal dialysis, Fresenius Medical Care holds rights on the
Safe-Lock(R) system, the double bag for bicarbonate peritoneal dialysis
solution, and its orientation of the two compartments. Pending patents include
non-PVC film (Biofine(TM)) for general use in intravenous and peritoneal
dialysis applications and a special film for a peelable, non-PVC double bag for
peritoneal dialysis solutions. Fresenius USA's intellectual property includes
the Inpersol(R) trademark and rights to certain manufacturing know-how Fresenius
USA obtained from Abbott, and a paid-up non-exclusive global sublicense from
Baxter to certain CAPD and connector technology.
The patent family covering Fresenius Polysulfone(TM) high flux membranes
has been subject to opposition by competitors in Europe and Japan. While
Fresenius Medical Care believes that these patents are valid in the relevant
jurisdictions, a successful opposition could have a material adverse effect on
the Company.
The Company believes that its success will depend, in large part, on
Fresenius Medical Care's technology. While Fresenius Medical Care, as a standard
practice, obtains such legal protections it believes are appropriate for its
intellectual property, such intellectual property is subject to infringement or
invalidation claims. In addition, technological developments in ESRD therapy
could reduce the value of Fresenius Medical Care's existing intellectual
property, which reduction could be rapid and unanticipated.
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COMPETITION
The markets in which the Company sells its dialysis products are highly
competitive. Among the Company's competitors in the sale of hemodialysis and
peritoneal dialysis products are CGH Medical (an affiliate of Gambro AB),
Baxter, Inc., Althin, Asahi Medical Co., Ltd., Bellco S.p.A. (a subsidiary of
Sorin Biomedica S.p.A.), Bieffe Medital S.p.A., B. Braun Melsungen AG, Nissho
Corporation (including Nissho Nipro Corporation Ltd.), Nikkiso Co., Ltd., Terumo
Medical Corporation and Toray Medical Co., Ltd. Some the Company's competitors
possess greater financial, marketing and research and development resources than
the Company.
The Company believes that in the dialysis product market, companies
compete primarily on the basis of product performance, cost-effectiveness,
reliability, assurance of supply and service and continued technological
innovation. The Company believes its products are highly competitive in all of
these areas. Independent dialysis centers and those operated by other chains
that were customers of Fresenius Worldwide Dialysis prior to the Merger may
elect to limit or terminate their purchases of the Company dialysis products in
order to avoid purchasing products manufactured by a competitor. The Company
believes, however, that customers will continue to consider its long-term
customer relationships and reputation for product quality in making product
purchasing decisions, and the Company intends to compete vigorously for such
customers.
EMPLOYEES
At December 31, 1998, the Company employed approximately 23,138
employees, including part-time and per diem employees. Such persons are employed
by the Company's principal businesses as follows: dialysis treatment and
laboratory services, approximately 20,023 employees; and dialysis products,
approximately 3,115 employees. Medical Directors of the Company's dialysis
centers are retained as independent contractors. Management believes that its
relations with its employees are good. Approximately 511, or 2% of the Company's
employees are covered by union agreements.
REGULATORY AND LEGAL MATTERS
Regulatory Overview
The operations of the Company are subject to extensive governmental
regulation at the federal, state and local levels. regarding the operation of
dialysis centers, laboratories and manufacturing facilities, the provision of
quality health care for patients, the maintenance of occupational, health,
safety and environmental standards and the provision of accurate reporting and
billing for governmental payments and/or reimbursement. In addition, some states
prohibit ownership of health care providers by for-profit corporations or
establish other regulatory barriers to direct ownership by for-profit
corporations. In those states, the Company works within the framework of local
laws to establish alternative contractual arrangements for the provision of
services to those facilities.
Any failure by the Company or its subsidiaries to receive required
licenses, certifications or other approvals for new facilities, significant
delays in such receipt, loss of its various federal certifications, termination
of licenses under the laws of any state or other governmental authority or
changes resulting from health care reform or other government actions that
reduce reimbursement or reduce or eliminate coverage for particular services
rendered by the Company or its subsidiaries could have a material adverse effect
on the business, financial condition and results of operations of the Company.
The Company must comply with legal and regulatory requirements under which
it operates, including the federal Medicare and Medicaid Fraud and Abuse
Amendments of 1977, as amended (the "anti-kickback statutes"), the federal
restrictions on certain physician referrals (commonly known as the "Stark Law")
and other fraud and abuse laws and similar state statutes, as well as similar
laws in other countries. Certain of NMC's and its subsidiaries' activities are
subject to investigation (the "OIG Investigation") by the Office of the
Inspector General ("OIG") of the HHS. See "--Legal Proceedings" for information
about the OIG's investigations and about additional regulatory, investigatory
and legal proceedings with respect to the Company. Moreover, there can be no
assurance that applicable laws, or the regulations thereunder, will not be
amended, or that enforcement agencies or the courts will not make
interpretations inconsistent with those of the Company, any one of which could
have a material adverse effect on its business, reputation, financial condition
and results of operations of the Company. Sanctions for violations of these
statutes may include criminal or civil penalties, such as imprisonment, fines or
forfeitures, denial of payments, and suspension or exclusion from the Medicare
and Medicaid programs. In the U.S., these laws have been broadly interpreted by
a number of courts, and significant government funds and personnel have been
devoted to their enforcement because such enforcement has become a high priority
for the federal
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government and some states. The Company, and the health care industry in
general, will continue to be subject to extensive federal, state and foreign
regulation, the full scope of which cannot be predicted.
NMC had historically employed certain mechanisms to monitor its compliance
with relevant laws, rules, regulations and business standards. Such
compliance-related policies and activities included periodic reaffirmations of
business ethics standards, internal audit reviews and legal reviews. To increase
the effectiveness of its compliance activities, the Company initiated in the
fall of 1996 a review and enhancement of NMC's compliance systems. It also hired
a senior-level corporate compliance officer to assist with such efforts.
In connection with its compliance program, the Company established a
toll-free Employee Action Line accessible to all its employees to seek guidance
and report potentially improper or unethical actions, or report violations of
applicable law or policies. Confidentiality of callers is protected to the
extent permitted by law, and the Company has a policy against retaliation or
retribution against anyone who in good faith reports an ethical or legal
concern. The Company seeks to ensure that cases are investigated thoroughly,
objectively, and promptly. A Code of Ethics and Business Conduct was developed
and distributed to all the Company employees in January 1997. This document
emphasizes the Company's commitment to conduct business in accordance with the
highest legal and ethical standards of business conduct, which every employee
has an obligation to uphold.
Compliance training for employees began in 1996. Currently, compliance
training is performed by Company management under the supervision and guidance
of the Company's Compliance Officer. The compliance training program, featuring
both live and video presentations, focuses on the current regulatory
environment, the Company's commitment to compliance, a page-by-page review of
the Code of Ethics and Business Conduct, a discussion of the Employee Action
Line, and an analysis of hypothetical cases involving compliance and ethics
challenges. Substantially all of the Company's employees throughout the United
States received compliance training by the end of the first quarter of 1998.
Training for new employees is ongoing.
Compliance-related communications to all employees have been and will
continue to be made regularly. In addition, compliance audits are a part of the
Company's overall compliance program. For example, the Company's Compliance
Officer oversees training and audits required under Spectra's Laboratories'
Corporate Integrity Agreement as discussed below.
Prior to Spectra's acquisition by the Company, Spectra settled an
investigation by the government and entered into a Corporate Integrity Agreement
("Agreement"). This Agreement provides for a government-mandated compliance
program which, among its provisions, requires an annual independent review to
assess the effectiveness of internal controls and the implementation and
operation of the program. Under its provisions, a material breach of the
Agreement may result in exclusion of Spectra from the Medicare and Medicaid
programs. A similar agreement was executed by Spectra to settle state Medicaid
claims.
In February 1999 the government advised Spectra that it may be in material
breach of the Agreement. Spectra is currently reviewing the government's areas
of concern and will take any necessary corrective action. While there can be no
assurances, the Company does not believe that the outcome of this matter will
have an adverse effect on the Company.
PRODUCT REGULATION
In the U.S., the FDA and comparable state regulatory agencies impose
requirements on certain subsidiaries of the Company as a manufacturer and a
seller of medical products and supplies under their jurisdiction. These require
that products be manufactured in accordance with GMP and that the Company comply
with FDA requirements regarding the design, safety, advertising, labeling,
recordkeeping and reporting of adverse events related to the use of its
products. In addition, in order to clinically test, produce and market certain
medical products and supplies (including hemodialysis and peritoneal dialysis
equipment and solutions, dialyzers, bloodlines and cell separators) for human
use, the Company must satisfy mandatory procedures and safety and efficacy
requirements established by the FDA or comparable state and foreign governmental
agencies. Such rules generally require that products be approved by the FDA as
safe and effective for their intended use prior to being marketed.
A "510(k)" pre-market notification or pre-market approval application is
required before certain new FDA-regulated devices may be sold or marketed in the
U.S. The FDA generally classifies medical devices as class I devices, which are
subject to general controls (e.g., labeling, pre-marketing notification and
adherence to GMP); class II devices, which are subject to special controls
(e.g., performance standards, post-marketing surveillance, patient registries
and FDA guidelines); and class III devices, which include life-sustaining,
lifesupporting and implantable devices, or new devices which are not
substantially equivalent to devices in interstate commerce prior to 1976 and
which require pre-market approvals. The FDA
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will generally grant 510(k) clearance if the submitted data establish that the
proposed device is "substantially equivalent" to a legally marketed class I or
class II medical device, or a class III medical device for which the FDA does
not require pre-marketing approval. The FDA may request additional data or
require pre-marketing approval for any device. The approval process is
expensive, time consuming and subject to unanticipated delays. There can be no
assurance that the Company will obtain necessary regulatory approvals or
clearances within reasonable time frames, if at all. Any such delay or failure
to obtain regulatory approval or clearances could have a materially adverse
effect on the business, financial condition and results of operations of the
Company.
The Company's peritoneal dialysis solutions have been designated as drugs
by the FDA and, as such, are subject to additional FDA regulation under the
Food, Drug and Cosmetic Act of 1938 ("FDC Act"). In order for a new drug to
receive marketing approval in the U.S., the Company must follow a series of
steps which may include: (a) pre-clinical laboratory and animal tests in
accordance with good laboratory practices, (b) an Investigational New Drug
application which must become effective before human clinical trials may begin,
(c) well-controlled human clinical trials to establish the safety and efficacy
of the new drug product, (d) a New Drug Application ("NDA") or an Abbreviated
New Drug Application ("ANDA") and (e) approval of the NDA or ANDA prior to any
commercial sale or shipment of the drug. FDA approval must be obtained for each
product designated as a drug. Generally, approval of an NDA, if obtained, takes
one and a half or more years and may take longer should the FDA raise questions
or have concerns about a new drug.
The FDA may also prohibit the sale or importation of products, order
product recalls or require post-marketing testing and surveillance programs to
monitor a product's effects. The Company believes that it has filed for or
obtained all necessary approvals for the manufacture and sale of its products in
jurisdictions in which those products are currently produced or sold.
See "--Legal Proceedings--FDA Matters" and "--Legal Proceedings--District
of New Jersey Investigation" for information about certain FDA matters,
including warning letters and import alerts that the FDA issued from 1991
through 1993 with respect to certain products assembled by NMC and the Consent
Decree entered into thereafter; 1994 and 1995 FDA audits of certain Fresenius
USA manufacturing facilities; and a District of New Jersey federal grand jury
investigation into NMC's historical activities
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FACILITIES AND OPERATIONAL REGULATION
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") subject
virtually all clinical laboratory testing facilities, including those of the
Company, to the jurisdiction of HHS. CLIA establishes national standards for
assuring the quality of laboratories based upon the complexity of testing
performed by a laboratory. Certain of the operations of the Company also subject
it to federal laws governing the repackaging and dispensing of drugs (including
oxygen) and the maintenance and tracking of certain life sustaining and
life-supporting equipment.
The operations of the Company are subject to various U.S. Department of
Transportation, Nuclear Regulatory Commission and Environmental Protection
Agency requirements and other federal, state and local hazardous and medical
waste disposal laws. As currently in effect, laws governing the disposal of
hazardous waste do not classify most of the waste produced in connection with
the provision of dialysis, or laboratory services as hazardous, although
disposal of nonhazardous medical waste is subject to specific state regulation.
SRM, Spectra and LifeChem, however, do generate hazardous waste which is
subject to specific disposal requirements. The operations of the Company are
also subject to various air emission and wastewater discharge regulations.
Federal, state and local regulations require the Company to meet various
standards relating to, among other things, the management of facilities,
personnel qualifications and licensing, maintenance of proper records,
equipment, quality
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assurance programs, the operation of pharmacies, and dispensing of controlled
substances. All of the operations of the Company in the U.S. are subject to
periodic inspection by federal and state agencies and other governmental
authorities to determine if the operations, premises, equipment, personnel and
patient care meet applicable standards. To receive Medicare reimbursement, the
Company's dialysis centers, renal diagnostic support business and laboratories
must be certified by HCFA. All of the Company's dialysis centers, and
laboratories that furnish Medicare services are so certified.
Certain facilities of the Company and certain of their employees are also
subject to state licensing statutes and regulations. These statutes and
regulations are in addition to federal and state rules and standards that must
be met to qualify for payments under Medicare, Medicaid and other government
reimbursement programs. Licenses and approvals to operate these centers and
conduct certain professional activities are customarily subject to periodic
renewal and to revocation upon failure to comply with the conditions under which
they were granted. See "--Legal Proceedings--FDA Matters" for information about
1995 FDA audits of Fresenius USA's facilities.
The Occupational Safety and Health Administration ("OSHA") regulations
require employers to provide employees who work with blood or other potentially
infectious materials with prescribed protections against blood-borne and
air-borne pathogens. The regulatory requirements apply to all health care
facilities, including dialysis centers, laboratories and renal diagnostic
support business, and require employers to make a determination as to which
employees may be exposed to blood or other potentially infectious materials and
to have in effect a written exposure control plan. In addition, employers are
required to provide hepatitis B vaccinations, personal protective equipment,
blood-borne pathogens training, post-exposure evaluation and follow-up, waste
disposal techniques and procedures, engineering and work practice controls and
other OSHA-mandated programs for blood-borne and air-borne pathogens.
Some states in which the Company operates have Certificate of Need ("CON")
laws that require any person or entity seeking to establish a new health care
service or to expand an existing service to apply for and receive an
administrative determination that the service is needed. The Company currently
operates in 13 states and the District of Columbia and Puerto Rico that have CON
laws applicable to dialysis centers. These requirements may provide a barrier to
entry to new companies seeking to provide services in these states, but also may
constrain the Company's ability to expand its operations in these states.
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REIMBURSEMENT
Dialysis Services. The Company's dialysis centers provide outpatient
hemodialysis treatment and related services for ESRD patients. In addition, some
of the Company's centers offer services for the provision of peritoneal and
hemodialysis treatment at home.
The Medicare program is the primary source of Dialysis Services' revenues
from dialysis treatment. For example, in 1998, approximately 57% of Dialysis
Services revenues resulted from Medicare's ESRD program. As described below,
Dialysis Services is reimbursed by the Medicare program in accordance with the
Composite Rate for certain products and services rendered at the Company's
dialysis centers. As described in the next paragraph, other payment
methodologies apply to Medicare reimbursement for other products and services
provided at the Company's dialysis centers and for products (such as those sold
by the Company) and support services furnished to ESRD patients receiving
dialysis treatment at home (such as those of Dialysis Products). Medicare
reimbursement rates are fixed in advance and are subject to adjustment from time
to time by the U.S. Congress. Although this form of reimbursement limits the
allowable charge per treatment, it provides the Company with predictable and
recurring per treatment revenues and allows the Company to retain any profit
earned.
When Medicare assumes responsibility as primary Dialysis Products payor
(see "Reimbursement--Coordination of Benefits"), Medicare is responsible for
payment of 80% of the Composite Rate set by HCFA for dialysis treatments. The
Composite Rate governs the Medicare reimbursement available for a designated
group of dialysis services, including the dialysis treatment, supplies used for
such treatment, certain laboratory tests and certain medications. The Composite
Rate consists of labor and nonlabor components with adjustments made for
regional wage costs, subject to a national payment floor and ceiling currently
ranging from $117 to $139 per treatment, with exceptions based on specified
criteria. In certain instances, products sold by Fresenius USA and Dialysis
Products are included in the non-labor component of the Composite Rate as
described below.
The method under which the Company is reimbursed for home dialysis is
based on which supplier is selected to provide dialysis supplies and equipment.
If the center is designated as the supplier ("Method I"), the center provides
all dialysis treatment related services, including equipment and supplies, and
is reimbursed using a methodology based on the Composite Rate. If Dialysis
Products is designated as the direct supplier ("Method II"), Dialysis Products
provides the patient directly with all necessary equipment and supplies and is
reimbursed by Medicare subject to a capitated ceiling. Clinics provide home
support services to Method II patients and these services are reimbursed at a
monthly fee for service basis subject to a capitated ceiling. The reimbursement
rates under Method I and Method II differ, although both are prospectively
determined and are subject to adjustment from time to time by Congress.
Certain items and services that the Company furnishes at its dialysis
centers are not included in the Composite Rate and are eligible for separate
Medicare reimbursement, typically on the basis of established fee schedule
amounts. Such items and services include certain drugs (such as EPO), blood
transfusions and certain diagnostic tests. The rate of utilization by the
Company's facilities of items and services that are not included in the
Composite Rate is a subject of the OIG Investigation. See "--Legal
Proceedings--OIG Investigation."
Medicare payments are subject to change by legislation and pursuant to
deficit reduction measures. The Composite Rate was unchanged from commencement
of the ESRD program in 1972 until 1983. From 1983 through December 1990,
numerous congressional actions resulted in a net reduction of the average
reimbursement rate from $138 per treatment in 1983 to approximately $125 per
treatment in 1990. Congress increased the ESRD reimbursement rate, effective
January 1, 1991, to an average rate of $126 per treatment.
In 1990, Congress required that the Prospective Payment Assessment
Commission ("PROPAC") study dialysis costs and reimbursement and make reports
annually to Congress with a recommendation as to the appropriateness of changes
to the ESRD reimbursement rates. In 1993, PROPAC recommended a 2.5% increase in
the Composite Rate for independent freestanding dialysis facilities, which was
not implemented by Congress. In March 1994 and again in 1995, PROPAC recommended
that no changes be made in the reimbursement rate. In March 1996, PROPAC
recommended a 2% increase in the Composite Rate for independent freestanding
dialysis facilities. In March 1997, the Medicare Payment Advisory Commission
("MedPAC") recommended a 2.8% increase in the Composite Rate for both
independent freestanding dialysis facilities and hospital-based dialysis
facilities for fiscal year 1998 which was not implemented by Congress. Congress
is not required to, and no congressional action was taken to, implement the
MedPAC recommendations and Congress could establish a different reimbursement
rate. The Company is unable to predict what, if any, future changes may occur in
the rate
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of Medicare reimbursement. Any significant decreases in the Medicare
reimbursement rates could have a material adverse effect on the Company's
provider business and, because the demand for products is affected by Medicare
reimbursement, on its products business. Increases in operating costs that are
affected by inflation, such as labor and supply costs, without a compensating
increase in reimbursement rates, also may adversely affect the Company's
business and results of operations.
The patient or third-party insurance payors, including employer-sponsored
health insurance plans, commercial insurance carriers and the Medicaid program,
are responsible for paying any co-payment amounts for approved services not paid
by Medicare (typically the annual deductible and 20% co-insurance), subject to
the specific coverage policies of such payors. The extent to which the Company
is actually paid the full co-payment amounts depends on the particular
responsible party. Each third-party payor, including Medicaid, makes payment
under contractual or regulatory reimbursement provisions which may or may not
cover the full 20% co-payment or annual deductible. Where the patient has no
third-party insurance or the third party insurance does not cover copayment or
deductible and is not eligible for Medicaid, the patient is responsible for
paying the co-payments or the deductible, which the Company frequently does not
collect fully despite reasonable collection efforts. In certain cases, the
Company through NMC has paid, or provided loans for the payment of, premiums for
supplemental medical insurance (under which Medicare Part B coverage is
provided) and/or for Medigap insurance (which covers co-payment amounts) on
behalf of financially needy patients. NMC believes that, in most cases, this
practice was lawful prior to the effective date of the Health Insurance
Portability and Accountability Act, Public Act 104-191 ("HIPAA"). 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. See "--Legal Proceedings--OIG Investigation" and
"--Legal Proceedings--Supplemental Medical Insurance." The government,
however, advised the Company orally that it is no longer pursuing this issue.
Furthermore, as a result of the passage of the HIPAA, 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.
Laboratory Tests. A substantial portion of SRM's net revenues are derived
from Medicare, which pays for clinical laboratory services provided to dialysis
patients in two ways. First, payment for certain routine tests is included in
the Composite Rate paid to the centers. As to such services, the dialysis
centers obtain the services from a laboratory and pay the laboratory for such
services. In accordance with industry practice, SRM usually provides such
testing services under capitation agreements with its customers pursuant to
which it bills a fixed amount per patient per month to cover the laboratory
tests included in the Composite Rate at the designated frequencies. In October
1994, the OIG issued a special fraud alert in which it stated its view that the
industry practice of providing tests covered by the Composite Rate at below fair
market value raised issues under the anti-kickback statutes, as such an
arrangement with an ESRD facility appeared to be an offer of something of value
(Composite Rate tests at below market value) in return for the ordering of
additional tests billed directly to Medicare. See "--Anti-kickback Statutes,
False Claims Act, Stark Law and Fraud and Abuse Laws" for a description of this
statute. LifeChem's use of capitation rates in billing for tests in the
Composite Rate is a subject of the OIG Investigation. See "--Legal Proceedings--
OIG Investigation" and "--Legal Proceedings--LifeChem."
Second, laboratory tests performed by SRM for Medicare beneficiaries that
are not included in the Composite Rate are separately billable directly to
Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts,
which are limited by national ceilings on payment rates, called National
Limitation Amounts ("NLAs"). Congress has periodically reduced the fee schedule
rates and the NLAs, with the most recent reductions in the NLAs occurring in
January 1998. (As part of the Balanced Budget Act of 1997, Congress lowered the
NLAs from 76% to 74% effective January 1, 1998.) Congress has also approved a
five year freeze on the inflation updates based on the Consumer Price Index
(CPI) for 1998-2002. In addition, LifeChem's practice of billing Medicare
directly for certain laboratory tests is a subject of the OIG Investigation and,
therefore, recent changes in such direct billing practices could materially
affect SRM's revenues. The issue of whether LifeChem inappropriately provided
to physicians information regarding the diagnosis codes required to assure
reimbursement for laboratory services is a subject of the OIG Investigation.
Medicare carriers have aggressively implemented Local Medical Review
Policies (LMRPs) limiting the coverage of certain clinical laboratory services
to an established list of diagnosis codes supporting medical necessity. These
LMRPs set forth medical necessity criteria based on diagnosis coding as well as
frequency of service provisions. Provisions in the Balanced Budget Act of 1997,
require the Secretary of HHS to adopt uniform coverage and payment policies for
laboratory testing by July 1, 1999. The adoption of additional coverage policies
would reduce the number of covered services and could materially affect SRM's
revenues. See "--Legal Proceedings--OIG Investigation" and "--Legal
Proceedings--LifeChem."
See "--Legal Proceedings--OIG Investigation" and "--Legal
Proceedings--LifeChem," for information relating to LifeChem's voluntary
disclosure of, and repayments associated with, certain billing problems and
related proceedings.
Laboratory tests may be ordered only by physicians based on the needs of
their patients. LifeChem services are promoted to physicians by sales
representatives who are Company employees. Such sales practices are a subject
of the OIG Investigation. See "--Legal Proceedings--OIG Investigation" and
"--Legal Proceedings--LifeChem."
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IDPN. Among its other services, SRM administers IDPN to chronic dialysis
patients who suffer from gastrointestinal malfunctions. These services are
covered by the Medicare program under the Medicare Parenteral and Enteral
Nutrition ("PEN") benefit, which requires extensive documentation and individual
physician certification of medical necessity for each patient. Treatment by IDPN
has been shown to increase the body content of vital, high biologic value
proteins like albumin. Deficiency of such proteins has been shown to be
associated with substantially higher risk of death, both long-term and
short-term (one year), among dialysis patients.
Prior to September 1993, IDPN claims were processed by two regional Medicare
specialty PEN carriers, which are private companies under contract with HCFA
responsible for processing claims and implementing certain Medicare benefits. In
late 1993, administration of Medicare PEN claims was transferred to four newly
created regional Durable Medical Equipment Regional Carriers ("DMERCs"). The
DMERCs implemented policies for IDPN reimbursement that resulted in a sharp
reduction in the number of IDPN claims approved for payment. As a result of
these payment reductions, several competitors of Homecare ceased providing IDPN.
Some of these competitors' patients subsequently became Homecare patients for
IDPN.
The Company believes that the reduction in IDPN claims paid by Medicare
represented an unauthorized policy coverage change. Accordingly, NMC, along with
certain other IDPN providers, is pursuing various administrative and legal
avenues, including administrative appeals, to address this problem. Although NMC
contends that its 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. See "Legal
Proceedings--IDPN Coverage Issues"
SRM has continued to provide IDPN therapy to malnourished dialysis
patients because the Company believes that to be the only clinically and
ethically responsible course of action. Analyses of data from the Company's PSP
database, both internal and as published in peer-reviewed medical journals,
indicate that malnutrition measured by a serum albumin value of 3.4 g/dl or less
is associated with significantly increased mortality risk in the chronic
dialysis population and that IDPN is effective in increasing serum albumin and
moderating mortality risk for such malnourished patients. These studies show
that when these initial albumin levels were 3.0 g/dl or less, IDPN treatment was
accompanied by a 70% improvement in survival. Similarly, when the initial
albumin was 3.4 g/dl or less, survival with IDPN treatment was improved by about
15%. IDPN treatment is therefore associated with improved odds of survival at
albumin concentration lower than 3.4 g/dl and the amount of improvement
increases as albumin concentrates falls. A statistical review conducted in March
1996 suggests that about 5% of dialysis patients suffer from albumin
concentration that is 3.0 g/dl or less.
Because the management of the Company has believed that the obligation of
medical professionals and companies that support medical care to ESRD patients
extends beyond the mere provision of paid-for-service to advocacy for needed
treatment, the Company has accepted increasing financial risk by continuing to
offer IDPN.
In April 1996, HCFA published new medical review policies which restrict
substantially the number of patients for whom IDPN is reimbursed by Medicare.
The new policies became final and effective for claims submitted on or after
July 1, 1996. NMC and other PEN providers continue to review to what extent
possible modifications to the new policies might be obtained in legislative or
administrative forums.
While the new policy permits continued coverage of IDPN and other PEN
therapies, and while the potential impact of the new policy is subject to
further analysis, NMC believes that the new policy has made it substantially
more difficult to qualify patients for future coverage by, among other things,
requiring certain patients to undergo onerous and/or invasive tests in order to
qualify for coverage. The new policy also eliminates all reimbursement for
infusion pumps. NMC, together with other interested parties, may seek to effect
certain changes in the new policy (other than with respect to the elimination of
pump revenues), and NMC has developed changes to its patient qualification
procedures in order to comply with the policy. This policy continues to
limit significantly the number of patients eligible for Medicare coverage of
IDPN and other PEN therapies.
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<PAGE> 28
If NMC is unable to collect its IDPN accounts receivable or if IDPN/PEN
coverage is reduced or eliminated, the Company's business, financial position
and results of operations would be materially adversely affected. See "--Legal
Proceedings--IDPN Coverage Issues."
See "--Legal Proceedings--OIG Investigation" for information on issues
raised by the OIG with respect to the provision of IDPN by Homecare and related
billing practices.
EPO. Since June 1, 1989, the Medicare program has provided coverage for
the administration of EPO to dialysis patients, with reimbursement made
separately from the Composite Rate. Medicare reimbursement for EPO was reduced
from $11.00 to $10.00 per 1,000 units, effective January 1, 1994. The OIG and
the Clinton Administration recently announced an intention to seek a 10%
reduction in Medicare reimbursement for EPO. Future changes in the EPO
reimbursement rate, inclusion of EPO in the Composite Rate, changes in the
typical dosage per administration or increases in the cost of EPO purchased by
NMC could adversely affect the Company's business and results of operations,
possibly materially. See "--Legal Proceedings--Qui Tam Actions."
Coordination of Benefits. Medicare entitlement begins for most patients in
the fourth month after the initiation of chronic dialysis treatment at a
dialysis center. During the first three months, considered to be a waiting
period, the patient or patient's insurance, Medicare or a state renal program
are responsible for payment.
Patients who have Medicare and are also covered by an employer group
health plan ("EGHP") are subject to a 30 month coordination period during which
the EGHP is the primary payor and Medicare the secondary payor. During this
coordination period the EGHP pays a negotiated rate or in the absence of such a
rate, the Company's standard rate or a rate defined by its plan documents. The
payments are generally higher than the Medicare Composite Rate. Insurance will
therefore cover a total of 33 months, the 3 month waiting period plus the 30
month coordination period.
Patients who already have Medicare based on age when they become ESRD
patients are dual eligible patients. If these patients have an EGHP that is
paying primary then these patients will have a 30 month coordination period. If
Medicare is already the primary payor when ESRD entitlement begins, Medicare
remains the primary payor, the EGHP is the secondary payor and no coordination
period will apply. Most patients over 65 are retired and fall into this second
category. Patients who do not have a health insurance retirement benefit plan
can purchase Medigap plans offered by AARP and many other insurance companies.
Possible Changes in Medicare. Because the Medicare program represents a
substantial portion of the federal budget, in order to reduce the federal
government deficit, and for other reasons, the U.S. Congress takes action in
almost every legislative session to modify the Medicare program by refining the
amounts payable to health care providers. Legislation or regulations may be
enacted in the future that could substantially modify or reduce the amounts paid
for services and products offered by the Company and its subsidiaries. In this
regard, both the executive branch and members of Congress from both parties have
recently proposed significant reductions in the Medicare program as part of
initiatives to reduce the federal government deficit. It is also possible that
statutes may be adopted or regulations may be promulgated in the future that
impose additional eligibility requirements for participation in the federal and
state health care programs. Such new legislation or regulations may adversely
affect the Company's businesses and results of operations.
ANTI-KICKBACK STATUTES, FALSE CLAIMS ACT, STARK LAW AND FRAUD AND ABUSE LAWS
Various operations of the Company are subject to federal and state
statutes and regulations governing financial relationships between health care
providers and potential referral sources and reimbursement for services and
items provided to Medicare and Medicaid patients. Such laws include the
anti-kickback statutes, health care fraud statutes, the False Claims Act, the
Stark Law, other federal fraud and abuse laws and similar state laws. These laws
apply because the Company's Medical Directors and other physicians with whom the
Company has financial relationships refer patients to, and order diagnostic and
therapeutic services from, the Company's dialysis centers and other operations.
As is generally true in the dialysis industry, at each dialysis facility a small
number of physicians account for all or a significant portion of the patient
referral base. An ESRD patient generally seeks treatment at a center that is
convenient to the patient and at which the patient's nephrologist has staff
privileges. Virtually all of the Company's centers maintain open staff
privileges for local nephrologists. The ability of the Company to provide
quality dialysis care and to otherwise meet the needs of patients and local
physicians is central to its ability to attract nephrologists to dialysis
facilities and to receive referrals from such physicians.
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<PAGE> 29
The federal government, many states and private third-party insurance
payors have made combating health care waste, fraud and abuse one of their
highest enforcement priorities, resulting in increasing resources devoted to
this problem. Consequently, the OIG and other enforcement authorities are
increasing scrutiny of arrangements between physicians and health care providers
for possible violations of the anti-kickback statutes or other federal laws.
Certain competitors of NMC who have faced federal criminal charges under these
statutes have entered into settlement agreements under which they have agreed to
pay substantial fines and penalties and have entered into corporate integrity
agreements. See "--Legal Proceedings" for information concerning the OIG's
investigations of NMC's activities under these provisions.
ANTI-KICKBACK STATUTES
The federal anti-kickback statutes establish criminal prohibitions against
and civil penalties for the knowing and willful solicitation, receipt, offer or
payment of any remuneration, whether direct or indirect, in return for or to
induce the referral of patients or the ordering or purchasing of items or
services payable in whole or in part under Medicare, Medicaid or other federal
health care programs. Certain federal courts have interpreted the anti-kickback
statutes broadly, for example as prohibiting payments intended to induce the
referral of Medicare business, irrespective of any other legitimate motives.
However, one federal appellate court, in a civil case, has found that a
violation of the anti-kickback statutes requires specific knowledge of the
anti-kickback statutes and specific intent to disobey the law. Federal district
courts in other circuits, however, have expressly declined to follow this
precedent. Sanctions for violations of the anti-kickback statutes include
criminal and civil penalties, such as imprisonment or criminal fines of up to
$25,000 per violation, and civil penalties of up to $50,000 per violation, and
exclusion from the Medicare or Medicaid programs and other federal programs. In
addition, certain provisions of federal criminal law that may be applicable
provide that if a corporation is found guilty of a criminal offense it may be
fined no more than twice any pecuniary gain to the corporation, or, in the
alternative, no more than $500,000 per offense.
Because of the breadth of the anti-kickback statutes, substantial
uncertainty has resulted regarding which practices violate the statutes and
which practices are legitimate. Three methods the OIG uses periodically to give
guidance to providers about the anti-kickback statutes are "safe harbor"
regulations, special fraud alerts and advisory opinions. The safe harbor
regulations, which were first promulgated in final form on July 29, 1991 and
have subsequently been amended, create safe harbors from prosecution, in
addition to the statutory exceptions, for certain business arrangements that
would otherwise be prohibited by the anti-kickback statutes. To date, a number
of regulatory safe harbors have been finalized and additional safe harbor
regulations are under consideration. An arrangement that satisfies all of the
standards of the applicable safe harbors is deemed not to be subject to
prosecution. Arrangements that fall outside of the safe harbors do not
necessarily violate the anti-kickback statutes; rather, such arrangements are
not afforded protection from prosecution and may be subject to scrutiny by
enforcement agencies. Special fraud alerts are intended to inform providers of
the OIG's enforcement priorities and to identify suspect practices the OIG
believes may violate the anti-kickback statutes. See "--Legal Proceedings" for
information concerning the OIG's investigations of certain of NMC's activities,
including Medical Director contracts and compensation, sales practices related
to the provision of laboratory services and payments made to dialysis
facilities in connection with "hang fees" relating to the provision of IDPN
services. Effective February 1997, the OIG must respond to requests for
advisory opinions concerning whether certain activities violate the
anti-kickback statutes. See "--Legal Proceedings--The Health Insurance
Portability and Accountability Act of 1996" for a reference to the advisory
opinion provision.
Some states also have enacted statutes similar to the anti-kickback
statutes, which may include criminal penalties, applicable to referrals of
patients regardless of payor source, and may contain exceptions different from
state to state and from those contained in the federal anti-kickback statutes.
FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS
The federal False Claims Act (the "False Claims Act") imposes civil
penalties for making false claims with respect to governmental programs, such as
Medicare and Medicaid, for services not rendered, or for misrepresenting actual
services rendered, in order to obtain higher reimbursement. Moreover, private
individuals may bring qui tam or "whistle blower" suits against providers under
the False Claims Act, which authorizes the payment of a portion of any recovery
to the individual bringing suit. Such actions are initially required to be filed
under seal pending their review by the Department of Justice. A few federal
district courts have recently interpreted the False Claims Act as applying to
claims for reimbursement that violate the anti- kickback statutes under certain
circumstances. The False Claims Act generally provides for the imposition of
civil penalties of $5,000 to $10,000 per claim and for treble damages, resulting
in the possibility of substantial financial penalties for small billing errors
that are replicated in a large number of claims, as each individual claim could
be deemed to be a separate violation of the False Claims Act. Criminal
provisions that are similar to the False Claims Act provide that if a
corporation is convicted of presenting a claim or making a statement that it
knows to be false, fictitious or fraudulent to any
29
<PAGE> 30
federal agency it may be fined not more than twice any pecuniary gain to the
corporation, or, in the alternative, no more than $500,000 per offense.
Some states also have enacted statutes similar to the False Claims Act
which may include criminal penalties, substantial fines, and treble damages.
THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
HIPAA was enacted in August 1996 and substantively changed federal fraud
and abuse laws by expanding their reach to all federal health care programs,
establishing new bases for exclusions and mandating minimum exclusion terms,
creating an additional exception to the anti-kickback penalties for risk-sharing
arrangements, requiring the Secretary of HHS to issue advisory opinions,
increasing civil money penalties to $10,000 (formerly $2,000) per item or
service and assessments to three times (formerly twice) the amount claimed,
creating a specific health care offense and related health fraud crimes, and
expanding investigative authority and sanctions applicable to health care fraud.
It also prohibits provider payments which could be deemed an inducement to
patient selection of a provider.
In addition to establishing minimum periods of exclusion from government
health programs, the statute authorizes exclusion of an individual with a direct
or indirect ownership or control interest in a sanctioned entity if the
individual "knows or should know" of the activity leading to the conviction or
exclusion of the entity or where the individual is an officer or managing
employee of the entity.
The law requires the Secretary of HHS to issue advisory opinions regarding
what constitutes a violation under the anti-kickback statutes and whether an
arrangement satisfies a statutory exception or regulatory safe harbor to the
anti-kickback law. While applicable only to the party requesting the advisory
opinion, these opinions may provide general guidance and insight.
Significantly, the law expands criminal sanctions for health care fraud
involving any governmental or private health benefit program, including freezing
of assets and forfeiture of property traceable to commission of a health care
offense.
BALANCED BUDGET ACT OF 1997
The Balanced Budget Act of 1997 ("the BBA") contained sweeping adjustments
to both the Medicare and Medicaid programs, as well as further expansion of the
fraud and abuse laws. Specifically, the BBA created a civil monetary penalty for
violations of the federal anti-kickback statute whereby violations will result
in damages equal to three times the amount involved as well as a penalty of
$50,000 per violation. In addition, the new provisions expanded the exclusion
requirements so that any person or entity convicted of three health care
offenses is automatically excluded from federally funded health care programs
for life. Individuals or entities convicted of two offenses are subject to
mandatory exclusion of 10 years, while any provider or supplier convicted of any
felony may be denied entry into the Medicare program by the Secretary of HHS if
deemed to be detrimental to the best interests of the Medicare program or its
beneficiaries.
The BBA also provides that any person or entity that arranges or contracts
with an individual or entity that has been excluded from a federally funded
health care program will be subject to civil monetary penalties if the
individual or entity "knows or should have known" of the sanction. The BBA also
requires that a variety of providers, including home health agencies, equipment
suppliers and rehabilitation agencies, post a $50,000 surety bond in an effort
to deter "sham" providers and suppliers from entering the Medicare program. In
addition, the BBA requires HCFA to issue advisory opinions in response to
inquiries as to whether physician referrals for designated health services are
prohibited by the Stark law. While applicable only to the party requesting the
advisory opinion, these opinions may provide general guidance and insight.
Finally, the BBA creates a Medicare+Choice Program that is designed to
provide a variety of options to Medicare beneficiaries, almost all of whom may
enroll in a Medicare+Choice Plan. The options include provider sponsored
organizations, coordinated care plans, HMOs with and without point of service
options involving out-of-network providers, and medical savings accounts offered
as a demonstration project.
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<PAGE> 31
STARK LAW
The original Stark Law, known as "Stark I" and enacted as part of the
Omnibus Budget Reconciliation Act of 1989, prohibits a physician from referring
Medicare patients for clinical laboratory services to entities with which the
physician (or an immediate family member) has a financial relationship, unless
certain exceptions apply. Sanctions for violations of the Stark Law may include
denial of payment, refund obligations, civil monetary penalties and exclusion of
the provider from the Medicare and Medicaid programs. The Stark Law prohibits
the entity receiving the referral from filing a claim or billing for services
arising out of the prohibited referral.
Provisions of OBRA 93, known as "Stark II," amended Stark I to revise and
expand upon various statutory exceptions, to expand the services regulated by
the statute to a list of "Designated Health Services," and to prohibit Medicaid
referrals where a financial relationship exists. The provisions of Stark II
generally became effective on January 1, 1995. The additional Designated Health
Services include: physical therapy services; occupational therapy services;
radiology services, including magnetic resonance imaging, computer axial
tomography scans and ultrasound services; durable medical equipment and
supplies; parenteral and enteral nutrients, equipment and supplies; home health
services; outpatient prescription drugs; and inpatient and outpatient hospital
services. The Company has determined that the Stark Law does apply to
dialysis-related Designated Health Services not paid for under the Composite
Rate as well as to certain services provided by SRM's renal support business.
However, pursuant to proposed regulations implementing Stark II, published on
January 9, 1998, erythropoietin (EPO) provided to ESRD patients as part of a
renal dialysis treatment plan is specifically exempted as a Designated Health
Service. Further, in the proposed regulations discussing Durable Medical
Equipment, ESRD equipment and supplies are excluded from coverage as a
Designated Health Service because the ESRD benefit is distinguished under
Medicare from the DME benefit. Outpatient prescription drugs and in-hospital
treatments would also be excluded.
Prior to the effective date of Stark II, NMC had compensated the
substantial majority of its Medical Directors on the basis of a percentage of
net pre-tax earnings of the facilities. In response to Stark II, since January
1, 1995, Dialysis Services has compensated its Medical Directors on a fixed
compensation arrangement intended to comply with the requirements of Stark II.
The compensation of Medical Directors is a subject of the OIG Investigation.
See "--Legal Proceedings--OIG Investigation" and "--Medical Director
Compensation."
On August 14, 1995, HCFA promulgated a final regulation implementing Stark
I and its statutory restrictions on referrals for clinical laboratory services.
One of the provisions of the regulation significantly affecting dialysis
providers is HCFA's interpretation that the Stark Law applies to
dialysis-related laboratory services. However, in proposed regulations published
on January 9, 1998, HCFA proposed a regulatory exception for clinical laboratory
services paid for as part of the Composite Rate. The proposed Stark II
regulations follow the provisions set forth in the Stark I regulation in that
any service included as part of the Composite Rate is not considered a
Designated Health Service. The government has not yet finalized the Stark II
regulations.
Several states in which the Company operates have enacted self-referral
statutes similar to the Stark Law. Such state self-referral laws may apply to
referrals of patients regardless of payor source and may contain exceptions
different from each other and from those contained in the Stark Law.
OTHER FRAUD AND ABUSE LAWS
The Company's operations are also subject to a variety of other federal
and state fraud and abuse laws, principally designed to ensure that claims for
payment to be made with public funds are complete, accurate and fully comply
with all applicable program rules.
The civil monetary penalty provisions are triggered by violations of
numerous rules under the statute, including the filing of a false or fraudulent
claim and billing in excess of the amount permitted to be charged for a
particular item or service. As a result of the HIPPA amendments, monetary
penalties of up to $10,000 plus three times the amount of the claim for each
item or service for which an improper claim for payment was made, may be
imposed, resulting in the possibility of substantial financial penalties for
small billing errors that are replicated in a large number of claims. Violations
may also result in suspension of payments, exclusion from the Medicare and
Medicaid programs, as well as other federal health care benefit programs, or
forfeiture of assets.
In addition to the statutes described above, other criminal statutes may
be applicable to conduct that is found to violate any of the statutes described
above.
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HEALTH CARE REFORM
Health care reform is considered by many in the U.S. to be a national
priority. Members of Congress from both parties and the executive branch are
continuing to consider many health care proposals, some of which are
comprehensive and far-reaching in nature. As noted above, the Medicare+Choice
Program was developed as part of the amendments in the BBA. This program is
designed to expand the options for Medicare beneficiaries and may have a
significant impact on the manner in which health care is delivered in the
future. Several states are also currently considering health care proposals. It
cannot be predicted what additional action, if any, the federal government or
any state may ultimately take with respect to health care reform or when any
such action will be taken. Health care reform may bring radical changes in the
financing and regulation of the health care industry, which could have a
material adverse effect on the business of the Company and the results of its
operations.
CHANGES IN THE HEALTH CARE INDUSTRY.
Significant changes in the health care industry are occurring as a result
of market driven forces that are creating significant downward pressure on
reimbursement rates that the Company and its subsidiaries will receive for their
services and products. A substantial portion of third-party health insurance is
now furnished through some type of managed care plan, including HMOs.
Managed care plans are increasing their market share, and this trend may
accelerate as a result of the merger and consolidation of providers and payors
in the health care industry and as a result of the discussions among members of
Congress and the executive branch regarding ways to increase the number of
Medicare and Medicaid beneficiaries served through such managed care plans. At
the same time, private purchasing cooperatives and the government are attempting
to limit premium increases for these plans. In such an environment, controlling
underlying medical costs is the only vehicle for ensuring satisfactory managed
care plan margins. Managed care plans have been aggressive in seeking lower
reimbursement levels for virtually all providers. For some populations, plans
have sought to limit their own financial risk by negotiating capitation
agreements under which providers assume responsibility for delivering a range of
services at a fixed payment amount. Capitation effectively "locks in" a base of
patients for providers who accept such arrangements. If substantially more
patients of the Company join managed care plans or if such plans reduce
reimbursements or capitate competitor companies, the Company's business and
results of operations could be adversely affected, possibly materially.
ITEM 2. PROPERTIES
The table below describes the Company's principal facilities as of the
date hereof.
<TABLE>
<CAPTION>
FLOOR AREA
(APPROXIMATE CURRENTLY OWNED
LOCATION SQUARE FEET) OR LEASED USE
-------- ------------ --------------- ---
<S> <C> <C> <C>
Lexington, Massachusetts 200,000 leased Corporate headquarters and administration.
Walnut Creek, California 85,000 leased Warehousing; machine manufacture and assembly.
Ogden, Utah 334,000 owned Production of disposable products.
Delran, New Jersey 42,000 leased Manufacture of liquid hemodialysis concentrate
solutions.
Perrysburg, Ohio 35,000 leased Manufacture of dry hemodialysis concentrates.
Livingston, California 32,000 leased Manufacture of liquid hemodialysis concentrate
solutions.
McAllen, Texas 92,856 leased/ Manufacture of bloodlines.
owned(1)
Reynosa, Mexico 48,745 owned Manufacture of bloodlines.
</TABLE>
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<PAGE> 33
<TABLE>
<S> <C> <C> <C>
Fremont, California 72,000 leased Clinical laboratory testing
Woodland Hills, California 24,000 leased Clinical laboratory testing
Rockleigh, New Jersey 85,000 leased Clinical Laboratory testing
</TABLE>
- ----------
(1) Land is leased, building is owned.
The lease on the Walnut Creek facility expires in 2002. The Company owns
one warehouse and leases 18 warehouses throughout the U.S. These warehouses are
used as regional distribution centers for Dialysis Services' peritoneal dialysis
products business. All such warehouses are subject to leases with remaining
terms not exceeding four years. At December 31, 1998, Dialysis Services
distributed its products through 25 warehouse facilities
The Company leases its corporate headquarters in Lexington, Massachusetts.
This lease expires on October 31, 2007.
The Company's subsidiaries lease most of the dialysis centers, and
manufacturing, laboratory, distribution and administrative and sales facilities
in the U.S. on terms which the Company believes are customary in the industry.
The Company's subsidiaries own those dialysis centers and manufacturing
facilities that it does not lease.
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<PAGE> 34
ITEM 3. 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
and 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 the Company 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 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.
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<PAGE> 35
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 understands that the government has utilized a grand jury
to investigate these matters. 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, Medicaid, CHAMPUS and other government and
commercial payors, 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 testing procedures, marketing,
customer relationships, competition, 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, a 1997 review of dialysis
facilities' standing orders, and the provision of discounts on products from
NMC's products division, grants, equipment and entertainment to customers; and
(d) Homecare and, in particular, information concerning IDPN utilization,
documentation of claims and 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, it is
expected that the government will assert that NMC has violated multiple
statutory and regulatory provisions. Additionally, nine 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.
During the appropriately three and one-half years since the initial
subpoenas were served NMC and the government have met periodically to discuss
issues in connection with the OIG Investigation, including theories of
liability. Recently, NMC and the government have begun to explore the
possibility of settling the matters which are encompassed by the OIG
Investigation and, as referenced below, have reached and agreement in principle
in connection with the diagnostics investigation matter. There can be no
assurance that any of the other matters subject to the OIG Investigation will be
settled. If, however, one or more of the matters encompassed by the OIG
Investigation is settled, it may result in NMC acknowledging that its past
practices violated federal statutes, as well as NMC incurring substantial civil
and criminal financial penalties which could have a material adverse effect on
the Company. If one or more of these matters is not settled, the government may
be expected to initiate litigation in which it would seek substantial civil and
criminal financial penalties and other sanctions that could result in the
exclusion of NMC and its subsidiaries from the Medicare program, Medicaid
program and other federal health care programs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Contingencies."
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<PAGE> 36
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 Dialysis Services' 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. Dialysis Services 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, Dialysis Services 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, Dialysis Services 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.
Dialysis Services 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 Dialysis Services
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 Dialysis Services 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 Dialysis Services' compensation arrangements with its Medical Directors
in connection with their audits of the costs claimed by Dialysis Services; that
the OIG stated in its audit reports that, with the exception of certain
technical issues, Dialysis Services had complied with applicable Medicare laws
and regulations pertaining to the ESRD program; and that Dialysis Services
reasonably relied on these audit reports in concluding that its program for
compensating Medical Directors was lawful. There has been no
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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 assert
that those specific arrangements were or are unlawful.
The government is also investigating whether Dialysis Services' 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, medical service providers like Dialysis
Services receive overpayments from Medicare intermediaries and other payors for
services that they provide to 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 Dialysis Services 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. Dialysis Services'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
Dialysis Services 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 Dialysis Services 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 as well as credit balances of other payors.
The government is also investigating whether Dialysis Services failed to
disclose Medicare overpayments that resulted from Dialysis Services' 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. Dialysis Services 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 Dialysis Services 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
Dialysis Services 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 HIPAA, the
Company terminated making such payments on
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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. In addition, the government has indicated
that it is investigating the method by which NMC made Medigap payments on behalf
of its indigent patients.
OVERPAYMENTS FOR HOME DIALYSIS SERVICES
NMC acquired HIC, an in-center and home dialysis service provider, in 1993.
At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC
had received payments for home dialysis services in excess of the Medicare
reasonable charge for services rendered prior to February 1, 1990. NMC settled
the HCFA claim against HIC in 1994. The government is investigating whether the
settlement concerning the alleged overpayments made to HIC resolved all issues
relating to such alleged overpayments. The government is also investigating
whether 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.
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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 Dialysis Services 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 Dialysis Services 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 products or supplies, the
provision of computer equipment, the provision of money for the purchase of
computer equipment, the provision of research grants and the provision of
entertainment to customers. NMC has identified certain instances in which
benefits were provided to customers who purchased medical products from NMC
Medical Products Inc., NMC's products company, and used LifeChem's laboratory
services. The government asserts that the provision of such benefits violates,
among other things, the anti-kickback statutes. In December 1998, the former
Vice President of Sales responsible for NMC's laboratory and products divisions
plead guilty to the payment of illegal kickbacks to obtain laboratory business
for NMC. In February 1999, the former President of NMC Medical Products, Inc.,
was indicted by the government for the payment of these same and/or similar
kickbacks.
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 in connection with LifeChem business and testing practices. 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. Recently the government served investigative subpoenas
requiring NMC to update its production on the above issues and to produce
contract files for twenty-three identified dialysis clinic customers. The
government is investigating each of these areas, and asserts that LifeChem
and/or NMC have violated the False Claims Act and/or the Anti-Kickback Statute
through the test ordering, paneling, requisitioning, utilization, coding,
billing and auditing practices described above.
IDPN
Administration kits. As discussed above, one of the activities of
SRM is to provide IDPN therapy to dialysis patients at both NMC-owned
facilities and at facilities owned by other providers. IDPN therapy was
provided by Homecare prior to its divestiture. 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
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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 asserts that NMC submitted false claims for administration
kits during the period from 1988 to June 30, 1996, and that Homecare's billing
for administration kits during this period violated, 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 the Company
cannot represent that Homecare followed this policy in every instance. The
government is investigating the propriety of Homecare's billings for infusion
pumps and IV poles and asserts that Homecare's billings violate the False
Claims Act.
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 Dialysis Services dialysis centers, the fee was $30 per administration,
based upon internal Dialysis Services 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. The
Company has identified instances in which other payments and amounts beyond
that reflected in a contract were paid to these third-party centers. The
Company has stopped paying "hang fees" to both Dialysis Services 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 asserts 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, the Company has been an
industry leader in identifying situations in which IDPN therapy is beneficial
to ESRD patients. It is the policy of the Company to seek Medicare reimbursement
for IDPN therapy only when it is prescribed by a patient's treating physician
and when it believes that the
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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%. The Company
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. Beginning in 1994 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. The government
asserts that Homecare submitted IDPN claims for individuals who were not
eligible for coverage and/or with inadequate documentation of eligibility.
The Company believes that it has presented to the government substantial
defenses which support NMC's interpretation of coverage rules of IDPN as HCFA
and its carriers published and explained them, and which demonstrated that HCFA
and its carriers improperly implemented unpublished, more restrictive criteria
after 1993. Nevertheless, the government is expected to assert in the OIG
Investigation that, on a widespread basis, NMC submitted and received payments
on claims for IDPN to Medicare for patients who were not eligible for coverage,
and for whom the documentation of eligibility was inadequate.
In addition, the government asserts that, in a substantial number of cases,
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 government continues to investigate
the IDPN claims.
QUI TAM ACTIONS
The Company and NMC have become aware that nine 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 violated the False Claims Act in connection with the
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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
asserts 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 asserts 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.
The ninth qui tam was filed in the United States District Court for the
District of Massachusetts in 1994 and was disclosed to the Company in February
1999. It alleges among other things that NMC violated the False Claims Act and
the Anti-Kickback Statute in connection with certain billing and documentation
practices regarding IDPN therapy, home oxygen therapy and certain medical
billings in NMC's Chicago office.
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Each of the qui tam complaints asserts 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.
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. Neither the entering into of the OIG
Agreements nor the providing of the Primary Guarantee and the $150 million
letter of credit is an admission of liability by any party with respect to the
OIG Investigation, nor does it indicate the liability which may result
therefrom.
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.
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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 has made extensive document production in response to the
subpoena. The Company and the government have been negotiating a resolution to
this matter, and negotiations have progressed to the point of a possible
settlement. The Company and the government have reached an agreement in
principle in which, among other things, the government has agreed to release
the Company from liability in this matter in exchange for a payment of
approximately $16.5 million from the Company. The Company and the government
are currently negotiating the terms of a settlement agreement. The agreement is
not final. For this reason, the eventual outcome of this matter, its duration,
and its effect, if any, on NMC or the Company cannot be predicted at this time.
The Company divested Non Renal Diagnostic Services on June 26, 1998. 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.
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 and have
recently conducted discussions 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.
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<PAGE> 45
During the period from 1991 through 1993, the FDA issued warning letters
concerning four of the six Dialysis Products 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 Dialysis Products's manufacturing facilities in the U.S.
Under the Consent Decree, Dialysis Products 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.
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
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<PAGE> 46
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 1997, the Company, NMC, and certain named NMC subsidiaries, 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. This matter is at a relatively early stage in
the litigation process, with substantial discovery just beginning 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 continue to vigorously defend
the lawsuit. It is also possible that one or more other private payors may
assert 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. HCFA further proposed that
its new instruction be effective retroactive to August 1993, the effective date
of OBRA 93.
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
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<PAGE> 47
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 and 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, and based on its finding, the Court also permanently
enjoined HCFA from enforcing and applying the April 1995 rule retroactively
against NMC. The Court took no action on HCFA's motion for summary judgment
pending completion of the outstanding discovery. On October 5, 1998 NMC filed
it's own motion for summary judgment requesting that the Court declare HCFA's
prospective application of the April 1995 rule invalid and permanently enjoin
HCFA from prospectively enforcing and applying the April 1995 rule. The Court
has not yet ruled on the parties' motions. The Company believes that the
Court's favorable rulings to date 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. 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 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 NMC of approximately $120 million attributable to all periods prior to
December 31, 1995. Also, in such event, the Company's business, financial
position and results of operations would be materially adversely affected.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In 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 and certain corporate records and personnel material. On
December 22, 1998, the Commission, in respect of the above-mentioned
investigation, (a) filed a civil complaint against Grace in the United States
District Court in Miami, Florida, alleging that from 1991 through 1995, Grace
inappropriately used certain accounting reserves to report inaccurate results
for Grace and its Health Care Group, the bulk of which was comprised of Grace's
then wholly owned subsidiary NMC, and (b) instituted in respect of substantially
similar allegations public administrative and cease-and-desist proceedings
against seven former personnel of Grace and NMC. NMC and the Company are neither
defendants (or otherwise parties) in the Commission's above-mentioned civil
action nor respondents (or otherwise parties) in the Commission's
above-mentioned administrative proceedings. While there can be no assurance, the
Company 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
SRM administers IDPN therapy to chronic dialysis patients who suffer from
severe gastrointestinal malfunctions. IDPM therapy was provided by Homecare
prior to its divestiture. 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
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<PAGE> 48
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.
NMC was successful in pursuing these claims through the administrative
process, receiving favorable decisions from Administrative Law Judges in more
than 80% of its cases. In early 1998, a group of claims which had been ruled on
favorably were remanded by the Medical Appeals Council to a single
Administrative Law Judge (the "ALJ") with extensive instructions concerning the
review of these decisions. A hearing was scheduled on the remanded claims to
take place in July, but later postponed until October 1998.
Prior to the July hearing date, the United States Attorney for the District
of Massachusetts requested that the hearing be stayed pending resolution of the
OIG Investigation, on the basis that proceeding could adversely effect the
government's investigation as well as the government's efforts to confirm its
belief that these claims are false. Prior to the ALJ issuing a decision on the
stay request, the U.S. Attorney's Office requested that NMC agree to a stay in
the proceedings in order to achieve a potential resolution of the IDPN claims
subject to the OIG Investigation as well as those which are subject to the
administrative appeals process. NMC has agreed to this request, and together
with the U.S. Attorney's Office has requested a stay. The ALJ has agreed to
this request in order to allow the parties the opportunity to resolve both the
IDPN claims which are the subject of the OIG Investigation and the IDPN claims
which are the subject of the administrative proceedings. At this time, it is
not possible to determine whether NMC and the government will be able to
resolve issues surrounding the IDPN claims. Further proceedings on all other
government appeals from the Administrative Law Judges' decisions favorable to
the Company have also been stayed by agreement of the parties.
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 December 31, 1998.
If NMC is unable to collect its IDPN receivable, either through the
administrative appeal process or through negotiation, 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. See
Notes to Consolidated Financial Statements - Note 8 - "Discontinued Operations."
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
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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 settled in January 1998 without the
contribution of any payment in connection with the settlements by the Company or
any of its affiliates.
ADMINISTRATIVE APPEALS
The Company regularly pursues various administrative appeals relating to
reimbursement issues in connection with its dialysis facilities. One such appeal
consists of a challenge to the Medicare regulation which capped reimbursement
for the bad debts incurred by dialysis facilities. In 1998, the United States
Court of Appeals for the District of Columbia ruled in favor of the Company in
connection with the bad debt issue, holding that the Secretary of Health & Human
Services had not adequately justified the bad debt regulation, and ruling that
the government's order adopting the rule was arbitrary and capricious. The Court
of Appeals remanded the matter to the Secretary to provide a more adequate
explanation of the bad debt cap or to abandon it. Subsequently, the Court
modified its holding to continue the bad debt regulation in effect pending
remand. The Company has recently begun settlement discussions with the
government in an attempt to recover reimbursement for disallowed bad debt
expenses. The Company cannot predict the outcome of these discussions.
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
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
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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. For
additional related information, see "Item 1, 'Business -- Regulatory and Legal
Matters.'"
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1998.
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the Company's common stock is held by Fresenius Medical Care. The
NMC Credit Facilities and the indentures pertaining to the Senior Subordinated
Notes of Fresenius Medical Care and one of its subsidiaries impose certain
limits on the Company's payment of dividends. See Item 7 - "Managements
Discussion and Analysis of Financial Condition and Results of Operations".
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------- -------------------------------------
Three Nine
Months Months
Year Ended Year Ended Ended Ended
(DOLLARS IN MILLIONS, EXCEPT SHARES AND PER Dec. 31, Dec. 31, Dec. 31, Sept. 30, Year Ended December 31,
SHARE DATA) 1998 1997 1996 1996 1995 1994
---------- ---------- -------- --------- ------- ---------
STATEMENT OF OPERATIONS DATA
CONTINUING OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 2,571 $ 2,166 $ 505 $ 1,615 $ 2,033 $ 1,818
COST OF SALES 1,707 1,456 340 969 1,176 1,027
------- ------- ------- ------- ------- -------
GROSS PROFIT 864 710 165 649 857 791
SELLING, GENERAL AND ADMINISTRATIVE AND
RESEARCH AND DEVELOPMENT 529 452 106 501 625 561
------- ------- ------- ------- ------- -------
OPERATING INCOME 335 258 59 145 232 230
INTEREST EXPENSE (NET) 209 176 43 16 26 16
------- ------- ------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING FOR START UP COSTS 126 80 16 129 206 214
INCOME TAX EXPENSE 74 46 11 66 109 112
------- ------- ------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR START UP COSTS $ 52 $ 34 $ 5 $ 63 $ 97 $ 102
------- ------- ------- ------- ------- -------
DISCONTINUED OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAXES (9) (14) (2) -- -- --
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS, NET OF INCOME TAX BENEFIT (97) -- -- -- -- --
------- ------- ------- ------- ------- -------
LOSS FROM DISCONTINUED OPERATIONS (106) (14) (2) -- -- --
------- ------- ------- ------- ------- -------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR START UP COSTS, NET OF TAX BENEFIT (5) -- -- -- -- --
NET INCOME (LOSS) $ (59) $ 20 $ 3 $ 63 $ 97 $ 102
======= ======= ======= ======= ======= =======
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE:
CONTINUING OPERATIONS $ 0.57 $ 0.37 $ 0.06 $ 0.66 $ 1.01 $ 1.08
DISCONTINUED OPERATIONS (1.18) (0.15) (0.02) -- -- --
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (0.05) -- -- -- -- --
NET INCOME (0.66) 0.22 0.04 0.66 1.01 1.08
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK AND COMMON STOCK EQUIVALENTS:
PRIMARY (000'S) 90,000 90,000 90,000 95,188 95,822 93,936
</TABLE>
<TABLE>
<CAPTION>
Successor Predecessor
----------------------------------------------------------
At December 31, At December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
WORKING CAPITAL $ 294 $ 394 $ 282 $ 125 $ 145
TOTAL ASSETS 4,613 4,771 4,370 1,998 1,644
TOTAL LONG TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 1,014 1,622 1,438 35 17
STOCKHOLDERS' EQUITY 1,949 1,987 1,764 1,363 1,159
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company. The discussion should be read in conjunction with the
financial statements included elsewhere in this document.
This section contains certain forward-looking statements that are subject
to various risks and uncertainties. Such statements include, without limitation,
discussions concerning the outlook of the Company, government reimbursement,
future plans and management's expectations regarding future performance. Actual
results could differ materially from those contained in these forward-looking
statements due to certain factors including, without limitation, changes in
business, economic and competitive conditions, regulatory reforms, foreign
exchange rate fluctuations, uncertainties in litigation or investigative
proceedings, and the availability of financing. These and other risks and
uncertainties, which are more fully described elsewhere in this Item 7 and in
the Company's reports filed from time to time with the Commission, could cause
the Company's results to differ materially from the results that have been or
may be projected by or on behalf of the Company.
OVERVIEW
The Company 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 the Company's history, a significant portion of the Company'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.
The Company derives a significant portion of its health care services net
revenues from Medicare, Medicaid and other government health care programs
(approximately 60% in 1998). The reimbursement rates under these programs,
including the Composite Rate, the reimbursement rate for EPO (which accounted
for approximately 26% of dialysis service's domestic net revenues in 1998), 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.
The Company'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 the Company
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. The Company'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.
The Company 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 the Company receives for its services and products.
53
<PAGE> 54
RESULTS OF OPERATIONS
The following table summarizes certain operating results of the Company by
principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Dialysis Products to Dialysis
Services. The table presents the year 1996 where there is a combination of 9
months of operations on a predecessor basis and 3 months of operations on a
successor basis. The entire year for 1997 and 1998 operations was on a successor
basis. These bases of accounting are not entirely compatible. In particular, the
successor basis has a significant increase in interest expense and depreciation
and amortization when compared to the predecessor basis. 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>
YEAR ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN MILLIONS)
1998 1997 1996
------- ------- -------
NET REVENUES
<S> <C> <C> <C>
Dialysis Services ............................. $2,133 $1,770 $1,560
Dialysis Products ............................. 660 627 368
Intercompany Eliminations ..................... (222) (231) (211)
------ ------ ------
Total Net Revenues ................................ $2,571 $2,166 $1,717
====== ====== ======
Operating Earnings:
Dialysis Services ............................. $ 340 $ 265 $ 258
Dialysis Products ............................. 107 67 40
------ ------ ------
Total Operating Earnings .......................... 447 332 298
------ ------ ------
Other Expenses:
General Corporate ............................. $ 108 $ 70 $ 69
Research & Development ........................ 4 4 3
Interest Expense, Net ......................... 209 178 49
------ ------ ------
Total Other Expenses .............................. 321 252 121
------ ------ ------
Earnings Before Income Taxes and
cumulative effect of change ................... 126 80 177
in accounting for start up costs
Provision for Income Taxes ........................ 74 46 75
------ ------ ------
Net earnings from continuing operations
before cumulative effect of change
in accounting for start up costs ............... $ 52 $ 34 $ 102
------ ------ ------
Discontinued Operations:
Net Revenues .................................. $ 121 $ 283 $ 363
====== ====== ======
Loss before income taxes ...................... (14) (21) (5)
Benefit for income Taxes ...................... (5) (7) (2)
------ ------ ------
Loss from operations .......................... (9) (14) (3)
------ ------ ------
Loss on disposal before income taxes........ (140) -- --
Income tax benefit ......................... (43) -- --
------ ------ ------
Loss on disposal ........................... (97) -- --
------ ------ ------
Total Loss on Discontinued Operations ............. $ (106) $ (14) $ (3)
====== ====== ======
Cumulative effect of change in accounting
for start up costs, net of tax benefits ........ (5) -- --
------ ------ ------
------ ------ ------
Net Income/(loss) ................................. $ (59) $ 20 $ 99
====== ====== ======
</TABLE>
54
<PAGE> 55
1998 COMPARED TO 1997
Net revenues from continuing operations for 1998 increased by 19% ($405
million) over 1997. Net earnings from continuing operations before cumulative
effect of change in accounting for start up costs for 1998 increased 53% ($18
million) over 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 1998 increased by 21% ($363 million)
over 1997, primarily as a result of a 14% 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
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 year revenue
impact of Spectra Laboratories acquired by the Company in June 1997, partially
offset by the decreased number of patients of other dialysis providers serviced
by the Company, during the third and fourth quarter of 1998, as competitors
consolidate lab activity.
Dialysis Services operating earnings for 1998 increased by 28% ($75
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 1998 increased by 5% ($33 million) over
the comparable period of 1997. This is due to increased sales of dialyzers ($26
million), machines ($13 million), concentrates ($5 million), partially offset by
decreased sales of bloodlines ($3 million), peritoneal products ($3 million),
and other products ($5 million).
Dialysis Products operating earnings for 1998 increased by 60% ($40
million) over 1997. This is primarily due to revenue growth and improvements in
gross margin resulting from manufacturing efficiencies from increased production
volume.
OTHER EXPENSES
The Company's other expenses for 1998 increased by 27% ($69 million) over
1997. General corporate expenses increased by $38 million primarily due to
foreign exchange gains ($28 million) realized in 1997, increased insurance and
legal expenses ($6 million) and other cost increases ($4 million). Research and
development expenses for 1998 were essentially the same as 1997. Interest
expense for 1998 increased by $31 million over 1997 mainly due to an increase in
debt to finance acquisitions.
INCOME TAX RATE
The effective tax rate from continuing operations for 1998 (58.9%) is
higher than the rate for 1997 (57.4%), due primarily to a rate reduction in 1997
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 businesses as discontinued operations. The Company sold both its
Non-Renal Diagnostic Services business and its Homecare business on, June 26,
1998 and July 29, 1998 respectively. In connection with the sale of Homecare,
the Company retained the assets and the operations associated with the delivery
of IDPN and records, for accounting purposes, its activity as part of
discontinued operations. 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 1998
with a net after tax loss of $9 million.
55
<PAGE> 56
1997 COMPARED TO 1996
Net revenues from continuing operations for 1997 increased by 26% ($449
million) over 1997. Net earnings from continuing operations for 1997 decreased
67% ($68 million) as compared to 1996 primarily as a result of increased
amortization and interest expenses partially offset by increased operating
earnings of dialysis products and dialysis services.
DIALYSIS SERVICES
Dialysis Services net revenues for 1997 increased by 14% ($210 million)
over 1996, which included a favorable OBRA adjustment ($10 million), primarily
as a result of a 15% increase in the number of treatments provided worldwide.
This increase was partially offset by a decline in the ancillary revenue rate
($16 million). The treatment increase was largely due to an increase in the
number of dialysis centers (715 at December 31, 1997 as compared to 623 at
December 31, 1996). Laboratory testing revenues for 1997 increased by $10
million over 1996. This was primarily due to revenues of Spectra Laboratories
($29 million), acquired by FMCH in June 1997, partially offset by decreases in
testing volume of LifeChem ($12 million) and Renal Diagnostics ($7 million).
Dialysis Services operating earnings for 1997 increased by 3% ($7 million)
over 1996. This was primarily due to the increase in treatment volume partially
offset by the aforementioned OBRA 93 adjustment in 1996, decreases in volume of
LifeChem laboratory and Renal Diagnostics testing and increases to personnel
costs. Spectra Laboratories operating earnings for 1997 were $4 million.
DIALYSIS PRODUCTS
Dialysis Products net revenues for 1997 increased by 70% ($259 million)
over 1996, primarily due to a $267 million increase in revenues for FUSA, which
was contributed to the Company by FMC effective October 1, 1996. Included in the
increased sales of FUSA, was a $30 million increase in product sales between
FUSA and Dialysis Services, which has been eliminated for financial reporting.
Dialysis Products operating earnings for 1997 increased by 68% ($27
million) over 1996, primarily due to increased operating earnings of FUSA ($22
million). NMC's Renal Product Division's operating earnings increased by
approximately $5 million during 1997, primarily due to a reduction in operating
expenses and distribution costs ($2 million) as well as one-time charges
recorded during 1996 for legal expenses ($3 million).
OTHER EXPENSES
The Company's other expenses for 1997 increased by 108% ($131 million)
over 1996. General corporate expense increased by 1% ($1 million) primarily due
to increased amortization expenses associated with the revaluation of intangible
assets at the time of the Merger ($56 million), almost entirely offset by
reduced legal expenses ($12 million) favorable savings in foreign exchange ($27
million), and other cost reductions ($16 million). Research and development
expenses for 1997 increased by $1 million over 1996. Interest expense for 1997
increased by $129 million over 1996 mainly due to the large amount of bank debt
incurred to finance the merger and the increase in interest expense associated
with FUSA ($7 million).
INCOME TAX RATE
The effective tax rate from continuing operations was 57.4% for 1997 as
compared with 42.5% in 1996. The effective income tax rates for 1997 and 1996
were significantly higher than the combined statutory rates due primarily to the
large amount of non-deductible goodwill incurred as a result of the Merger in
1996 and 1997, partially offset by a reduction in the FUSA valuation allowance.
DISCONTINUED OPERATIONS
On June 1, 1998, the Company classified its Non Renal Diagnostic Services
and Homecare divisions as discontinued operations. The Company sold both its Non
Renal Diagnostic Services division and its Homecare division on June 26, 1998
and July 29, 1998, respectively. For comparison purposes, 1997 and 1996 results
for these businesses are shown as discontinued operations. The discontinued
operations revenues were $283 million and $363 for 1997 and 1996, respectively,
with a net after tax loss of $14 million and $3 million for 1997 and 1996,
respectively.
56
<PAGE> 57
The following table represents the unaudited proforma statements of
operations for continuing operations of the Company for the fiscal year 1996,
assuming the Merger occurred on January 1, 1996, and the actual statements of
operations for continuing operations for the fiscal year 1996.
<TABLE>
<CAPTION>
ACTUAL PROFORMA
YEARS ENDED DECEMBER 31,
1996 1996
------- --------
(DOLLARS IN MILLIONS)
Net Revenues:
<S> <C> <C>
Dialysis Services $ 1,560 $ 1,560
Dialysis Products 368 629
Intercompany Eliminations (211) (261)
------- -------
Total Net Revenues $ 1,717 $ 1,928
======= =======
Operating Earnings:
Dialysis Services $ 258 $ 258
Dialysis Products 40 37
------- -------
298 295
------- -------
Other Expenses:
General Corporate 69 111
Research and Development 3 5
Interest Expense, Net 49 138
------- -------
Total Other Expenses 121 254
------- -------
Earnings Before Income Taxes from
Continuing Operations 177 41
Provision for Income Taxes 75 32
------- -------
Net Earnings from Continuing Operations $ 102 $ 9
======= =======
</TABLE>
EFFECT OF MERGER ON RESULTS OF OPERATIONS
In accordance with U.S. GAAP relating to purchase accounting rules, the
Company has adjusted to fair value its assets and liabilities which, on a pro
forma basis, would have resulted in increased amortization of approximately $41
million for 1996, in the pro forma Statement of Operations shown as part of
general corporate expenses. In addition, as part of the Merger, the Company has
incurred additional debt, which would have resulted in a net increase in
interest expense, including amortization of debt issuance costs and other fees,
in the amount of $89 million for 1996 on a pro forma basis. In connection with
the Merger, the addition of FUSA for the entire year would have resulted in
increased revenues for Renal Products of $211 million and decreased operating
earnings for Renal Products of $3 million in 1996, on a pro forma basis. The
addition of FUSA for the entire year would have also resulted in a $2 million
increase in research and development expense, on a pro forma basis. The Merger
would have resulted in a decrease in the Company's provision for income taxes of
$43 million in 1996, on a pro forma basis. As a result of the above adjustments,
on a pro forma basis, the Company would have reported a net income from
continuing operations of $9 million in 1996, as compared to its actual net
profit from continuing operations of $102 million in 1996.
57
<PAGE> 58
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements, including, to a limited extent,
acquisitions, have historically been funded by cash generated from operations.
Cash generated from continued operations was $212 million, $127 million, and
$134 million the years 1998, 1997 and 1996, respectively. These increases are
primarily due to the Company's improved profit levels as well as working capital
improvements.
The Company made acquisitions totaling $170 million, $476 million and $90
million in 1998, 1997 and 1996, respectively net of cash acquired. The Company
made capital expenditures for internal expansion, improvements, new furnishings
and equipment of $75 million, $134 million and $127 million in 1998, 1997 and
1996, respectively. The Company intends to capitalize on the continuing shift in
the U.S. from physician-owned and hospital based dialysis clinics to
multi-center providers by acquiring existing dialysis centers and the
establishment of new or expanded centers and, accordingly, will require
significant capital resources to pursue its growth strategy in the dialysis
marketplace. The Company may also make other strategic acquisitions in the
future.
During 1998 and 1997, the Company funded its acquisitions and capital
expenditures primarily through proceeds from external short and long-term debt
and the proceeds from the receivable financing facility and proceeds from the
sale of the Non Renal Diagnostics and Homecare divisions. In addition,
acquisitions were also funded through the issuance of investment securities by
Fresenius Medical Care Finance, S.A., a Luxembourg subsidiary of FMC ("FMC
Finance"). In exchange for such financing, an intercompany account was
established between FMC Finance and the Company with payables due to FMC Finance
of $42 million and $67 million for 1998 and 1997, respectively. The Company
received net cash advances from Fresenius AG of $513 million during 1996. Prior
to the Merger, the Company funded its acquisitions and capital expenditures with
cash advances from the Grace Consolidated Group and cash from operations
supplemented by financing programs, including the accounts receivable
securitization program. The Company received net cash advances from Grace of
$279 million for 1996.
Effective July 1, 1995, the Company 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. The Company 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, the Company may be able to rebill such services to
third-party payors and, as a result, the Company's future results of operations
and financial position would be favorably affected by the incremental revenue
that the Company would recognize. For further discussion see Notes to
Consolidated Financial Statements - Note 16, "Commitments and Contingencies --
Omnibus Budget Reconciliation Act of 1993".
CONTINGENCIES
The Company 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 and is a
defendant in significant commercial insurance litigation. An adverse outcome in
any of these matters, could have a material adverse effect on the Company's
business, financial condition and results of operations. Because of the
significant complexities and uncertainties associated with the above referenced
governmental investigations and proceedings, neither an estimate of the possible
loss or range of loss the Company may incur in respect of such matters nor a
reserve based on any such estimate can be reasonably made. See Item 3 - Legal
Proceedings and Notes to Consoliated Financial Statement - Note 16 "Commitments
and Contingencies."
The Company 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, the Company may need to sell assets or obtain debt or equity
financing from external sources. There can be no assurance that the Company will
be able to do so on satisfactory terms, if at all.
DIVESTITURES
The Company 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.
58
<PAGE> 59
IMPACT OF INFLATION
A substantial portion of the Company's net revenue is subject to
reimbursement rates which are regulated by the federal government and do not
automatically adjust for inflation. 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 the Company's business and
results of operations, possibly materially.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 does not
believe the adoption of SFAS 133 will have a material impact on the consolidated
financial statements.
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 and is in the process of completing these
changes. Based on continued progress in addressing Year 2000 compliance issues,
the Company is on the course to resolve such issues for all critical systems by
September 30, 1999.
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 substantially all of this equipment. The
Company has developed specific plans to remediate or replace substantially all
non-compliant non-IT equipment and is in the process of completing these
changes. Based on continued progress addressing Year 2000 compliance issues, the
Company is on course to resolve such issues for substantially all non-IT
equipment by September 30, 1999.
59
<PAGE> 60
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.
In conjunction with the fiscal intermediaries which process many of the
claims submitted to Medicare and Medicaid, the Company has successfully tested
its systemic interfaces to ensure that it will be able to bill these
intermediaries before and after January 1, 2000. The Company is also working
with these intermediaries and significant private payors to ensure that these
payors will be able to process and make remittances for billed services.
The Company has contacted substantially all significant vendors and
service providers to seek assurances from these third parties that the services
and products they provide will not be interrupted or malfunction due to the Year
2000 problem. Although no method exists for achieving certainty that any
third party's organization will be Year 2000 compliant, the Company's goal is to
obtain as much detailed information as possible about its significant vendors
and service providers and to identify those companies which appear to pose a
significant risk of failure to perform their obligations to the Company as a
result of the Year 2000 problem. 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 services 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 $5 million in
remediation and replacement efforts, including new software and hardware, costs
to modify existing software, and consultant fees. The Company does not
separately track internal costs incurred for the Year 2000 remediation effort;
such costs are principally related to compensation costs for certain members of
the Company's IT Department. The Company estimates remaining costs to be
approximately $4 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 vendors or service 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.
The Year 2000 Steering Committee is completing its review of the various
risk areas which might require a contingency plan. The committee is considering
the need to develop contingency plans for certain key risk areas. At this point
in time, the committee has not identified any risk areas which appears to have a
reasonable likelihood to cause a material disruption to the Company's
operations. Contingency plans will be developed on a case-by-case basis in
respect to their Year 2000 status. Despite these efforts, judgements regarding
contingency plans such as to what extent they should be developed are themselves
subject to many variables and uncertainties. There can be no assurance that the
Company will correctly anticipate the level, impact or duration of noncompliance
by third party vendors or suppliers that provide inadequate information. As a
result, there can be no assurance that any contingency plan will be sufficient
to mitigate the impact of non-compliance by third-party vendors and service
providers, and some material adverse effect to the Company could result
regardless of such contingency plans.
60
<PAGE> 61
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due to changes in interest rates
and foreign currency rates. The Company uses derivative financial instruments,
including interest rate swaps and foreign exchange contracts, as part of its
market risk management strategy. These instruments are used as a means of
hedging exposure to interest rate and foreign currency fluctuations in
connection with debt obligations and purchase commitments. The Company does not
hold or issue derivative instruments for trading or speculative purposes.
Hedge accounting is applied if the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge. Additionally,
changes in the value of the derivative must result in payoffs that are highly
correlated to the changes in value of the hedged item. Derivatives are measured
for effectiveness both at inception and on an ongoing basis.
The Company enters into foreign exchange contracts that are designated as
and effective as hedges for firmly committed purchases. Also, since the Company
carries a substantial amount of floating rate debt, the Company uses interest
rate swaps to synthetically change certain variable-rate debt obligations to
fixed-rate obligations, as well as options to mitigate the impact of interest
rate fluctuations.
Gains and losses on foreign exchange contracts accounted for as hedges are
deferred in other current assets or liabilities. The deferred gains and losses
are recognized as adjustments to the underlying hedged transaction when the
future sales or purchases are recognized. Interest rate swap payments and
receipts are recorded as part of interest expense. The fair value of the swap
contracts is not recognized in the financial statements. Cash flows from
derivatives are recognized in the consolidated statement of cash flows in the
same category as the item being hedged.
If a derivative instrument ceases to meet the criteria for deferral, any
subsequent gains or losses are recognized in operations. If a firm commitment
does not occur, the foreign exchange contract is terminated and any gain or loss
is recognized in operations. If a hedging instrument is sold or terminated prior
to maturity, gains or losses continue to be deferred until the hedged item is
recognized. Should a swap be terminated while the underlying obligation remains
outstanding, the gain or loss is capitalized as part of the underlying
obligation and amortized into interest expense over the remaining term of the
obligation.
The Company's hedging strategy vis-a-vis the above-mentioned market risks
has not changed significantly from 1997 to 1998. For additional information, see
also "Notes to Consolidated Financial Statements - Note 2. Summary of
Significant Accounting Policies - Derivative Financial Instruments" and "Notes
to Consolidated Financial Statements Note 15. Financial Instruments".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is indexed in Item 14 of this
Report and contained on the pages following the signature page hereof.
61
<PAGE> 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G. (3) to Form 10-K, the
information required by Part III is incorporated by reference to the Company's
definitive information statement to be filed by April 30, 1999.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Index to Consolidated Financial Statements
The following consolidated financial statements are filed with this report:
Report of Independent Auditors.
Consolidated Statements of Operations for the Years Ended December 31,
1998 and 1997 and the Three Months Ended December 31, 1996 (Successor) and
for the Nine Months Ended September 30, 1996 (Predecessor).
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998 and 1997 and the Three Months Ended December 31, 1996
(Successor) and for the Nine Months Ended September 30, 1996
(Predecessor).
Consolidated Balance Sheets as of December 31, 1998 and 1997 (Successor).
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998 and 1997 and the Three Months Ended December 31, 1996 (Successor) and
for the Nine Months Ended September 30, 1996 (Predecessor).
Consolidated Statements of Changes in Equity for the Years Ended December
31, 1998 and 1997 and the Three Months Ended December 31,1996 (Successor)
and for the Nine Months Ended September 30, 1996 (Predecessor).
Notes to Consolidated Financial Statements.
The Company is a majority-owned subsidiary of Fresenius Medical Care AG.
The operating results and other financial information of the Company
included in this report are not necessarily indicative of the operating
results and financial condition of Fresenius Medical Care AG at the dates
or for the periods presented herein. Users of the Company's financial
statements wishing to obtain financial and other information regarding
Fresenius Medical Care AG should consult the Annual Report on Form 20-F of
Fresenius Medical Care AG, which is expected to be filed with the
Securities and Exchange Commission and the New York Stock Exchange on or
about March 15, 1999.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
Exhibits. The following exhibits are filed or incorporated by reference as
required by Item 601 of Regulation S-K.
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<PAGE> 63
EXHIBIT NO. DESCRIPTION
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).
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).
63
<PAGE> 64
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. (incorporated herein by reference to the
Form 10-Q of Registrant filed with Commission on November 12,
1998)
Exhibit 4.9 Amendment No. 7 dated as of December 31, 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 Guarantors, the
Lenders named therein, Nations Bank, N.A. as paying agent and
the Bank of Nova Scotia, the Chase Manhattan Bank, Dresdner
Bank A. G. and Nations Bank, N.A. as Managing Agents (filed
herewith).
Exhibit 4.10 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 4.11 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 4.12 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 4.13 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
64
<PAGE> 65
due 2008 (incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on March 23, 1998).
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. (incorporated herein by reference to the
Form 10-Q of Registrant filed with Commission on November 12,
1998).
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. (incorporated herein by reference to
the Form 10-Q of Registrant filed with Commission on
November 12, 1998).
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. (incorporated herein by reference to
the Form 10-Q of Registrant filed with Commission on
November 12, 1998).
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).
65
<PAGE> 66
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. (incorporated
herein by reference to the Form 10-Q of Registrant filed with
Commission on November 12, 1998.)
Exhibit 10.18 Employment Agreement dated October 23, 1998 by and between
Roger S. Stoll and National Medical Care, Inc.
(filed herewith)
Exhibit 10.19 Employment Agreement dated November 11, 1998 by and between
William F. Grieco and National Medical Care, Inc.
(filed herewith)
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 27 Financial Data Schedule
(d) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
66
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 9, 1999 FRESENIUS MEDICAL CARE HOLDINGS, INC.
By: /s/ Ben J. Lipps
Ben J. Lipps, President
(Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Ben J. Lipps President and Director March 9, 1999
Ben J. Lipps (Chief Executive Officer)
/s/ Jerry A. Schneider Chief Financial Officer and Treasurer March 9, 1999
Jerry A. Schneider (Chief Financial and Accounting Officer)
/s/ Udo Werle Director March 9, 1999
Udo Werle
/s/ Hans-Ulrich Sutter Director March 9, 1999
Hans-Ulrich Sutter
67
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Fresenius Medical Care Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Fresenius
Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of December
31, 1998 and 1997 and the related consolidated statements of operations,
comprehensive income, changes in equity and cash flows for the years ended
December 31, 1998 and 1997 and the period October 1, 1996 to December 31, 1996,
the successor periods, and for the period January 1, 1996 to September 30, 1996,
the predecessor period. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying predecessor consolidated financial statements were
prepared on the basis of presentation described in Note 1, and are not intended
to be a complete presentation of the assets, liabilities, revenues and expenses
of the Company.
In our opinion, the accompanying consolidated financial statements
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the year ended December 31, 1998 and
1997 and for the period October 1, 1996 to December 31, 1996, the successor
periods, in conformity with generally accepted accounting principles, and for
the period January 1, 1996 to September 30, 1996, the predecessor period
pursuant to the basis of presentation in Note 1, in conformity with generally
accepted accounting principles.
As more fully described in Note 1 to the consolidated financial
statements, the Company was acquired as of September 30, 1996 in a business
combination accounted for as a purchase. As a result of the acquisition, the
consolidated financial statements for the successor periods are presented on a
different basis of accounting than that of the predecessor period, and therefore
are not directly comparable.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for start-up costs.
KPMG Peat Marwick LLP
February 9, 1999
Boston, MA
68
<PAGE> 69
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------------------------------ --------------
TWELVE MONTHS TWELVE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 SEPT. 30, 1996
------------- ------------- ------------- --------------
NET REVENUES
<S> <C> <C> <C> <C>
Health care services ....................... $2,100,422 $1,726,842 $352,421 $1,495,451
Medical supplies ........................... 470,984 439,037 152,950 119,209
---------- ---------- -------- ----------
2,571,406 2,165,879 505,371 1,614,660
---------- ---------- -------- ----------
EXPENSES
Cost of health care services ............... 1,390,321 1,138,575 270,662 888,441
Cost of medical supplies ................... 317,122 317,829 69,139 80,545
General and administrative expenses ........ 253,920 204,644 49,076 319,466
Provision for doubtful accounts ............ 54,709 43,301 7,526 80,475
Depreciation and amortization .............. 216,214 199,726 48,889 93,097
Research and development ................... 4,060 4,077 1,083 1,906
Allocation of Grace Chemicals expenses ..... -- -- -- 5,322
Interest expense, net, and related financing
costs including $77,705, $36,158 and $1,138,
of interest with affiliates 208,776 178,087 42,618 16,325
---------- ---------- -------- ----------
2,445,122 2,086,239 488,993 1,485,577
---------- ---------- -------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF 126,284 79,640 16,378 129,083
CHANGE IN ACCOUNTING FOR START UP COSTS
PROVISION FOR INCOME TAXES ...................... 74,447 45,720 11,001 66,202
---------- ---------- -------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR START UP COSTS ........................... $ 51,837 $ 33,920 $ 5,377 $ 62,881
---------- ---------- -------- ----------
DISCONTINUED OPERATIONS (NOTE 8)
Loss from discontinued operations, net of
income taxes ............................. (8,669) (13,783) (1,787) --
Loss on disposal of discontinued operations,
net of income tax benefit ................ (97,228) -- -- --
---------- ---------- -------- ----------
Loss from discontinued operations .......... $ (105,897) $ (13,783) (1,787) --
---------- ---------- -------- ----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
START UP COSTS, NET OF TAX BENEFIT ........... (4,890) -- -- --
---------- ---------- -------- ----------
NET INCOME (LOSS) ............................... $ (58,950) $ 20,137 $ 3,590 $ 62,881
========== ========== ======== ==========
Basic and fully dilutive earnings per share
Continuing operations ........................ $ 0.57 $ 0.37 $ 0.06 $ 0.66
Discontinued operations ...................... $ (1.18) $ (0.15) $ (0.02) $ --
Cumulative effect of accounting change ....... $ (0.05) $ -- $ -- $ --
Net Income (loss) ............................ $ (0.66) $ 0.22 $ 0.04 $ 0.66
</TABLE>
See accompanying Notes to Consolidated Financial Statements
69
<PAGE> 70
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------------------------------- -------------
TWELVE MONTHS TWELVE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $(58,950) $20,137 $3,590 $62,881
Other comprehensive income
Foreign currency translation adjustments 1,872 -- 801 (2,653)
-------- ------- ------ -------
Total other comprehensive income 1,872 -- 801 (2,653)
-------- ------- ------ -------
COMPREHENSIVE INCOME (LOSS) $(57,078) $20,137 $4,391 $60,228
======== ======= ====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
70
<PAGE> 71
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
----------------------------
DECEMBER 31,
----------------------------
1998 1997
---------- ----------
ASSETS
- ------
Current Assets:
<S> <C> <C>
Cash and cash equivalents .................... $ 6,579 $ 13,054
Accounts receivable, less allowances of and .. 254,783 252,023
$49,209 and $53,109
Inventories .................................. 169,789 137,470
Deferred income taxes ........................ 139,653 94,905
Other current assets ......................... 93,912 82,148
Income taxes receivable ...................... -- 9,425
Net assets of discontinued operations ........ 149,949 370,677
---------- ----------
Total Current Assets .................... 814,665 959,702
---------- ----------
Properties and equipment, net ..................... 429,639 505,929
---------- ----------
Other Assets:
Excess of cost over the fair value of net
assets acquired and other intangible assets,
net of accumulated amortization of $289,167
and $136,243 ............................... 3,317,424 3,265,260
Other assets and deferred charges ............ 51,675 40,295
---------- ----------
Total Other Assets ...................... 3,369,099 3,305,555
---------- ----------
Total Assets ...................................... $4,613,403 $4,771,186
========== ==========
LIABILITIES AND EQUITY
- ----------------------
Current Liabilities:
Current portion of long-term debt and
capitalized lease obligations................ $ 43,348 $ 18,599
Current portion of borrowing from affiliates . 32,716 67,584
Accounts payable ............................. 107,482 119,027
Accrued liabilities .......................... 306,333 338,238
Net accounts payable to affiliates ........... 17,966 22,279
Accrued Income taxes ......................... 12,411 --
---------- ----------
Total Current Liabilities ............... 520,256 565,727
Long-term debt .................................... 1,010,880 1,613,657
Non-current borrowings from affiliates ............ 956,284 441,524
Capitalized lease obligations ..................... 2,666 7,968
Deferred income taxes ............................. 144,605 129,942
Other liabilities ................................. 29,278 25,718
---------- ----------
Total Liabilities ....................... 2,663,969 2,784,536
---------- ----------
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 ................................ 1,942,235 1,921,853
Retained deficit ............................... (100,156) (40,686)
Accumulated comprehensive income ............... 1,037 (835)
---------- ----------
Total Equity .............................. 1,949,434 1,986,650
---------- ----------
Total Liabilities and Equity ...................... $4,613,403 $4,771,186
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
71
<PAGE> 72
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------------------------------- ---------------
Twelve Twelve Three Nine
Months Months Ended Months Ended Months Ended
Ended Dec. Dec. 31, 1997 Dec. 31, 1996 Sept. 30., 1996
31, 1998
---------- ------------- ------------- ---------------
Cash Flows from Operating Activities:
<S> <C> <C> <C> <C>
Net income (loss) ..................................... $ (58,950) $ 20,137 $ 3,590 $ 62,881
Adjustments to reconcile net earnings to net cash from
Operating activities:
Depreciation and amortization .................... 216,212 199,726 48,889 93,097
Loss from discontinued operations ................ 8,669 13,783 1,787 --
Loss on disposition of businesses ................ 97,228 -- -- --
Cumulative effect of change in accounting ............ 4,890 -- -- --
Provision for doubtful accounts .................. 54,709 43,300 7,526 80,475
Deferred income taxes ............................ 16,734 6,262 2,070 (8,268)
Loss on disposal of properties and equipment ..... 402 587 13,394 5,816
Changes in operating assets and liabilities, net of effects
of purchase acquisitions and foreign exchange:
Increase in accounts receivable ................. (159,228) (113,631) (53,810) (82,981)
(Increase) decrease in inventories ............... (30,979) 1,085 (7,504) 2,570
Decrease (increase) in other current assets ..... 3,890 (28,967) (11,437) (20,569)
(Increase) decrease in other assets and deferred
charges ..................................... (19,554) 2,521 (34,336) 987
(Decrease) increase in accounts payable .......... (11,705) 11,934 (6,736) 12,454
Increase (decrease) in accrued income taxes ...... 74,395 (16,615) 9,281 11,013
Decrease in accrued liabilities .................. (31,040) (42,792) (17,385) (17,282)
Increase (decrease) in other long-term
liabilities ................................. 3,560 (6,095) (5,291) 5,320
Net changes due to/from affiliates ............... 22,777 17,935 11,530 --
Other, net ....................................... 19,616 17,569 24,396 2,812
--------- --------- --------- -----------
Net cash provided by (used in) operating activities of
continued operations ............................. 211,626 126,739 (14,036) 148,325
--------- --------- --------- -----------
Net cash used in operating activities of discontinued
operations ....................................... (11,947) (18,762) (10,536) --
--------- --------- --------- -----------
Net cash provided by (used in) operating activities ... 199,679 107,977 (24,572) 148,325
--------- --------- --------- -----------
Cash Flows from Investing Activities:
Capital expenditures ............................. (74,653) (133,744) (34,016) (92,853)
Payments for acquisitions, net of cash acquired .. (170,137) (473,954) (561) (89,090)
Proceeds from disposition of businesses .......... 82,500 -- -- --
-------- --------- --------- -----------
Net cash used in investing activities of continued
operations ....................................... (162,290) (607,698) (34,577) (181,943)
--------- --------- --------- -----------
Net cash used in investing activities of discontinued
operations ....................................... (8,925) (22,744) (3,518) --
--------- --------- --------- -----------
Net cash used in investing activities ................. (171,215) (630,442) (38,095) (181,943)
--------- --------- --------- -----------
Cash Flows from Financing Activities:
Advances from Grace Chemicals, net ............... -- -- (1,130) 279,819
Increase in borrowings from affiliates ........... 445,447 137,282 513,448 --
Cash dividends paid .............................. (520) (520) (8,930) (2,114,396)
Proceeds from issuance of debt ................... 16,385 203,937 90,334 2,390,607
Proceeds from receivable financing facility ..... 105,600 52,000 0 --
Payments on debt and capitalized leases ......... (599,714) (60,978) (953,834) (338,793)
Contributed Capital from FMC AG ................. -- 202,170 249,005 --
Other net ....................................... (2,027) 3,918 5,876 --
--------- --------- --------- -----------
Net cash provided by (used in) used by financing ...... (34,829) 537,809 (105,231) 217,237
--------- --------- --------- -----------
activities of continued operations
Net cash used in financing activities of discontinued
operations ....................................... (2,107) (4,462) (9,890) --
--------- --------- --------- -----------
Net cash provided by (used in) financing activities ... (36,936) 533,347 (115,121) 217,237
--------- --------- --------- -----------
Effects of changes in foreign exchange rates ............... 1,997 (18,799) 20,537 3,353
--------- --------- --------- -----------
Change in cash and cash equivalents ........................ (6,475) (7,917) (157,251) 186,972
Cash and cash equivalents at beginning of period ........... 13,054 20,971 179,140 33,530
--------- --------- --------- -----------
Cash and cash equivalents at end of period ................. $ 6,579 $ 13,054 $ 21,889 $ 220,502
========= ========= ========= ===========
</TABLE>
72
<PAGE> 73
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------------------------------------------- ---------------
Twelve Twelve Three Nine
Months Ended Months Ended Months Ended Months Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Sept. 30., 1996
------------- ------------- ------------- ---------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
<S> <C> <C> <C> <C>
Interest ................................. $133,679 $136,998 $24,250 $21,328
Income taxes (received)/paid, net ........ (19,149) 40,471 (465) 23,293
Details for Acquisitions:
Assets acquired ............................... 172,511 508,594 6,408 90,928
Liabilities assumed ........................... (2,374) (32,830) (5,847) (1,820)
-------- -------- ------- -------
Cash paid ..................................... 170,137 475,764 561 89,108
Less cash acquired ............................ -- 1,810 -- 18
-------- -------- ------- -------
Net cash paid for acquisitions ................ $170,137 $473,954 $ 561 $89,090
======== ======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
73
<PAGE> 74
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Preferred Stocks Common Stock
------------------------ ------------------------
Shares Amount Shares Amount
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 (Predecessor) .................. -- -- 10,268,701 103
Net Income for 9 months ended 9/30/96 ..................... -- -- -- --
Cumulative foreign currency translation adjustments ....... -- -- -- --
Cash dividends to Grace Chemicals for Reorganization ...... -- -- -- --
Increases to advances from Grace Chemicals
for 9 months ended 9/30/96 .............................. -- -- -- --
---------- ------- ---------- -------
BALANCE, SEPTEMBER 30, 1996 (PREDECESSOR) ................. -- -- 10,268,701 103
Excess of purchase price over book value .................. -- -- -- --
Adjustment to establish successor basis for Reorganization 89,136,435 16,318 79,731,299 89,897
---------- ------- ---------- -------
BALANCE, OCTOBER 1, 1996 (SUCCESSOR) ...................... 89,136,435 16,318 90,000,000 90,000
Cash dividends to Grace Chemicals for Reorganization ...... -- -- -- --
Net income for 3 months ended 12/31/96 .................... -- -- -- --
Cash dividends on preferred stocks ........................ -- -- -- --
Contributed capital from Fresenius USA at 10/1/96 ......... -- -- -- --
Contributed capital from Fresenius Medical Care, AG ....... -- -- -- --
Transfer of International operations ...................... -- -- -- --
Cumulative foreign currency translation adjustments ....... -- -- -- --
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1996 (SUCCESSOR) .................... 89,136,435 $16,318 90,000,000 $90,000
Net Income ................................................ -- -- -- --
Cash dividends on preferred stocks ........................ -- -- -- --
Contributed capital from Fresenius Medical Care, AG ....... -- -- -- --
Tax benefit of dispositions of stock options .............. -- -- -- --
Cumulative foreign currency translation adjustments ....... -- -- -- --
Other adjustments ......................................... -- -- -- --
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1997 (SUCCESSOR) .................... 89,136,435 $16,318 90,000,000 $90,000
Net Income ................................................ -- -- -- --
Cash dividends on preferred stock ......................... -- -- -- --
Contributed capital from Fresenius Medical Care, AG ....... -- -- -- --
Transfer of International operations ...................... -- -- -- --
Tax benefit on International transfer ..................... -- -- -- --
Tax benefit of dispositions of stock options .............. -- -- -- --
Other Comprehensive Income - Cumulative foreign currency
adjustments ............................................. -- -- -- --
Other adjustments ......................................... -- -- -- --
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1998 (SUCCESSOR) .................... 89,136,435 $16,318 90,000,000 $90,000
========== ======= ========== =======
</TABLE>
74
<PAGE> 75
<TABLE>
<CAPTION>
Accumulated
Capital in Retained Other Advance from
Excess of Par Earnings Comprehensive Grace
Value (Deficit) Income Chemicals
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 (PREDECESSOR) ............. 15,560 516,912 (3,126) 833,326
Net Income for 9 months ended 9/30/96 ................ -- 62,881 -- --
Cumulative foreign currency translation
adjustments ........................................ -- -- (2,653) --
Cash dividends to Grace Chemicals for
Reorganization ..................................... -- 2,114,396) -- --
Increases to advances from Grace Chemicals
for 9 months ended 9/30/96 ......................... -- -- -- 199,905
----------- ----------- -------- -----------
BALANCE, SEPTEMBER 30, 1996 (PREDECESSOR) ............ 15,560 (1,534,603) (5,779) 1,033,231
Excess of purchase price over book value ............. 1,696,698 -- -- --
Adjustment to establish successor basis for
Reorganization .................................... (613,366) 1,534,603 5,779 (1,033,231)
----------- ----------- -------- -----------
BALANCE, OCTOBER 1, 1996 (SUCCESSOR) ................. 1,098,892 -- -- --
Transfer of International operations ................. (3,662) -- -- --
Cash dividends to
Grace Chemicals for Reorganization .................. (8,800) -- -- --
Net income for 3 months ended 12/31/96 ............... -- 6,046 -- --
Cash dividends on preferred stocks ................... -- (130) -- --
Contributed capital from Fresenius USA at 10/1/96 .... 384,248 (67,005) (34) --
Contributed capital from Fresenius Medical Care, AG .. 249,005 -- -- --
Cumulative foreign currency translation
adjustments ........................................ -- -- (801) --
----------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1996 (SUCCESSOR) ............... $ 1,719,683 $ (61,089) $ (835) $ 0
Net Income ........................................... -- 20,923 -- --
Cash dividends on preferred stocks ................... -- (520) -- --
Contributed capital from Fresenius Medical Care, AG .. 199,425 -- -- --
Tax benefit of dispositions of stock options ......... 2,739 -- -- --
Cumulative foreign currency translation adjustments .. -- -- -- --
Other adjustments .................................... 6 -- -- --
----------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1997 (SUCCESSOR) ............... $ 1,921,853 $ (40,686) $ (835) $ 0
Net Loss ............................................. -- (58,950) -- --
Cash dividends on preferred stocks ................... -- (520) -- --
Contributed capital from Fresenius Medical Care, AG .. -- -- -- --
Tax benefit on International transfer ................ 20,382 -- -- --
Tax benefit of dispositions of stock options ......... -- -- -- --
Other Comprehensive income Cumulative foreign
currency adjustments ............................... -- -- 1,872 --
Other adjustments .................................... -- -- -- --
----------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1998 ........................... $ 1,942,235 $ (100,156) $ 1,037 $ 0
=========== =========== ======== ===========
</TABLE>
75
<PAGE> 76
<TABLE>
<CAPTION>
TOTAL EQUITY
------------
<S> <C>
BALANCE, DECEMBER 31, 1995 (PREDECESSOR) $ 1,362,775
Net Income for 9 months ended 9/30/96 62,881
Cumulative foreign currency translation adjustments (2,653)
Cash dividends to Grace Chemicals for Reorganization (2,114,396)
Increases to advances from Grace Chemicals for 9 months ended 9/30/96 199,905
-----------
BALANCE, SEPTEMBER 30, 1996 (PREDECESSOR) $ (491,488)
Excess of purchase price over book value 1,696,698
Adjustment to establish successor basis for Reorganization 0
-----------
BALANCE, OCTOBER 1, 1996 (SUCCESSOR) $ 1,205,210
Transfer of International operations (3,662)
Cash dividends to Grace Chemicals for Reorganization (8,800)
Net income for 3 months ended 12/31/96 6,046
Cash dividends on preferred stocks (130)
Contributed capital from Fresenius USA at 10/1/96 317,209
Contributed capital from Fresenius Medical Care, AG 249,005
Cumulative foreign currency translation adjustments (801)
-----------
BALANCE, DECEMBER 31, 1996 (SUCCESSOR) $ 1,764,077
Net Income 20,923
Cash dividends on preferred stocks (520)
Contributed capital from Fresenius Medical Care, AG 199,425
Tax benefit of dispositions of stock options 2,739
Cumulative foreign currency translation adjustments --
Other adjustments 6
-----------
BALANCE, DECEMBER 31, 1997 (SUCCESSOR) $ 1,986,650
Net Loss (58,950)
Cash dividends on preferred stocks (520)
Contributed capital from Fresenius Medical Care, AG --
Tax benefit on International Operations 20,382
Tax benefit of dispositions of stock options --
Other comprehensive income 1,872
Other adjustments --
-----------
BALANCE, DECEMBER 31, 1998 (SUCCESSOR) $ 1,949,434
===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
76
<PAGE> 77
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY, REORGANIZATION AND BASIS OF PRESENTATION
THE COMPANY
Fresenius 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") formerly known as the Reorganization, which is more fully described
hereunder.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, NMC and FUSA and those financial
statements where the Company controls professional corporations in accordance
with Emerging Issues Task Force Issue 97-2.
The Company is primarily engaged in (i) providing kidney dialysis
services, and clinical laboratory testing and renal diagnostic services, and
(ii) manufacturing and distributing products and equipment for dialysis
treatment.
THE MERGER
The Merger, which was effective September 30, 1996, resulted from the
culmination of the following transactions: (1) NMC, which was a subsidiary of
W. R. Grace & Co. -- Conn. ("Grace Chemicals"), a wholly-owned subsidiary of
Grace New York, borrowed $2,300,000 and paid a cash dividend of approximately
$2,100,000 to Grace Chemicals; (2) the stock of NMC was transferred to Grace
New York, so that NMC and Grace Chemicals became sibling subsidiaries of Grace
New York; (3) the stock of Grace Chemicals was transferred to a newly formed
Delaware subsidiary of Grace New York ("New Grace") and the shares of New Grace
were spun-off to the Grace New York shareholders in a pro rata distribution;
(4) Grace New York was recapitalized such that each Grace New York shareholder
received one share of Class D Preferred Stock of Grace New York (the "Class D
Preferred Stock") for each share of Grace New York common stock held; and (5)
Grace New York, with NMC as its sole business, merged with a wholly-owned
subsidiary of Fresenius Medical Care AG ("FMC"), and Fresenius AG's worldwide
dialysis business (including its controlling interest in FUSA) ("FWD") was
contributed as separate subsidiaries of FMC with the result that 44.8% of the
ordinary shares of FMC were exchanged for the common stock held by Grace New
York common shareholders in the merger transaction and the balance of the
ordinary shares of FMC were received by Fresenius AG and the shareholders of
FUSA, in consideration of the contribution of FWD to FMC. All of the Grace New
York (now the Company) common stock is held by FMC, while the Class D Preferred
Stock (which entitles its shareholders to a contingent dividend based on the
consolidated performance of FMC in the years 1997-2001) and other previously
issued classes of the Company preferred stock remain outstanding.
Effective October 1, 1996, FMC contributed all of the assets and
liabilities of FUSA to the Company. The contribution of FUSA to the Company by
FMC was accounted for on the cost basis since FUSA was a subsidiary under
control of a common parent. These consolidated financial statements include the
results of FUSA's operations and cash flows for the period October 1, 1996
through December 31, 1998.
INTERNATIONAL OPERATIONS
Effective January 1, 1998, the Company 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 December 31, 1998 and 1997 and for the three months ended December 31,
1996 do not include operating results and cash flows of the International
Operations. See Note 7 - "International Operations."
77
<PAGE> 78
BASIS OF PRESENTATION
BASIS OF CONSOLIDATION - PREDECESSOR BASIS
The consolidated financial statements have been prepared as if the
Company had operated as an independent, stand alone entity for all periods
presented. Such financial statements have been prepared using the historical
basis of accounting prior to the Merger ("Predecessor") and include all of the
assets, liabilities, revenues, expenses and related taxes on income of the Grace
New York health care business operated by NMC (the "NMC Business") previously
included in the consolidated financial statements of Grace New York and its
subsidiaries prior to the Merger (the "Grace Consolidated Group"). Consequently,
these consolidated financial statements include balances for goodwill and other
assets and liabilities related to the NMC Business that were previously included
in the financial statements of the Grace Consolidated Group, except that there
is no allocation to the NMC Business of Grace Chemicals' borrowings and related
interest expense. These consolidated financial statements reflect only the
borrowings and interest expense of NMC prior to the Merger and interest expense
of the Company after the Merger. In accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 55 ("SAB 55"), the financial statements
have also been adjusted to include certain expenses incurred by Grace Chemicals
on the NMC Business's behalf prior to the Merger.
These consolidated financial statements do not necessarily indicate the
financial position and results of operations that would have occurred if the NMC
Business were a stand-alone entity on the dates, and for the periods, indicated.
ACCOUNTING FOR THE MERGER - SUCCESSOR BASIS
The issuance of FMC ordinary shares for all of the common stock of NMC
has been recorded as an acquisition in accordance with the purchase method of
accounting. Accordingly, purchase accounting adjustments recorded by FMC have
been "pushed down" to NMC, thus establishing a new basis of accounting at NMC
("Successor"). The purchase price of the acquisition was determined as the
average of the mid-points of the ranges of valuation of NMC and FMC,
respectively, as assigned by independent financial advisors to Fresenius AG and
was approximately $1,152,000. The valuation has been increased for direct costs
incurred to consummate the transaction. The excess of the purchase price over
the cost of the net identifiable assets acquired at September 30, 1996 of
$1,696,698 has been allocated to the fair value of the assets acquired and
liabilities assumed with the remaining portion recorded as goodwill.
The Agreement and Plan for Reorganization also provides for the payment
of additional purchase price to the holders of the Company Class D Preferred
Stock in the form of a dividend, contingent upon the attainment of certain
specific consolidated operating results by FMC. Such future dividends, if any,
will be recorded as an increase in goodwill.
In order to properly allocate purchase price to assets acquired, the
Company obtained an independent appraisal to fair value all assets of NMC.
Accordingly, the carrying values of specifically identified intangible assets
and certain tangible assets were adjusted upward by $186,030 and $53,122,
respectively, to approximate their fair values.
The Company has also recorded adjustments to increase liabilities
assumed by approximately $123,000 for pre-acquisition contingencies primarily
related to legal settlements and the anticipated costs incurred in the defense
of litigation. These adjustments resulted from discussions with the government
in March 1997. The Company has provided an estimate of legal costs at the low
end of an expected range, but the ultimate costs could be significantly higher.
The Company is in discussions with the government regarding these matters. Any
difference between the final settlement and the Company's estimate would be
adjusted to goodwill, if determined within the allocation period, or charged to
income if determined thereafter. In addition, the Company has accrued
approximately $50,000 for certain costs related to the closing of certain renal
products manufacturing and distribution operations as well as the closing of
certain clinics of the Homecare Division. These restructuring costs primarily
relate to severance payments and lease commitments. Through the period ended
December 31, 1998 approximately $62,000 in payments and other charges have been
applied against the pre-acquisition contingencies and $40,000 against the
restructuring costs.
All intercompany transactions and balances under the predecessor and
successor basis have been eliminated in consolidation.
78
<PAGE> 79
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions affecting the reported amounts of assets and liabilities
(including disclosed amounts of contingent assets and liabilities) at the dates
of the consolidated financial statements and the reported revenues and expenses
during the reporting periods. Actual amounts could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of
three months or less when purchased.
Derivative Financial Instruments
Foreign currency contracts -- Gains and losses on foreign currency
contracts that are designated and effective as hedges of existing assets,
liabilities (including borrowings) and firm commitments are deferred and
recorded as an adjustment to general and administrative expenses in the period
in which the related transaction is consummated. Gains and losses on other
foreign currency contracts are recognized at each reporting period.
Interest rate swaps -- Interest rate agreements that are designated and
effective as a hedge of a debt or other long-term obligations are accounted for
on an accrual basis. That is, the interest payable and interest receivable under
the swaps terms are accrued and recorded as an adjustment to interest expense of
the designated liabilities or obligations.
Amounts due from and payable to the counterparties of interest rate
swaps are recorded on an accrual basis at each reporting date on amounts
computed by reference of the respective interest rate swap contract. Realized
gains and losses that occur from the early termination or of foreign currency
contracts and interest rate swaps are recorded in the consolidated statement of
operations over the remaining period of the original agreement. Gains and losses
arising from the interest differential on contracts that hedge specific
borrowings are recorded as a component of interest expense over the life of the
contract.
The effectiveness of the hedge is measured by a historical and probable
future high correlation of changes in the fair value of the hedging instruments
with changes in the value of the hedged item. If correlation ceases to exist,
hedge accounting will be terminated and gains on losses recorded in other
income. To date, high correlation has always been achieved.
Revenue Recognition
Revenues are recognized on the date services and related products are
provided/shipped and are recorded at amounts estimated to be received under
reimbursement arrangements with a large number of third-party payors, including
Medicare and Medicaid. The Company establishes appropriate allowances based upon
factors surrounding credit risks of specific third party payors, historical
trends and other information. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and adjusted in
future periods as final settlements are determined.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Properties and Equipment
Properties and equipment are stated at cost. Significant improvements
are capitalized; repairs and maintenance costs that do not extend the lives of
the assets are charged to expense as incurred. The cost and accumulated
depreciation of assets sold or otherwise disposed of are removed from the
accounts, and any resulting gain or loss is included in income when the assets
are disposed.
The cost of properties and equipment is depreciated over estimated
useful lives on a straight - line basis as follows: buildings - 20 to 40 years,
equipment and furniture - 3 to 10 years, and leasehold improvements - the
shorter of the lease term or useful life. For income tax purposes, depreciation
is calculated using accelerated methods to the extent permitted.
79
<PAGE> 80
Excess of Cost Over the Fair Value of Net Assets Acquired and Other
Intangible Assets
On a predecessor basis, the Company had adopted the following useful
lives and methods to amortize intangible assets: goodwill - 40 years on a
straight - line basis; patient relationships and other intangible assets - over
the estimated period to be benefited, generally from 7 to 25 years; and certain
contractual arrangements - over the life of the agreements on a straight-line
basis.
On a successor basis, the Company has adopted the following useful lives
and methods to amortize intangible assets: trade name, acute care agreements 40
years; and goodwill--25 to 40 years on a straight-line basis; patient
relationships and other intangible assets - over the estimated period to be
benefited, generally from 5 to 6 years on a straight line basis.
Debt Issuance Costs
Costs related to the issuance of debt are amortized over the term of the
related obligation using a straight line method.
Self Insurance Programs
The Company is self insured for professional, product and general
liability, auto and worker's compensation claims up to predetermined amounts
above which third party insurance applies. Estimates include ultimate costs for
both reported claims and incurred but not reported.
Impairment
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company reviews the carrying value of its investments for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. The Company considers various
valuation factors including discounted cash flows, fair values and replacement
costs to assess any impairment of goodwill and other long lived assets.
Foreign Currency Translation
The Company follows the provisions of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". Substantially all assets and
liabilities of the Company's foreign subsidiaries are translated at year end
exchange rates, while revenue and expenses are translated at exchange rates
prevailing during the year. Adjustments for foreign currency translation
fluctuations are excluded from net earnings and are deferred in the cumulative
translation adjustment component of equity. In addition, the translation of
certain intercompany borrowings denominated in foreign currencies, which are
considered foreign equity investments, is included in the cumulative translation
adjustment.
Gains and losses resulting from the translation of revenues and expenses
and intercompany borrowings, which are not considered equity investments, are
included in general and administrative expense. On a successor basis,
translation gains amounted to $766, $27,732, and $2,142 for the twelve months
ended December 31, 1998 and 1997 and for the three months ended December 31,
1996, respectively. On a predecessor basis, similar exchange losses amounted to
$3,661 for the nine months ended September 30, 1996.
Income Taxes
Income tax expense and certain other tax-related information included in
these consolidated financial statements have been calculated as if the Company
were a stand-alone taxpayer for all periods presented.
Deferred income taxes are provided for temporary differences between the
reporting of income and expense for financial reporting and tax return purposes.
Deferred tax liabilities or assets at the end of each period are determined
using the tax rates then in effect for the periods when taxes are actually
expected to be paid or recovered. Accordingly, income tax expense provisions
will increase or decrease in the period in which a change in tax rates is
enacted.
80
<PAGE> 81
Research and Development
Research and development costs are expensed as incurred.
Earnings per Share
The Company adopted the provisions of SFAS No. 128, Earnings per Share,
effective for fiscal 1997. This statement requires the presentation of basic
earnings per share and diluted earnings per share. Basic earnings per share are
computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the year. Diluted
earnings per share includes the effect of all dilutive potential common shares
that were outstanding during the year. The number of shares used to compute
basic and diluted earnings per share was (in thousands) 90,000 for the year
ended December 31, 1998 and 1997, and the three months ended December 31, 1996,
successor basis, as there were no potential common shares and no adjustments to
net earnings to be considered for purposes of the diluted earnings per shares
calculation. On a predecessor basis, primary earnings per share was computed on
the basis of weighted average number of common shares outstanding.
Comprehensive Income
The Company adopted the provisions of 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.
Pension and other Postretirement Benefits
Effective December 31, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits". The
provisions of SFAS No. 132 revise employers' disclosures about pension and other
post retirement benefit plans. It does not change the measurement or recognition
of these plans. It standardized the disclosure requirements for pensions and
other post retirement benefits to the extent practicable.
Accounting Changes
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 and was adopted by the Company,
effective January 1, 1998. SOP 98-5 requires that the costs of start-up
activities, including organization costs, which have been previously
capitalized, should be expensed as incurred. As a result of the adoption of SOP
98-5, all deferred start-up activities as of January 1, 1998, have been
recognized as a cumulative effect of a change in accounting for start-up costs
net of tax benefit, in the consolidated statements of operations for the twelve
months ended December 31, 1998. During 1998, costs for start-up activities were
expensed as incurred.
81
<PAGE> 82
NOTE 3. ACQUISITIONS
The Company acquired certain health care facilities and clinical
laboratories for a total consideration of $170,137 and $ 475,764 for the twelve
months ended December 31, 1998 and 1997, respectively, and $561 for the three
months ended December 31, 1996, on a successor basis, and $91,737 for the nine
months ended September 30, 1996, on a predecessor basis. These acquisitions have
been accounted for as purchase transactions and, accordingly, are included in
the results of operations from the dates of acquisition. The excess of the total
acquisition costs over the fair value of tangible net assets acquired was
$157,836 and $383,626 for the twelve months ended December 31, 1998 and 1997 and
$0 for the three months ended December 31, 1996, on a successor basis, and
$81,189 for the nine months ended September 30, 1996, on a predecessor basis.
Had the acquisitions occurred during the twelve months ended December
31, 1998 been consummated on January 1, 1997, unaudited proforma net revenues
for the twelve months ended December 31, 1998 and 1997 would have been
$2,584,806 and $2,226,976, respectively. Unaudited proforma income from
continuing operations before cumulative effect of change in accounting for
start up costs would have been $50,806 and $27,657 for the twelve months ended
December 31, 1998 and 1997 respectively.
Had the acquisitions that occurred during the twelve months ended
December 31, 1997 been consummated on October 1, 1996, unaudited proforma net
revenues for the twelve months ended December 31, 1997 would have been
$2,530,129 and $630,494 for the three months ended December 31, 1996 on a
successor basis. Unaudited proforma net earnings would have been $15,573 for the
twelve months ended December 31, 1997 and $928 for the three months ended
December 31, 1996, on a successor basis.
82
<PAGE> 83
NOTE 4. OTHER BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
Successor
December 31,
---------------------------
1998 1997
---------- ----------
Inventories
<S> <C> <C>
Raw materials $ 35.199 $ 37,792
Manufactured goods in process 18,802 14,074
Manufactured and purchased inventory available for sale 86,615 53,511
---------- ----------
140,616 105,377
Health care supplies 29,173 32,093
---------- ----------
Total $ 169,789 $ 137,470
========== ==========
Under the terms of certain unconditional purchase commitments, the Company is
obligated to purchase raw materials during 1999 amounting to $61,785
Other Current Assets
Miscellaneous accounts receivable $ 70,126 $ 67,612
Deposits and prepaid expenses 23,786 14,536
---------- ----------
$ 93,912 $ 82,148
========== ==========
Excess of Cost Over the Fair Value of Net Assets
Acquired and Other Intangible Assets:
Goodwill, less accumulated amortization of
$156,210 and $62,140 $2,710,236 $2,739,939
Patient relationships, less accumulated
amortization of $57,650 and $28,398 115,954 138,329
Other intangible assets, less accumulated
amortization of $75,307 and $45,705 491,234 386,992
---------- ----------
Total $3,317,424 $3,265,260
========== ==========
Accrued Liabilities
Accrued operating expenses $ 42,943 $ 52,913
Accrued insurance 66,513 65,813
Accrued legal and compliance costs 46,329 62,470
Accrued salaries and wages 38,740 41,836
Accrued receivable credit balances 42,804 38,589
Accrued interest 30,742 32,270
Accrued other 9,830 13,947
Accrued physician compensation 17,495 16,178
Accrued restructuring 4,526 6,899
Accrued bonus and incentive compensation 6,411 7,323
---------- ----------
$ 306,333 $ 338,238
========== ==========
</TABLE>
Accounts receivable credit balances principally reflect overpayments
from third party payors and are in the process of repayment.
83
<PAGE> 84
NOTE 5. SALE OF ACCOUNTS RECEIVABLE
On September 27, 1997, NMC established a new $204,000 receivable
financing facility with NationsBank to replace its former facility with
CitiCorp. The NationsBank facility was amended on February 27, 1998 to
increase the commitment amount to $331,500. The current agreement has an
effective interest rate of 5.30% and matures on September 27, 1999. At December
31, 1998 and 1997, $305,600 and $200,000 had been received pursuant to such
sales; these amounts are reflected as reductions to accounts receivable. Under
the terms of the agreement, new interests in accounts receivable are sold as
collections reduce previously sold accounts receivable. The costs related to
such sales are expensed as incurred and recorded as interest expense and
related financing costs. There were no gains or losses on these transactions.
NOTE 6. DEBT
Long-term debt to outside parties consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
NMC Credit Facility $1,032,700 $1,613,300
Third-party debt, primarily bank borrowings at
variable interest rates (3% -14%) with various maturities 16,215 12,475
---------- ----------
1,048,915 1,625,775
Less amounts classified as current 38, 035 12,118
========== ==========
$1,010,880 $1,613,657
========== ==========
</TABLE>
NMC entered into a credit agreement with a group of banks (collectively,
the "Lenders"), pursuant to which the Lenders made available to NMC and certain
specified subsidiaries and affiliates an aggregate of $2,000,000 through two
credit facilities (collectively, the "NMC Credit Facility"). The NMC Credit
Facility, as amended, includes: (i) a revolving credit facility of up to
$1,000,000 for up to seven years (of which up to $250,000 is available for
letters of credit, up to $450,000 is available for borrowings in certain
non-U.S. currencies, up to $50,000 is available as swing lines in U.S. dollars
and up to $20,000 is available as swing lines in certain non-U.S. currencies)
("Facility 1") and (ii) a term loan facility of $1,000,000 for up to seven years
("Facility 2").
Loans under the NMC Credit Facility bear interest at one of the
following rates, at either (i) LIBOR plus an applicable margin or (ii) a base
rate equal to the sum of (1) the higher from time to time of (A) the prime rate
of NationsBank, N.A. or (B) the federal funds rate plus 0.50% and (2) an
applicable margin. A commitment fee is payable to the Lenders equal to a
percentage per annum applied against the unused portion of the NMC Credit
Facility.
In addition to scheduled principal payments, the NMC Credit Facility
will be reduced by certain portions of the net cash proceeds from certain sales
of assets, sales of accounts receivable and the issuance of subordinated debt
and equity securities. All payments outstanding under Facility 1 are due and
payable at the end of the seventh year. Prepayments are permitted at any time
without penalty, except in certain defined periods. The NMC Credit Agreement
contains certain affirmative and negative covenants with respect to the Company,
NMC and its subsidiaries, customary for this type of agreement.
In February 1998, $250 million of Facility 2 was repaid, primarily using
borrowings from affiliates. The voluntary prepayment reduces the available
financing under the agreement to $1,750,000. At December 31, 1998 and 1997 the
Company had available $508 million and $168 million, respectively, of additional
borrowing capacity under the NMC Credit Facility including $33 million and $40
million respectively, available for additional letters of credit.
In connection with the purchase of certain assets, FUSA entered into a
term loan agreement with a commercial bank to borrow $25 million at an interest
rate of 5.68% per annum. The loan was repaid in February 1998.
In consideration of proprietary technology acquired, FUSA issued a note
payable due in annual installments of $2,500 through 1998. The obligation was
fully repaid in 1998.
84
<PAGE> 85
Non current borrowings from affiliates consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Fresenius Medical Care AG non-current borrowings
primarily at interest rates approximating 6 - 9.25% . $ 94,471 $351,549
Fresenius AG non-current borrowing at interest rates
approximating 6 - 7% ............................ 60,000 --
Fresenius Medical Care AG deutsche mark denominated at
variable interest rate approximately 5% ............. -- 72,601
Fresenius Medical Care Finance SA borrowings
primarily at interest rates approximating 6.5% ....... 47,665 67,584
approximately 5% (deutsche mark denominated) ......... -- 17,099
Fresenius Medical Care-Deutschland-at interest rates
Fresenius Medical Care Trust Finance S.a.r.l
at interest rate of 8.43% and 9.25% .................. 786,524 --
Other ................................................ 340 275
-------- --------
989,000 509,108
Less amounts classified as current ................... 32,716 67,584
-------- --------
Total ................................................ $956,284 $441,524
======== ========
</TABLE>
Scheduled maturities of long-term debt and non-current borrowings from
affiliates are as follows:
1999 $ 70,751
2000 300,379
2001 300,000
2002 300,000
2003 300,000
2004 and beyond 766,785
----------
Total $2,037,915
==========
85
<PAGE> 86
NOTE 7. INTERNATIONAL OPERATIONS
Effective January 1, 1998, the Company 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 December 31, 1998 and 1997 and for the three months ended December 31,
1996 do not include the operating results and cash flows of the international
operations which were transferred. The consolidated financial statements at
December 31, 1997 and for the three months ended December 31, 1996 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>
TWELVE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Net Revenues:...................................
<S> <C> <C>
Previously reported........................ $2,338,294 $549,211
Less International Transfer................ 172,415 43,840
---------- --------
Restated FMCH.............................. $2,165,879 $505,371
========== ========
Net earnings from continuing operations before
cumulative effect of change in accounting for
start up cost...................................
Previously reported........................ $ 34,706 $ 7,833
Less International Transfer................ 786 2,456
---------- --------
Restated FMCH.............................. $ 33,920 $ 5,377
========== ========
Restated basic and fully diluted earnings per share $ 0.23 $ 0.22
</TABLE>
The following table shows the restatement to the previously reported
October 1, 1996 stockholders equity:
<TABLE>
<CAPTION>
CONSOLIDATED INTERNATIONAL RESTATED
FMCH TRANSFER FMCH
------------- ------------- ----------
<S> <C> <C> <C>
Net Equity...................................... $1,205,210 $(3,662) $1,201,548
</TABLE>
86
<PAGE> 87
NOTE 8. DISCONTINUED OPERATIONS
Effective June 1, 1998, the Company classified its non renal diagnostic
Services business ("Non Renal Diagnostic Services") and homecare business
("Homecare") 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. In connection with the sale of Homecare, the
Company retained the assets and the operations associated with the delivery of
IDPN and records, for accounting purporses, its activity as part of
discontinued operations. 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 16 - "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>
TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ------------------
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
NET REVENUES ................................. $ 120,940 $283,006 $81,355
--------- -------- -------
Loss from operations before income tax benefit (14,212) (21,001) (3,030)
Income tax benefit ........................... (5,543) (7,218) (1,243)
--------- -------- -------
Loss from operations ......................... (8,669) (13,783) (1,787)
--------- -------- -------
Loss on disposal before income tax benefit ... (140,000) -- --
Income tax benefit ........................... (42,772) -- --
--------- -------- -------
Loss on disposal ............................. (97,228) -- --
--------- -------- -------
Loss from discontinued operations ............ (105,897) (13,783) (1,787)
========= ======== =======
</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 December 31, 1998 are as follows:
Total
Current assets........................... $168,005
Properties & equipment, net.............. 219
Other assets............................. 594
--------
Total Assets.......................... $168,818
========
Current liabilities...................... 18,622
Other liabilities........................ 247
--------
Total Liabilities..................... 18,869
========
Net assets............................ $149,949
========
87
<PAGE> 88
NOTE 9. INCOME TAXES
Income from continuing operations before income taxes and cumulative
effect of change in accounting for start-up costs are as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------------------------------------------- --------------
TWELVE MONTHS TWELVE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 SEPT. 30, 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Domestic $ 125,347 $ 80,461 $ 18,415 $ 154,878
Foreign (63) (821) (2,037) (25,795)
========= ======== ======== =========
Total $ 126,284 $ 79,640 $ 16,378 $ 129,083
========= ======== ======== =========
</TABLE>
The provision for income taxes was as
follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------------------------------------------- --------------
TWELVE MONTHS TWELVE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 SEPT. 30, 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Current tax expense
Federal $44,777 $25,040 $ 7,098 $ 56,100
State 12,406 13,354 1,596 15,183
Foreign 530 1,064 237 3,187
------- ------- ------- --------
Total Current 57,713 39,458 8,931 74,470
Deferred tax (benefit) expense
Federal 14,642 5,137 1,783 (7,235)
State 2,092 1,125 287 (1,033)
------- ------- ------- --------
Total deferred 16,734 6,262 2,070 (8,268)
------- ------- ------- --------
Total provision $74,447 $45,720 $11,001 $ 66,202
======= ======= ======= ========
</TABLE>
The income tax expense (benefit) for the year ended December 31, 1998 was
allocated as follows:
Income from continuing operations $ 74,447
Discontinued operations (48,315)
Change in accounting method (3,260)
--------
Total tax expense $ 22,872
========
88
<PAGE> 89
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
SUCCESSOR
--------------------------
DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Allowance for doubtful accounts $ (28,965) $ (16,960)
Insurance liability (23,550) (24,780)
Legal liability (28,972) (37,666)
Restructuring reserves -- (2,978)
Deferred and incentive compensation (9,335) (17,028)
Pension and benefit accruals (16,153) (14,230)
Accrued interest (9,990) (3,460)
Inventory reserves (4,155) (2,450)
General reserves (14,684) (4,354)
Discontinued operations
-- (5,861)
Other temporary differences (8,791) (3,557)
Loss carry forwards (18,405) (7,231)
--------- ---------
Gross deferred tax assets (162,998) (140,555)
Deferred tax assets valuation 5,340 3,368
--------- ---------
Deferred tax assets (157,658) (137,187)
--------- ---------
Depreciation and amortization 162,148 182,974
Other temporary differences 462 2,007
--------- ---------
Gross deferred tax liabilities 162,610 184,981
--------- ---------
Net deferred tax liabilities $ 4,952 $ 47,794
========= =========
</TABLE>
The provision for income taxes for continuing operations before the
cumulative effect of change in accounting for start-up costs for the twelve
months ended December 31, 1998, December 31, 1997 and the three months ended
December 31, 1996 and for the periods prior to the Merger of the Company as
described in Note 1 differed from the amount of income taxes determined by
applying the applicable statutory Federal income tax rate to pretax earnings as
a result of the following differences:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------------------------------------------- --------------
TWELVE MONTHS TWELVE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 SEPT. 30, 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0% 35.0%
State income taxes, net of Federal
tax benefit 7.5 11.8 7.5 7.1
Amortization of goodwill 16.6 25.2 22.2 0.9
Foreign losses and taxes 0.4 1.7 5.8 7.7
Decrease in valuation allowance 0.0 (16.5) 0.0 0.0
Other (0.6) 0.2 (3.3) 0.6
==== ==== ==== ====
Effective tax rate 58.9% 57.4% 67.2% 51.3%
==== ==== ==== ====
</TABLE>
The net changes in the valuation allowance for deferred tax assets were
$1,972, ($11,042), ($5,090), and $0, for the twelve months ended December 31,
1998, and 1997, for the three months ended December 31, 1996, and for the nine
months ended September 30, 1996, respectively. The increase for 1998 relates to
losses incurred by foreign subsidiaries. The decrease for 1997 relates mainly to
the utilization of the FUSA loss carryforward. The decrease for the three months
ended December 31, 1996 relates mainly to the transfer of a portion of the
Company's international operations to FMC. There were no tax provision
implications regarding the transfer of the valuation allowance.
At December 31, 1997, there were approximately $13,454 of foreign (net)
operating losses, the majority of which expire in varying amounts over the next
seven years. The Company also has $37,329 of domestic U.S. net operating losses
that will expire in the year 2018.
Provision has not been made for additional federal, state, or foreign
taxes on $3,418 of undistributed earnings of foreign subsidiaries. Those
earnings have been, and will continue to be, reinvested. The earnings could
become subject to additional tax if they were remitted as dividends, if foreign
earnings were loaned to the Company or a U.S. affiliate, or if the Company
should
89
<PAGE> 90
sell its stock in the subsidiaries. The Company estimates that the distribution
of these earnings would result in $1,386 of additional foreign withholding and
federal income taxes.
90
<PAGE> 91
NOTE 10. PROPERTIES AND EQUIPMENT
<TABLE>
<CAPTION>
SUCCESSOR
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Land and improvements $ 5,219 $ 6,190
Buildings 68,384 48,594
Capitalized lease property 9,398 9,950
Leasehold improvements 176,099 144,361
Equipment and furniture 327,643 376,199
Construction in progress 16,932 31,477
--------- ---------
603,675 616,771
Accumulated depreciation and amortization (174,035) (110,842)
--------- ---------
Properties and equipment, net $ 429,639 $ 505,929
========= =========
</TABLE>
Depreciation expense relating to properties and equipment amounted to
$81,683 and $76.912 for the years ended December 31,1998 and 1997 respectively
and $21,847 for the three months ended December 31, 1996 on a successor basis,
and $53,509, for the nine months ended September 30, 1996, on a predecessor
basis.
Included in properties and equipment as of December 31, 1998, and 1997
were $24,428 and $16,313, respectively, of peritoneal dialysis cycler machines
which the Company leases to customers with end-stage renal disease on a
month-to-month basis.. Rental income for the peritoneal dialysis cycler machines
was $7,679 and $6,230 for the twelve months ended December 31, 1998 and 1997,
respectively and $467, for the three months ended December 31, 1996.
Leases
In September 1997, FUSA entered into an amended operating lease
arrangement with a bank that covers approximately $40,100 of certain new
equipment of FUSA's dialyzer manufacturing facility at its Ogden, Utah plant.
The agreement has a basic term expiration date of January 1, 2010, renewal
options and a purchase option at the greater of 20% of the original cost or the
fair market value. If FUSA elects not to purchase the equipment or renew the
lease at the end of the lease term, FUSA will be obligated to pay a remarketing
fee of up to $1,350.
Machine sales for 1998 and 1997 include $32.6 million and $1.6 million,
respectively, of net revenues for machines sold to a third party leasing
company which are utilized by the dialysis services division to provide
services to the Company's customers.
91
<PAGE> 92
Future minimum payments under noncancelable leases (principally for
clinics and offices) as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES TOTAL
--------- ------- --------
<C> <C> <C> <C>
1999 $ 76,521 $5,992 $ 82,513
2000 67,154 1,647 68,801
2001 59,456 342 59,798
2002 41,607 300 41,907
2003 35,392 284 35,676
2004 and beyond 107,944 522 108,466
-------- ------ --------
Total minimum payments $388,074 $9,087 $397,161
======== ========
Less interest and operating costs 1,108
------
Present value of minimum lease Payments
($5,313 payable in 1999). $7,979
======
</TABLE>
Rental expense for operating leases was $103,838 and $81,740 for the
years ended December 31, 1998 and 1997 respectively, $19,826 for the three
months ended December 31, 1996 on a successor basis and $66,864, for nine months
ended September 30, 1996, on a predecessor basis. Amortization of properties
under capital leases amounted to $968 and $3,445 for the years ended December
31, 1998 and 1997 and $465 for the three months ended December 31, 1996 on a
successor basis and $629 for the nine months ended September 30, 1996, on a
predecessor basis.
Lease agreements frequently include renewal options and require that the
Company pay for utilities, taxes, insurance and maintenance expenses. Options to
purchase are also included in some lease agreements, particularly capital
leases.
92
<PAGE> 93
NOTE 11. EMPLOYEE INCENTIVES
PREDECESSOR BASIS
Compensation Arrangements
On a predecessor basis, Grace New York and NMC had established long term
incentive and annual incentive compensation plans under which certain key
executives were eligible to receive payments and bonuses if certain corporate
objectives were attained. These programs were terminated as of the effective
date of the Merger. The earnings for the nine months ended September 31, 1996
included charges of $5,084 for costs associated with these programs.
SUCCESSOR BASIS
Annual Incentive Compensation Plan
The Company has an annual incentive compensation plan under which key
employees of the Company are eligible to receive bonuses based upon the
achievement of EBIT results and other key objectives. Target awards range from
10% to 40% of employee's salary. Awards under these plans were accrued in 1998
for payment in 1999. No awards were paid in 1997.
93
<PAGE> 94
NOTE 12. PENSION AND OTHER POST RETIREMENT BENEFITS
Defined Benefit Pension Plans
Substantially all domestic employees are covered by NMC's
non-contributory, defined benefit pension plan. Each year NMC contributes at
least the minimum required by the Employee Retirement Income Security Act of
1974, as amended. Plan assets consist primarily of publicly traded common stock,
fixed income securities and cash equivalents.
The following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans.
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------------------------------------------- --------------
TWELVE MONTHS TWELVE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 SEPT. 30, 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year 72,025 63,260
Service Cost 7,416 7,100
Interest Cost 5,217 4,561
Amendments -- --
Actuarial (Gain)/Loss 5,810 (1,972)
Divestures (1,717) --
Benefits Paid (1,287) (924)
-------- --------
Benefit obligation at end of year 87,464 72,025
-------- --------
CHANGE ON PLAN ASSETS
Fair value of plan assets at beginning of year 65,088 54,218
Actual return on plan assets 13,218 11,794
Employee contribution 0 0
Benefits paid (1,287) (924)
-------- --------
Fair value of plan assets at end of year 77,019 65,088
-------- --------
Funded Status (10,444) (6,937)
Unrecognized net (gain)/loss (15,239) (15,152)
Recognition of U.A -- --
Adjustment for sale -- --
-------- --------
Accrued benefit costs (25,683) (22,089)
-------- --------
WEIGHTED - AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate 6.75% 7.50% 7.25% 7.25%
Expected return of plan assets 9.70 9.00 9.00 9.00
Rate of compensation increase 4.50 4.50 4.50 4.50
COMPONENTS OF NET PERIOD BENEFIT COST
Service Cost $ 7,416 7,100 1,678 5,036
Interest Cost 5,217 4,561 1,021 3,063
Expected return on plan assets (6,430) (4,758) (1,103) (3,310)
Amortization of transition asset -- -- (128) (384)
Amortization of prior service cost -- -- (11) (35)
Recognized net (gain)/loss (891) (139) 76 223
Curtailment net (gain) (1,717) -- -- --
-------- -------- -------- --------
Net periodic benefit costs $ 3,595 $ 6,764 $ 1,533 $ 4,593
-------- -------- -------- --------
</TABLE>
NMC also sponsors a supplemental executive retirement plan to provide
certain key executives with benefits in excess of normal pension benefits. The
projected benefit obligation was $3,100 at December 31, 1998 and 1997
respectively. Pension expense for this plan, for the twelve months ended
December 31, 1998 and 1997 and the three months ended December 31, 1996 was $374
and $360, and $149, respectively on a successor basis, and $319 for the nine
months ended September 30, 1996, on a predecessor basis.
NMC does not provide any postretirement benefits to its employees other
than those provided under its pension plan and supplemental executive retirement
plan.
94
<PAGE> 95
Defined Contribution Plans
The Company's employees are eligible to join NMC's 401 (k) Savings Plan
once they have achieved a minimum of one year of service and if they have more
than 900 hours of service before their one year anniversary date. Under the
provisions of the 401 (k) plan, employees are allowed to contribute up to 16% of
their salaries. The Company contributes 50% of their savings up to 6% of saved
pay. The Company's total contributions for the year ended December 31, 1998 and
1997 was $7,195 and $6,385 respectively and for the three months ended December
31, 1996 and nine months ended September 30, 1996 amounted to $1,204 and $3,428,
respectively.
FUSA employees are eligible to join FUSA's 401 (k) Savings Plan once
they have achieved a minimum of one year of service, 1000 hours of service and
attained the age of 18. Under the provisions of FUSA's 401 (k) Savings Plan,
FUSA contributes 2% of eligible employee base salary to the FUSA 401 (k) Plan.
FUSA's obligation to the FUSA 401 (k) Savings Plan was approximately $422, $780,
and $217 for the twelve months ended December 31, 1998 and 1997 and for the
three months ended December 31, 1996, respectively.
NOTE 13. EQUITY
PREFERRED STOCK-SUCCESSOR BASIS
At December 31, 1998, the components of the Company's preferred stocks
as presented in the Consolidated Balance Sheet and the Consolidated Statement
of Changes in Equity are as follows:
<TABLE>
<S> <C>
PREFERRED STOCKS, $100 PAR VALUE
- - 6% Cumulative (1); 40,000 shares authorized;
36,460 outstanding $ 3,646
- - 8% Cumulative Class A (2); 50,000 shares
authorized; 16,176 outstanding 1,618
- - 8% Noncumulative Class B (2); 40,000 shares
authorized; 21,483 outstanding 2,148
-------
$ 7,412
-------
PREFERRED STOCKS, $.10 PAR VALUE
- - Noncumulative Class D (3); 100,000,000 shares
authorized; 89,062,316 outstanding 8,906
-------
Total Preferred $16,318
=======
</TABLE>
(1) 160 votes per share
(2) 16 votes per share
(3) 1/10 vote per share
Stock Options - Predecessor Basis
On a predecessor basis, stock options were granted under the stock
incentive plans of companies within the Grace Consolidated Group. At September
30, 1996, options for 6,740,450 shares were outstanding with an average exercise
price of $30.12 (of which 4,726,562 were exercisable) and 7,000,000 shares were
available for additional grants. As of the date of the Merger, all outstanding
Grace New York stock options were, in the case of NMC employees, converted to
FMC stock options and, for non-NMC personnel, converted into Grace Chemical
stock options. Accordingly, there are no outstanding stock options on the
Company's common stock.
Stock Options - Successor Basis
Immediately prior to the Merger, FMC adopted a stock incentive plan (the
"FMC Plan") under which the Company's key management and executive employees are
eligible. Under the FMC Plan, eligible employees will have the right to acquire
Preference Shares of FMC. Options granted under the FMC Plan will be evidenced
by a non-transferable convertible bond and corresponding non-recourse loan to
the employee, secured solely by the bond with which it was made. Each
convertible bond, which will be DM denominated, will entitle the holder thereof
to convert the bond in Preference Shares equal to the face amount
95
<PAGE> 96
of the bond divided by the Preference Share's nominal value. During 1997, FMC
granted 2,697,438 options (of which 216,663 were forfeited) to the Company,
under the FMC Plan. At December 31, 1997 no options were exercisable. During
1998, 2,169,273 options were cancelled or forfeited leaving 311,502 options
outstanding under the plan. If these awards are exercised, a total of 103,800
non-voting preference shares would be issued at December 31, 1998. No options
were exercisable under the FMC Plan.
During 1998, the Company adopted a new stock incentive plan ("FMC 98 Plan")
under which the Company's key management and executive employees are eligible.
Under the FMC 98 Plan, eligible employees will have the right to acquire
Preference Shares of FMC. Options granted under the FMC 98 Plan will be
evidenced by a non-transferable convertible bond and a corresponding
non-recourse loan to the employee, secured solely by the bond with which it was
made. Each convertible bond, which will be DM denominated, will entitle the
holder thereof to convert the bond in Preference Shares equal to the face amount
of the bond divided by the Preference Share's nominal value. During 1998, FMC
awarded 1,024,083 options and exercisable upon vesting for 1,024,083 Preference.
At December 31, 1998 no options were exercisable under the FMC 98 Plan.
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NOTE 14. FINANCIAL INSTRUMENTS
Market Risk
The Company is exposed to market risks due to changes in interest rates
and foreign currency rates. The Company uses derivative financial instruments,
including interest rate swaps and foreign exchange contracts, as part of its
risk management strategy. These instruments are used as a means of hedging
exposure to interest rate and foreign currency fluctuations in connection with
firm commitments and debt obligations. The Company does not hold or issue
derivative instruments for trading or speculative purposes.
The mark-to-market valuations of the financial instruments and of
associated underlying exposures are closely monitored at all times. The Company
uses portfolio sensitivities and stress tests to monitor risk. Overall financial
strategies and the effects of using derivatives are reviewed periodically.
Foreign Currency Contracts
The Company uses foreign exchange contracts as a hedge against foreign
exchange risks associated with the settlement of foreign currency denominated
payables and firm commitments. At December 31, 1998 and 1997, the Company had
outstanding foreign currency contracts for the purchase of Deutsche Marks
("DEM") totaling of $33,280 and $135,000, respectively. The contracts
outstanding at December 31, 1998 include forward contracts for delivery of DEM
between January and June 1999, at rates ranging from 1.7528 to 1.804 DEM per
U.S. Dollar ("USD"), plus option contracts to provide downside protection at
1.6500 DEM per USD and upside potential up to 1.7640 DEM per USD on $12,000 with
a maturity date in September 1999.
The fair value of forward currency contracts are the estimated amounts
that the Company would receive or pay to terminate the agreement at the
reporting date, taking into account the current exchange rates and the current
credit worthiness of the counterparties. At December 31, 1998 and 1997, the
Company would have received $1,658 and paid $2,985, respectively to terminate
the contracts.
Interest Rate Agreements
At December 31, 1998 and 1997, the Company had interest rate swaps and
option agreements outstanding with various commercial banks for notional amounts
totaling $1,600,000 and $1,950,000 respectively. Of the amount outstanding at
December 31, 1998, $1,350,000 relate to agreements that became effective prior
to December 31, 1998. Three other agreements totaling $250,000 become effective
on January 4, 2000. All of these agreements were entered into for other than
trading purposes and expire at various dates between January 4, 2000 and January
5, 2004.
The interest rate swaps totaling $1,450,000 effectively change the
Company's interest rate exposure on its variable-rate revolving loans under the
Credit Facility (drawn as of December 31, 1998: $1,032,700), the drawdowns under
the receivables financing facility (drawn as of December 31, 1998: $305,600),
and certain operating lease payments to fixed rates of interest ranging between
6.05% and 6.6025%.
For a notional amount of $150,000, the option agreements give protection
against an increase of interest rates above 6.76% whereas the Company has to pay
the difference between the current interest rates and 5.55% when the current
rates are below that level. These option contracts will be effective between
January 4, 2000 and January 4, 2005. Under the NMC Credit facility, the Company
agreed to maintain at least $500,000 of interest rate protection.
The fair value of the interest rate swaps and options is the estimated
amount that the Company would receive or pay to terminate the agreements. The
fair value of these agreements at December 31, 1998 and 1997 would require the
Company to pay approximately $51,500 and $23,000, respectively. These estimates
are subjective in nature and involves uncertainties and matters of significant
judgement and therefore cannot be determined with precision. Changes in
assumptions significantly affect the estimates.
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Credit Risk
The Company is exposed to credit risk to the extent of potential
nonperformance by counterparties on financial instruments. As of December 31,
1998, the Company's credit exposure was insignificant and limited to the fair
value stated above; the Company believes the risk of incurring losses due to
credit risk is remote.
Fair Value of Other Financial Instruments
At December 31, 1998 and 1997, the carrying value of cash, cash
equivalents, accounts receivable, prepaid expenses, accounts payable, accrued
expenses, short-term borrowings, short-term borrowing from related parties and
current liabilities approximated their fair values, based on the short-term
maturities of these instruments. At December 31, 1998, the fair value of the
mandatorily redeemable trust preferred securities exceeded their carrying value
by $13,486. At December 31, 1997, the fair value of this debt outstanding at
that time exceeded its carrying value by $16,200. Fair value was determined
based upon market quotes.
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NOTE 15. RELATED PARTY TRANSACTIONS AND ALLOCATIONS
PREDECESSOR BASIS
Corporate Services
In accordance with SAB 55, Grace Chemicals allocated a portion of its
domestic corporate expenses to its business units, including NMC. These expenses
have included management and corporate overhead; benefit administration; risk
management/insurance administration; tax and treasury/cash management services;
environmental services; litigation administration services; and other support
and executive functions. Allocations and charges were based on either a direct
cost pass through or a percentage allocation for such services provided based on
factors such as net sales, management time, or headcount. Such allocations and
charges totaled $5,322, for the nine months ended September 30, 1996.
Domestic research and development expenses of Grace Chemicals related to
NMC's business and allocated to NMC in accordance with SAB 55 totaled $0, for
the nine months ended September 30, 1996.
Management believes that the basis used for allocating corporate
services was reasonable and that the terms of these transactions would not
materially differ from those that would result from transactions among unrelated
parties.
Grace Chemicals also charged NMC for its share of domestic workers'
compensation, employee life, medical and dental, and other general business
liability insurance premiums and claims which were handled by Grace Chemicals on
a corporate basis. These charges have been based on NMC's actual and expected
future experience, including actual payroll expense, and totaled $13,314, for
the nine months ended September 30, 1996, and have been included in either cost
of health care services or general and administrative expenses, depending upon
the nature of the employee's or insured asset's function.
NOTE 16. COMMITMENTS AND CONTINGENCIES
Contingent Non-NMC Liabilities of Grace New York (Now Known as Fresenius
Medical Care Holdings, Inc.)
In connection with the Merger, 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.
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NOTE 16. 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 understands that the government has utilized a grand jury
to investigate these matters. 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, Medicaid, CHAMPUS and other
government and commercial payors, its billing for home dialysis services, and
its payment of supplemental
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medical insurance premiums on behalf of indigent patients; (c) NMC's LifeChem
laboratory subsidiary's ("LifeChem") business, including testing procedures,
marketing, customer relationships, competition, 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, a
1997 review of dialysis facilities' standing orders, and the provision of
discounts on products from NMC's products division, grants, equipment and
entertainment to customers; and (d) NMC's homecare division ("Homecare") and, in
particular, information concerning intradialytic parenteral nutrition ("IDPN")
utilization, documentation of claims and 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, it is expected that the government will assert
that NMC has violated multiple statutory and regulatory provisions.
Additionally, nine 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.
During the approximately three and one-half years since the initial
subpoenas were served NMC and the government have met periodically to discuss
issues in connection with the OIG Investigation, including theories of
liability. Recently, NMC and the government have begun to explore the
possibility of settling the matters which are encompassed by the OIG
Investigation and, as referenced below, have reached an agreement in principal
in connection with the diagnostics investigation matter. There can be no
assurance that any of the other matters subject to the OIG Investigation will be
settled. If however, one or more of the matters encompassed by the OIG
Investigation is settled, it may result in NMC acknowledging that its past
practices violated federal statutes, as well as NMC incurring substantial civil
and criminal financial penalties which could have a material adverse effect on
the Company. If one or more of these matters is not settled, the government may
be expected to initiate litigation in which it would seek substantial civil and
criminal financial penalties and other sanctions that could result in the
exclusion of NMC and its subsidiaries from the Medicare program, Medicaid
program and other federal health care programs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations Contingencies."
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 has made extensive document production in response to the subpoena.
The Company and the government have been negotiating a resolution to this
matter, and negotiations have progressed to the point of a possible settlement.
The Company and the government have reached an agreement in principle in which,
among other things, the government has agreed to release the Company from
liability in this matter in exchange for a payment of approximately $16.5
million from the Company. The Company and the government are currently
negotiating the terms of a settlement agreement. The agreement is not final. For
this reason, the eventual outcome of this matter, its duration, and its effect,
if any, on NMC or the Company cannot be predicted at this time. The Company
divested Non-Renal Diagnostic services on June 26, 1998. See Note 8 -
"Discontinued Operations."
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MEDICAL DIRECTOR COMPENSATION
The government is investigating whether Dialysis Services' 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. Dialysis Services 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, Dialysis Services 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, Dialysis Services 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.
Dialysis Services 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 Dialysis Services 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 Dialysis Services 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 Dialysis Services; 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 assert that those specific arrangements were or are unlawful.
The government is also investigating whether Dialysis Services' 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.
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CREDIT BALANCES
In the ordinary course of business, medical service providers like Dialysis
Services receive overpayments from Medicare intermediaries and other payors for
services that they provide to 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 Dialysis Services 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. Dialysis Services' 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
Dialysis Services 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 Dialysis Services 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 as well as credit balances of other payors.
The government is also investigating whether Dialysis Services failed to
disclose Medicare overpayments that resulted from Dialysis Services' 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.
Dialysis Services 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 Dialysis Services 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
Dialysis Services 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 HIPAA, 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. In addition, the
government has indicated that it is investigating the method by which NMC made
Medigap payments on behalf of its indigent patients.
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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.
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 Dialysis Services and third-
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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 Dialysis Services 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 products or supplies, the
provision of computer equipment, the provision of money for the purchase of
computer equipment, the provision of research grants and the provision of
entertainment to customers. NMC has identified certain instances in which
benefits were provided to customers who purchased medical products from NMC
Medical Products, Inc., NMC's products company, and used LifeChem's laboratory
services. The government may assert that the provision of such benefits
violates, among other things, the anti-kickback statutes. In December 1998, the
former Vice President of Sales responsible for NMC's laboratory and products
divisions plead guilty to the payment of illegal kickbacks to obtain laboratory
business for NMC. In February 1999, the former President of NMC Medical
Products, Inc. was indicted by the government for the payment of these
same and/or similar kickbacks.
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 in connection with LifeChem business and testing practices. 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. Recently the government served investigative subpoenas
requiring NMC to update its production on the above issues and to produce
contract files for twenty-three identified dialysis clinic customers. The
government is investigating each of these areas, and asserts that LifeChem
and/or NMC have violated the False Claims Act and/or the Anti-Kickback Statute
through the test ordering, paneling, requisitioning, utilization, coding,
billing and auditing practices described above.
INTRADIALYTIC PARENTERAL NUTRITION
Administration kits. One of the activities of SRM is to provide IDPN
therapy to dialysis patients at both NMC-owned facilities and at facilities
owned by other providers. IDPN therapy was provided by Homcare prior to its
divestiture 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,
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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 asserts that NMC submitted false claims for administration
kits during the period from 1988 to June 30, 1996, and that Homecare's billing
for administration kits during this period violated, 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 the Company
cannot represent that Homecare followed this policy in every instance. The
government is investigating the propriety of Homecare's billings for infusion
pumps and IV poles and asserts that Homecare's billings violate the False
Claims Act.
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 Dialysis Services dialysis centers, the fee was $30 per administration,
based upon internal Dialysis Services 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. The
Company has identified instances in which other payments and amounts beyond
that reflected in a contract were paid to these third-party centers. The
Company has stopped paying "hang fees" to both Dialysis Services 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 assert 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, the Company 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 the Company
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%. The Company 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
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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.
Beginning in 1994 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. The government
asserts that Homecare submitted IDPN claims for individuals who were not
eligible for coverage and/or with inadequate documentation of eligibility.
The Company believes that it has presented to the government substantial
defenses which support NMC's interpretation of coverage rules of IDPN as HCFA
and its carriers published and explained them, and which demonstrated that HCFA
and its carriers improperly implemented unpublished, more restrictive criteria
after 1993. Nevertheless, the government is expected to assert in the OIG
Investigation that, on a widespread basis, NMC submitted and received payments
on claims for IDPN to Medicare for patients who were not eligible for coverage,
and for whom the documentation of eligibility was inadequate.
In addition, the government asserts that, in a substantial number of cases,
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 government continues to investigate
the IDPN claims.
QUI TAM ACTIONS
The Company and NMC have become aware that nine 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 and was disclosed to the
Company in November 1996. It alleges, among
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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 asserts 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 asserts 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.
The ninth qui tam was filed in the United States District Court for the
District of Massachusetts in 1994 and was disclosed to the Company in February
1999. It alleges among other things that NMC violated the False Claims Act and
the Anti-Kickback Statute in connection with certain billing and documentation
practices regarding IDPN therapy, home oxygen therapy and certain medical
billings in NMC's Chicago office.
Each of the qui tam complaints asserts 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.
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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.
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. Neither the entering into of the OIG
Agreements nor the providing of the Primary Guarantee and the $150 million
letter of credit is an admission of liability by any party with respect to the
OIG Investigation, nor does it indicate the liability, which may result
therefrom.
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
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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. HCFA further proposed that
its new instruction be effective retroactive to August 1993, the effective date
of OBRA 93.
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 and 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, and based
on its finding, the Court also permanently enjoined HCFA from enforcing and
applying the April 1995 rule retroactively against NMC. The Court took no action
on HCFA's motion for summary judgment pending completion of outstanding
discovery. On October 5, 1998 NMC filed it's own motion for summary judgment
requesting that the Court declare HCFA's prospective application of the April
1995 rule invalid and permanently enjoin HCFA from prospectively enforcing and
applying the April 1995 rule. The Court has not yet ruled on the parties'
motions. The Company believes that the Court's favorable rulings to date 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.
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 Dialysis Services 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 Dialysis Services of approximately
$120 million attributable to all periods prior to December 31, 1995. Also, in
such event, the Company's business, financial position and results of operations
would be materially adversely affected.
INTRADIALYTIC PARENTERAL NUTRITION COVERAGE ISSUES
SRM administers IDPN therapy to chronic dialysis patients who suffer from
severe gastrointestinal malfunctions. IDPN therapy was provided by Homecare
prior to its divestiture 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
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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.
NMC was successful in pursuing these claims through the administrative
process, receiving favorable decisions from Administrative Law Judges in more
than 80% of its cases. In early 1998, a group of claims which had been ruled on
favorably were remanded by the Medical Appeals Council to a single
Administrative Law Judge (the "ALJ") with extensive instructions concerning the
review of these decisions. A hearing was scheduled on the remanded claims to
take place in July, but later postponed until October 1998.
Prior to the July hearing date, the United States Attorney for the District
of Massachusetts requested that the hearing be stayed pending resolution of the
OIG Investigation, on the basis that proceeding could adversely effect the
government's investigation as well as the government's efforts to confirm its
belief that these claims are false. Prior to the ALJ issuing a decision on the
stay request, the U.S. Attorney's Office requested that NMC agree to a stay in
the proceedings in order to achieve a potential resolution of the IDPN claims
subject to the OIG Investigation as well as those which are subject to the
administrative appeals process. NMC has agreed to this request, and together
with the U.S. Attorney's Office has requested a stay. The ALJ has agreed to
this request in order to allow the parties the opportunity to resolve both the
IDPN claims which are the subject of the OIG Investigation and the IDPN claims
which are the subject of the administrative proceedings. At this time, it is
not possible to determine whether NMC and the government will be able to
resolve issues surrounding the IDPN claims. Further proceedings on all other
government appeals from the Administrative Law Judges' decisions favorable to
the Company have also been stayed by agreement of the parties.
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 December 31, 1998.
If NMC is unable to collect its IDPN receivable, either through the
administrative appeal process or through negotiation, 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
Notes to Consoliated Financial Statements Note 8 -"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 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
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government investigators and the Company have narrowed the issues with respect
to which the government has previously expressed concerns and recently have
conducted discussions 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 1997, the Company, NMC and certain named NMC subsidiaries 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. This matter is at a relatively early stage in
the litigation process, with substantial discovery just beginning 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 continue to vigorously defend
the lawsuit. It is also possible that one or more other private payors may
assert 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.
ADMINISTRATIVE APPEALS
The Company regularly pursues various administrative appeals relating to
reimbursement issues in connection with its dialysis facilities. One such appeal
consists of a challenge to the Medicare regulation which capped reimbursement
for the bad debts incurred by dialysis facilities. In 1998, the United States
Court of Appeals for the District of Columbia ruled in favor of the Company in
connection with the bad debt issue, holding that the Secretary of Health & Human
Services had not adequately justified the bad debt regulation, and ruling that
the government's order adopting the rule was arbitrary and capricious. The Court
of Appeals remanded the matter to the Secretary to provide a more adequate
explanation of the bad debt cap or to abandon it. Subsequently, the Court
modified its holding to continue the bad debt regulation in effect pending
remand. The Company has recently begun settlement discussions with the
government in an attempt to recover reimbursement for disallowed bad debt
expenses. The Company cannot predict the outcome of these discussions.
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NOTE 17. SIGNIFICANT RELATIONS
For the periods presented, approximately 60% of the Company's health
care services net revenues are paid by and subject to regulations under
governmental programs, primarily Medicare and Medicaid. The Company maintains
reserves for losses related to these programs, including uncollectible accounts
receivable, and such losses have been within management's expectations.
Revenues from EPO accounted for approximately 26% of the Dialysis
Services net revenues for the twelve months ended December 31, 1998 and
materially contribute to Dialysis Services' operating earnings. EPO is produced
by a single source manufacturer, Amgen, Inc., and any interruption of supply
could materially adversely affect the Company's business and results of
operations.
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NOTE 18. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the fourth quarter of 1998. SFAS No.
131 established the standards for reporting information about operating
statements in annual financial statements and requires selected information
about operating segments in interim financial reports issued to stockholders.
The Company's reportable segments are Dialysis Services and Dialysis
Products. For purposes of segment reporting, the Dialysis Services division and
Spectra Renal Management are combined and reported as Dialysis Services. These
divisions are aggregated because of their similar economic classifications.
These include the fact that they are both health care service providers whose
services are provided to a common patient population, and both receive a
significant portion of their net revenue from Medicare and other government and
non government third party payors. The Dialysis Products segment reflects the
activity of the Dialysis Products Division only.
The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies. The Company
generally evaluates division operating performance based on Earnings Before
Interest and Taxes (EBIT) but does use Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) in some cases.
The table below provides information for the years ended December 31,
1998 and 1997 and the three months ended December 31, 1996 on a successor basis
and for the nine months ended September 30, 1996 on a predecessor basis
pertaining to the Company's operations by geographic area.
<TABLE>
<CAPTION>
UNITED STATES EUROPE OTHER TOTAL
------------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
NET REVENUES
Twelve Months Ended 1998 $2,564,785 -- $ 6,621 $2,571,406
Twelve Months Ended 1997 2,156,622 -- 9,257 2,165,879
Three Months Ended 12/31/96 502,811 -- 2,560 505,371
Nine Months Ended 9/30/96 1,480,500 103,576 30,584 1,614,660
OPERATING EARNINGS
Twelve Months Ended 1998 446,725 -- 1,013 447,738
Twelve Months Ended 1997 332,166 -- (123) 332,043
Three Months Ended 12/31/96 76,374 -- 380 76,754
Nine Months Ended 9/30/96 219,289 (12,277) (4,099) 202,913
Assets 1998 2,452,279 -- 9,584 2,461,863
1997 2,233,932 -- 12,239 2,240,171
1996 1,740,211 -- 16,260 1,756,471
</TABLE>
The table below provides information for the years ended December 31,
1998 and 1997 and three months ended December 31, 1996 on a successor basis and
the nine months ended September 30, 1996 on a predecessor basis pertaining to
the Company's two industry segments. The predecossor basis has not been
restated and includes results of operations of discontinued operations and
international operations which were discontinued and transferred, respectively,
on a successor basis.
<TABLE>
<CAPTION>
LESS
DIALYSIS DIALYSIS INTERSEGMENT
SERVICES PRODUCTS SALES TOTAL
-------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
NET REVENUES
Twelve Months Ended 1998 $2,133,314 $660,458 $222,366 $2,571,406
Twelve Months Ended 1997 1,770,212 626,397 230,730 2,165,879
Three Months Ended 12/31/96 406,680 165,674 66,983 505,371
Nine Months Ended 9/30/96 1,523,458 240,175 148,973 1,614,660
OPERATING EARNINGS
Twelve Months Ended 1998 340,618 107,120 -- 447,738
Twelve Months Ended 1997 264,643 67,400 -- 332,043
Three Months Ended 12/31/96 67,318 9,436 -- 76,754
Nine Months Ended 9/30/96 169,715 33,198 -- 202,913
Assets Successor 1998 1,817,751 644,112 -- 2,461,863
1997 1,621,037 625,134 -- 2,246,171
1996 1,141,515 614,956 -- 1,756,471
CAPITAL EXPENDITURES
Twelve Months Ended 1998 55,972 11,996 -- 67,968
Twelve Months Ended 1997 80,278 49,574 -- 129,852
Three Months Ended 12/31/96 27,472 5,486 -- 32,958
Nine Months Ended 9/30/96 89,684 2,198 -- 91,882
DEPRECIATION AND AMORTIZATION
OF PROPERTIES AND EQUIPMENT
Twelve Months Ended 1998 114,471 21,944 -- 136,415
Twelve Months Ended 1997 94,737 26,574 -- 121,311
Three Months Ended 12/31/96 21,305 8,444 -- 29,749
Nine Months Ended 9/30/96 82,217 5,303 -- 87,520
</TABLE>
114
<PAGE> 115
The table below provides the reconciliations of reportable segment
operating earnings, assets, capital expenditures, and depreciation and
amortization to the Company's consolidated totals.
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS THREE MONTHS NINE MONTHS
SEGMENT RECONCILIATION ENDED 12/31/98 ENDED 12/31/97 ENDED 12/31/96 ENDED 9/30/96
---------------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
START UP COSTS:
Total operating earnings for reportable segments $ 447,738 $ 332,043 $ 76,754 $202,913
Corporate G&A (including foreign exchange) (108,618) (70,240) (16,416) (55,598)
Research and development expense (4,060) (4,077) (1,083) (1,906)
Net interest expense (208,776) (178,086) (42,877) (16,326)
---------- ---------- ---------- --------
Income Before Income Taxes and cumulative
effect of change in accounting for start
up costs $ 126,284 $ 79,640 $ 16,378 $129,083
========== ========== ========== ========
ASSETS:
Total assets for reportable segments $2,461,863 $2,246,171 $1,756,471
Intangible assets not allocated to segments 2,067,648 2,002,656 1,891,079
Accounts receivable financing agreement (305,600) (200,000) (148,000)
Net assets of discontinued operations 149,949 370,677 345,709
Other unallocated assets 239,543 351,682 525,228
---------- ---------- ----------
Total Assets $4,613,403 $4,771,186 $4,370,487
========== ========== ==========
Capital Expenditures
Total capital expenditures for reportable segments $ 67,968 $ 129,852 $ 32,958 $ 91,882
Corporate capital expenditures 6,685 3,892 1,058 971
---------- ---------- ---------- --------
Total Capital Expenditures $ 74,653 $ 133,744 $ 34,016 $ 92,853
========== ========== ========== ========
DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization for
reportable segments $ 136,415 $ 121,311 $ 29,749 $ 87,520
Corporate depreciation and amortization 79,799 78,415 19,140 5,577
---------- ---------- ---------- --------
Total Depreciation and Amortization $ 216,214 $ 199,726 $ 48,889 $ 93,097
========== ========== ========== ========
</TABLE>
115
<PAGE> 116
NOTE 19. QUARTERLY SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR
--------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998
Net revenues $610,046 $638,282 $655,652 $667,426
Cost of health care services and
medical supplies 406,438 422,167 432,126 446,712
Operating expenses 136,824 132,626 135,609 123,844
Interest expense, net 47,099 53,080 54,880 53,717
-------- -------- -------- --------
Total expenses 590,361 607,873 622,615 624,273
-------- -------- -------- --------
Earnings from continuing operations
before Income Taxes and cumulative
effect of accounting policy change 19,685 30,409 33,037 43,153
Provision for Income Taxes 9,962 17,582 18,872 28,031
-------- -------- -------- --------
Net earnings from continuing
operations before cumulative
effect of accounting change $ 9,723 $ 12,827 $ 14,165 $ 15,122
======== ======== ======== ========
<CAPTION>
SUCCESSOR
--------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1997
Net revenues $503,059 $529,320 $547,678 $585,822
Cost of health care services and
medical supplies 344,635 342,065 368,122 401,582
Operating expenses 105,033 117,991 112,427 116,297
Interest expense, net 38,758 43,428 47,547 48,354
-------- -------- -------- --------
Total expenses 488,426 503,484 528,096 566,233
-------- -------- -------- --------
Earnings from continuing
operations before Income Taxes 14,633 25,836 19,582 19,589
Provision for Income Taxes 7,749 14,940 9,775 13,256
-------- -------- -------- --------
Net earnings $ 6,884 $ 10,896 $ 9,807 $ 6,333
======== ======== ======== ========
</TABLE>
116
<PAGE> 117
To the Board of Directors and Stockholders of Fresenius Medical Care Holdings,
Inc.
Under the date of February 11, 1999, we reported on the consolidated
balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries
(the "Company") as of December 31, 1998 and 1997 and the related consolidated
statements of operations, comprehensive income, changes in equity and cash flows
for the years ended December 31, 1998 and 1997 and the period October 1, 1996 to
December 31, 1996, the successor periods and the period January 1, 1996 to
September 30, 1996, the predecessor period, as included in the annual report on
Form 10-K for the year 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules. These consolidated financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statement schedules based on
our audits.
In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
The audit report on the consolidated financial statements of the
Company referred to above contains an explanatory paragraph that states that the
Company was acquired as of September 30, 1996 in a business combination
accounted for as a purchase. As a result of the acquisition, the consolidated
financial statements for the successor period are presented on a different basis
of accounting than that of the predecessor period, and therefore are not
directly comparable. It is further explained that the predecessor period
consolidated financial statements were prepared on the basis of presentation
described in the notes to the consolidated financial statement and are not
intended to be a complete presentation of the assets, liabilities, revenues and
expenses of the Company.
KPMG PEAT MARWICK LLP
February 11, 1999
Boston, MA
117
<PAGE> 118
SCHEDULE II
FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR - FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
ADDITIONS (DEDUCTIONS)
----------------------------
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES OTHER NET END OF PERIOD
------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
DESCRIPTION
Valuation and qualifying accounts deducted
from assets:
Allowances for notes and accounts receivable 53,109 54,709 (58,609) 49,209
Valuation allowance for deferred tax assets 3,368 1,972 -- 5,340
<CAPTION>
SUCCESSOR - FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
ADDITIONS (DEDUCTIONS)
----------------------------
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES OTHER NET END OF PERIOD
------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
DESCRIPTION
Valuation and qualifying accounts deducted
from assets:
Allowances for notes and accounts receivable $ 56,491 $ 43,300 $(46,682) $ 53,109
Valuation allowance for deferred tax assets 14,140 (11,042) -- 3,368
<CAPTION>
SUCCESSOR - FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
ADDITIONS (DEDUCTIONS)
----------------------------
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES OTHER NET END OF PERIOD
------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
DESCRIPTION
Valuation and qualifying accounts deducted
from assets:
Allowances for notes and accounts receivable $ 55,242 $ 7,526 $ (6,277) $ 56,491
Valuation allowance for deferred tax assets 19,500 12,219 (17,309) 14,410
<CAPTION>
PREDECESSOR - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
ADDITIONS (DEDUCTIONS)
----------------------------
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES OTHER NET END OF PERIOD
------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
DESCRIPTION
Valuation and qualifying accounts deducted
from assets:
Allowances for notes and accounts receivable $119,914 $ 80,475 $(59,870) $140,519
Valuation allowance for deferred tax assets 19,500 -- -- 19,500
</TABLE>
118
<PAGE> 119
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
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).
119
<PAGE> 120
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.
(incorporated herein by reference to the Form 10-Q of
Registrant filed with Commission on November 12, 1998)
Exhibit 4.9 Amendment No. 7 dated effective December 31, 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 Lendors
named therein, Nations Bank, N.A. as paying agent and the Bank of
Nova Scotia, the Chase Manhattan Bank, N. A., as Dresdner Bank AG
and Nations Bank, N.A. as Managing Agents (filed herewith).
Exhibit 4.10 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 4.11 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 4.12 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).
120
<PAGE> 121
Exhibit 4.13 Senior Subordinated Indenture dated as of February 19, 1998 among
FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State Street
Bank and Trust Company as Trustee and Fresenius Medical Care
Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with
respect to the issuance of 7 3/8% Senior Subordinated Notes due
2008 (incorporated herein by reference to the Form 10-K of
Registrant filed with Commission on March 23, 1998).
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. (incorporated herein by reference to the Form
10-Q of Registrant filed with Commission on November 12, 1998)
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. (incorporated herein by reference to the Form
10-Q of Registrant filed with Commission on November 12, 1998)
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. (incorporated herein by reference to the Form
10-Q of Registrant filed with Commission on November 12, 1998)
121
<PAGE> 122
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).
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. (incorporated
herein by reference to the Form 10-Q of Registrant filed with
Commission on November 12, 1998)
Exhibit 10.18 Employment Agreement dated October 23, 1998 by and between Roger
G. Stoll and National Medical Care, Inc. (filed herewith).
Exhibit 10.19 Employment Agreement dated November 11, 1998 by and between
William F. Grieco and National Medical Care, Inc. (filed
herewith)
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On July 16, 1998, the Company filed a report on Form 8-K with respect
to the Company's divestiture of its Non Renal Diagnostic Services and
Homecare divisions.
On August 5, 1998, the Company 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.
Schedule II - Valuation and Qualifying Accounts
Portions of this Exhibit have been granted confidential treatment by the
Commission.
122
<PAGE> 1
EXHIBIT 4.9
AMENDMENT NO. 7
THIS AMENDMENT NO. 7, dated as of December __, 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
the Lenders to amend the provisions of the Credit Agreement to provide for the
obligations of certain of the Borrowers thereunder to be joint and several;
WHEREAS, the required 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:
1. The Credit Agreement is amended and modified in the following
respects:
1.1. In Section 1.1, the following definitions are hereby
amended or added to read as follows:
"CO-BORROWERS" means NMC and each of the Designated
Borrowers which has been designated as a "Co-Borrower" in a
Borrower Joinder Agreement executed pursuant to Section 3.16
in which it has agreed that its liability hereunder shall be
joint and several with the other Co-Borrowers.
"PRIMARY BORROWERS" means (i) those Borrowers
identified as such on SCHEDULE 2.1(A)-2, (ii) any Borrower
designated as a Primary Borrower in a Borrower Joinder
Agreement executed pursuant to Section 3.16, and (iii) any
Co-Borrower.
1.2 Section 2.1 (Revolving Loans) is hereby amended as
follows:
(i) by deleting the words "on behalf of a
Primary Borrower" in the first sentence of clause (b)(i)
thereof and inserting the words, "on behalf of the
Co-Borrowers or any other Primary Borrower" in place thereof;
(ii) by deleting clause (B) from the second
sentence of clause (b)(i) thereof and inserting the following
clause in its place "(B) the applicable Borrower or the
Co-Borrowers,";
(iii) by deleting the words "for the account of
each such Primary Borrower" from the first sentence of clause
(b)(iii) thereof and inserting in place thereof the words "for
the account of the Co-Borrowers or of each such Primary
Borrower, as applicable, in each case"; and
<PAGE> 2
(iv) by inserting the words "(but each Loan to
the Co-Borrowers will count as one Loan)" in subsection (f) at
the end of clause (i) of the last sentence thereof.
1.3 Section 2.5 (Domestic Swingline Loan Subfacility) is
hereby amended as follows:
(i) by deleting the words "on behalf of a
Primary Borrower" in the first sentence of clause (b)(i)
thereof and inserting the words, "on behalf of the
Co-Borrowers or any other Primary Borrower" in place thereof;
(ii) by deleting clause (B) from the second
sentence of clause (b)(i) thereof and inserting the following
clause in its place "(B) the applicable Borrower or the
Co-Borrowers,";
(iii) by inserting the words "on behalf of the
Co-Borrowers" immediately after the words "the Company shall
be deemed to have requested" in the second sentence of clause
(iii) thereof; and
(iv) by inserting the words "the Co-Borrowers or"
immediately before the words "the applicable Primary Borrower"
in the third sentence of clause (iii) thereof.
1.4 Section 2.7(e) is hereby amended by deleting the
words "on behalf of a Primary Borrower" from the first sentence thereof
and inserting the words "on behalf of the Co-Borrowers or any other
Primary Borrower" in place thereof.
1.5 Section 3.16 is hereby amended as follows:
(i) by inserting the following at the end of the
first sentence of clause (a) thereof:
"and, if applicable, requesting that the Applicant
Borrower be a Co-Borrower hereunder. The Designated Borrower
Limit for any Co-Borrower shall be the same as the Designated
Borrower Limit in effect for the Company."
(ii) by inserting the following proviso at the
end of clause (b) thereof:
"PROVIDED, that a Co-Borrower (other than NMC) shall
cease to be a Borrower on the date that the Paying Agent
receives such request."
1.6 Section 3.17 is hereby deleted in its entirety and
the following substituted therefor:
"3.17 SEVERAL LIABILITY OF BORROWERS; JOINT AND
SEVERAL LIABILITY OF CO-BORROWERS. The obligations of the
Borrowers, as Borrowers, are several, and not joint,
obligations of each of the Borrowers; PROVIDED, that the
obligations of the Company and the other Co-Borrowers shall be
joint and several."
1.7 A new Section 6.16 is added to read as follows:
"6.16 YEAR 2000 COMPLIANCE. Holdings and the Company
have each (i) initiated a review and assessment of all
material areas within its and each of its Subsidiaries'
business and operations (including those affected by major
suppliers, vendors and account debtors) that could be
adversely affected by the "Year 2000 Problem" (that is, the
risk that computer applications used by Holdings or any of its
Subsidiaries (or such suppliers, vendors and account debtors)
may be unable to recognize and perform properly date-sensitive
functions involving any date after December 31, 1999), (ii)
developed a plan and timeline for addressing the Year 2000
Problem on a timely basis, and (iii) to date, implemented that
plan, to the extent that the timetable is controlled by
Holdings and its Subsidiaries and not by third parties, on a
timetable consistent with addressing the Year 2000 Problem on
a timely basis. Based on the foregoing, Holdings currently
believes that all computer applications used by Holdings or
any of its Subsidiaries that are material to its or
2
<PAGE> 3
any of its Subsidiaries' business and operations are
reasonably expected to be able to perform properly
date-sensitive functions for all dates 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 to have
Material Adverse Effect."
1.8 The following shall be inserted at the end of clause
(iv) of Section 7.1(b):
; PROVIDED, that, in the case of the Co-Borrowers,
the requirements of this clause (iv) shall be satisfied by the
delivery of a company-prepared consolidated balance sheet of
the Company, the Co-Borrowers and their respective
Subsidiaries and related company-prepared consolidated
statements of income and retained earnings;
1.9 A new Section 7.16 is added to read as follows:
"7.16 YEAR 2000 COMPLIANCE. Holdings and the Company
will promptly notify the Paying Agent in the event either
discovers or determines that any computer application
(including those of its suppliers, vendors and customers) that
is material to Holdings' or any of its Subsidiaries'
(including the Company's and its Subsidiaries') business and
operations will not be Year 2000 compliant, except to the
extent that such failure could not reasonably be expected to
have a Material Adverse Effect."
1.10 SCHEDULE 3.16-1 to the Credit Agreement is hereby
amended by deleting said SCHEDULE 3.16-1 in its entirety and
substituting in place thereof a new SCHEDULE 3.16-1 in the form of
ANNEX A to this Amendment.
2. Pursuant to Section 3.16, the Company requests that each of
the Subsidiaries identified on ANNEX B hereto (collectively, the "DESIGNATED
CO-BORROWERS") be designated as Co-Borrowers hereunder and confirms that it has
delivered, or will deliver, a Borrower Joinder Agreement in the form specified
by Section 3.16 to the Paying Agent on behalf of each of the Designated
Co-Borrowers. The Required Lenders hereby consent to the joinder of each of the
Designated Co-Borrowers as a Designated Borrower under the Credit Agreement as
amended hereby, subject to and effective upon the delivery to the Paying Agent
of executed promissory notes, if any, required in connection therewith, and
supporting resolutions, articles of incorporation, bylaws, incumbency
certificates, opinions of counsel and such other items as the Paying Agent may
request, and hereby waive the provision contained in Section 3.16 that such
joinder become effective ten days after such consent and delivery.
3. The Company hereby agrees that its obligations under the
Credit Agreement as a Borrower are joint and several with the obligations of the
other Co-Borrowers thereunder.
4. This Amendment shall be effective upon receipt by the Paying
Agent of (i) copies of this Amendment executed by the Company and the other
members of the Consolidated Group identified on the signature pages hereto, and
(ii) the consent of the Required Lenders to this Amendment.
5. Except as modified hereby, all of the terms and provisions of
the Credit Agreement (and Exhibits and Schedules) remain in full force and
effect.
6. 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.
7. 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.
8. 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.
3
<PAGE> 4
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date first above
written.
BORROWERS: NATIONAL MEDICAL CARE, INC.,
a Delaware corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
FRESENIUS MEDICAL CARE AG
By /s/ Dr. K.-D. Schwab
-----------------------------------------
Name: Dr. K.-D. Schwab
Title: SVP Finance
By /s/ Dr. D. Blumenhagen
-----------------------------------------
Name: Dr. D. Blumenhagen
Title: Treasurer
NMC DO BRASIL LTDA.,
a Brazil corporation
By /s/ Joao Padrinsui
-----------------------------------------
Name: Joao Padrinsui
Title: Manager
NATIONAL MEDICAL CARE OF SPAIN, S.A.,
a Spanish corporation
By /s/ Dr. E. Gatti and J. Allen
-----------------------------------------
Name: Dr. E. Gatti and J. Allen
Title: Board Members
NATIONAL MEDICAL CARE OF TAIWAN, INC.,
a Delaware corporation
By /s/ Marc Lieberman
-----------------------------------------
Name: Marc Lieberman
Title: Assistant Treasurer
NMC CENTRO MEDICO NACIONAL, LDA.,
a Portuguese corporation
By /s/ J. Allen
-----------------------------------------
Name: J. Allen
Title: Board Member
FRESENIUS MEDICAL CARE ARGENTINA, S.A.,
as successor by merger to
NMC DE ARGENTINA, S.A.,
an Argentine corporation
By /s/ Guido Yagupsky
-----------------------------------------
Name: Guido Yagupsky
Title: Board Member
4
<PAGE> 5
FRESENIUS USA, INC.,
a Massachusetts corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
FRESENIUS MEDICAL CARE DEUTSCHLAND GmbH,
a German corporation
By /s/ Dr. K.-D. Schwab
-----------------------------------------
Name: Dr. K.-D. Schwab
Title: SVP Finance
By /s/ Dr. D. Blumenhagen
-----------------------------------------
Name: Dr. D. Blumenhagen
Title: Treasurer
FRESENIUS MEDICAL CARE GROUPE FRANCE
(formerly known as Fresenius Groupe
France S.A.), a French corporation
By /s/ Dr. A. Stopper and Dr. E. Gatti
-----------------------------------------
Name: Dr. A. Stopper and Dr. E. Gatti
Title: Board Members
FRESENIUS MEDICAL CARE HOLDING, S.p.A.,
an Italian corporation
By /s/ Dr. A. Stopper and Dr. E. Gatti
-----------------------------------------
Name: Dr. A. Stopper and Dr. E. Gatti
Title: Board Members
FRESENIUS MEDICAL CARE ESPANA S.A.,
a Spanish corporation
By /s/ Dr. E. Gatti
-----------------------------------------
Name: Dr. E. Gatti
Title: Board Member
5
<PAGE> 6
FRESENIUS MEDICAL CARE MAGYAROSZA KfG,
a Hungarian corporation
By /s/ Norman Erhard
-----------------------------------------
Name: Norman Erhard
Title: General Manager
GUARANTORS: FRESENIUS MEDICAL CARE HOLDINGS, INC.,
a New York corporation formerly known
as WRG-NY
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
NATIONAL MEDICAL CARE, INC.,
a Delaware corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
BIO-MEDICAL APPLICATIONS MANAGEMENT CO.,
INC., a Delaware corporation
By /s/ Patrick Moriarty
-----------------------------------------
Name: Patrick Moriarty
Title: Vice President
LIFECHEM, INC.,
a Delaware corporation
By /s/ Patrick Moriarty
-----------------------------------------
Name: Patrick Moriarty
Title: Assistant Treasurer
FRESENIUS MEDICAL CARE AG,
a German corporation
By /s/ Dr. K.-D. Schwab
-----------------------------------------
Name: Dr. K.-D. Schwab
Title: SVP Finance
By /s/ Dr. D. Blumenhagen
-----------------------------------------
Name: Dr. D. Blumenhagen
Title: Treasurer
6
<PAGE> 7
FRESENIUS USA, INC.,
a Massachusetts corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
FRESENIUS MEDICAL CARE DEUTSCHLAND
GmbH, a German corporation
By /s/ Dr. K.-D. Schwab
-----------------------------------------
Name: Dr. K.-D. Schwab
Title: SVP Finance
By /s/ Dr. D. Blumenhagen
-----------------------------------------
Name: Dr. D. Blumenhagen
Title: Treasurer
FRESENIUS MEDICAL CARE GROUPE FRANCE,
a French corporation (formerly known as
Fresenius Groupe France S.A.)
By /s/ Dr. A. Stopper and Dr. E.Gatti
-----------------------------------------
Name: Dr. A. Stopper and Dr. E. Gatti
Title: Board Members
FRESENIUS SECURITIES, INC.,
a California corporation
By /s/ Ben J. Lipps
-----------------------------------------
Name: Ben J. Lipps
Title: President
NEOMEDICA, INC.,
a Delaware corporation
By /s/ Patrick Moriarty
-----------------------------------------
Name: Patrick Moriarty
Title: Treasurer
FMC FINANCE S.A.,
a Luxembourg corporation
By /s/ J. Allen
-----------------------------------------
Name: J. Allen
Title: Board Member
7
<PAGE> 8
FMC TRUST FINANCE S.a.r.l. LUXEMBOURG,
a Luxembourg corporation
By /s/ Dr. A. Stopper
-----------------------------------------
Name: Dr. A. Stopper
Title: General Manager
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
8
<PAGE> 9
CONSENT TO AMENDMENT NO. 7
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. 7 dated December __, 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:
9
<PAGE> 10
ANNEX A
to Amendment No. 7
SCHEDULE 3.16-1
Form of Borrower Joinder Agreement
THIS BORROWER JOINDER AGREEMENT (the "AGREEMENT"), dated as of
________________, 19__, is by and between ______________________, a
________________ (the "APPLICANT BORROWER"), and NATIONSBANK, N.A., in its
capacity as Paying Agent under that certain Credit Agreement (as amended and
modified, the "CREDIT AGREEMENT"), dated as of September 27, 1996, by and among
NATIONAL MEDICAL CARE, INC., a Delaware corporation, and certain subsidiaries
and affiliates (the "BORROWERS"), the Guarantors identified therein, the Lenders
and NationsBank, N.A., as Paying Agent. All of the defined terms in the Credit
Agreement are incorporated hereby by reference.
The Applicant Borrower has indicated its desire to become a Designated
Borrower pursuant to Section 3.16 of the Credit Agreement.
Accordingly, the Applicant Borrower hereby agrees as follows with the
Paying Agent, for the benefit of the Lenders:
1. The Applicant Borrower hereby acknowledges, agrees and
confirms that, by its execution of this Agreement, the Applicant Borrower will
be deemed to be a party to the Credit Agreement and a Designated Borrower for
all purposes of the Credit Agreement and the other Credit Documents, and shall
have all of the obligations of a Borrower thereunder as if it has executed the
Credit Agreement and the other Credit Documents. The Applicant Borrower hereby
ratifies, as of the date hereof, and agrees to be bound by, all of the terms,
provisions and conditions contained in the Credit Documents, including without
limitation (i) all of the representations and warranties of the Credit Parties
set forth in Section 6 of the Credit Agreement, and (ii) all of the affirmative
and negative covenants set forth in Sections 7 and 8 of the Credit Agreement.
The Applicant Borrower requests approval [as a Primary Borrower[, a
Co-Borrower] and] of a Designated Borrower Limit of $__________. Unless it is a
Co-Borrower or it is approved by the Required Lenders, the Applicant Borrower
will not be a Primary Borrower.
2. The Applicant Borrower acknowledges and confirms that it has
received a copy of the Credit Agreement and the Schedules and Exhibits thereto.
The information on the Schedules to the Credit Agreement and the Pledge
Agreement are amended to provide the information shown on the attached SCHEDULE
A.
3. National Medical Care, Inc. ("NMC") confirms that all of its
obligations under the Credit Agreement are, and upon the Applicant Borrower
becoming a Designated Borrower shall continue to be, in full force and effect.
NMC further confirms that immediately upon the Applicant Borrower becoming a
Designated Borrower the term "Obligations", as used in the Credit Agreement,
shall include all Obligations of such Designated Borrower under the Credit
Agreement and under each other Credit Document.
4. The Applicant Borrower hereby agrees that upon becoming a
Designated Borrower it will assume all Obligations of a Borrower as set forth in
the Credit Agreement [Co-Borrowers only: and all Obligations of the Company and
the other Co-Borrowers (if any) thereunder in respect of outstanding Revolving
Loans and outstanding Domestic Swingline Loans and that its liability in respect
of the Obligations shall be joint and several with the other Co-Borrowers].
5. Each of NMC and the Applicant Borrower agrees that at any time
and from time to time, upon the written request of the Paying Agent, it will
execute and deliver such further documents and do such further acts and things
as the Paying Agent may reasonably request in order to effect the purposes of
this Certificate.
10
<PAGE> 11
6. This Agreement may be executed in two or more counterparts,
each of which shall constitute an original but all of which when taken together
shall constitute one contract.
7. This Agreement 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]
11
<PAGE> 12
IN WITNESS WHEREOF, the Applicant Borrower has caused the Borrower
Joinder Agreement to be duly executed by its authorized officers, and the Paying
Agent, for the benefit of the Lenders, has caused the same to be accepted by its
authorized officer, as of the day and year first above written.
APPLICANT BORROWER:
By:
----------------------------------------
Name:
Title:
NATIONAL MEDICAL CARE, INC.,
a Delaware corporation
By:
----------------------------------------
Name:
Title:
Acknowledged and accepted:
NATIONSBANK, N.A., as Paying Agent
By:
----------------------------------------
Name:
Title:
12
<PAGE> 13
ANNEX B
to Amendment No. 7
DESIGNATED CO-BORROWERS
LifeChem, Inc.
Bio-Medical Applications of Alabama, Inc.
Bio-Medical Applications of Florida, Inc.
Bio-Medical Applications of Georgia, Inc.
Bio-Medical Applications of Indiana, Inc.
Bio-Medical Applications of Kentucky, Inc.
Bio-Medical Applications of Louisiana, Inc.
Bio-Medical Applications of Maryland, Inc.
Bio-Medical Applications of Massachusetts, Inc.
Bio-Medical Applications of North Carolina, Inc.
Bio-Medical Applications of Ohio, Inc.
Bio-Medical Applications of Pennsylvania, Inc.
Bio-Medical Applications of South Carolina, Inc.
Bio-Medical Applications of Texas, Inc.
Bio-Medical Applications of Virginia, Inc.
13
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made and entered into this 23rd day October, 1998, by and
between National Medical Care, Inc. d/b/a Fresenius Medical Care North America
("FMC") or the "EMPLOYER"), with principal offices located at 95 Hayden Avenue,
Lexington, MA 02420 and Roger G. Stoll (`EMPLOYEE") currently residing at 106
Clearview Lane, New Canaan, CT 06840.
WITNESSETH:
WHEREAS, FMC desires to employ EMPLOYEE as Executive Vice President of Fresenius
Medical Care North America ("FMC"), and
WHEREAS, the parties hereto desire to express the terms and conditions of such
employment.
NOW THEREFORE, it is understood and agreed to between the parties as follows:
1. EMPLOYMENT. FMC hereby employs EMPLOYEE as its Executive Vice President,
and EMPLOYEE hereby accepts the employment upon the terms and conditions of
this Agreement.
2. TERM. The term of this Agreement shall commence as of the date EMPLOYEE
begins employment at FMC's Lexington, Massachusetts headquarters but no
later than October 5, 1998 and shall continue thereafter, unless terminated
in accordance with the provisions hereinafter stated.
3. DUTIES AND RESPONSIBILITIES. EMPLOYEE shall serve full-time as FMC's
Executive Vice President and will be responsible for business activities,
including full P&L responsibilities, for the company's Renal Products and
Laboratory and Diagnostic Services businesses and Corporate Information
Services. EMPLOYEE will also assume responsibility for future activities as
mutually agreed upon by EMPLOYEE and Ben Lipps. EMPLOYEE shall report
directly to Ben Lipps, the Chief Executive Officer of FMC. EMPLOYEE shall
to the best of his ability and experience competently, loyally, diligently
and conscientiously perform all of the duties and obligations expressly or
implicitly required under this Agreement. EMPLOYEE further agrees that he
will not in conducting business in the interest of the EMPLOYER engage in,
or knowingly permit others under his control to carry on, or induce others
to engage in any practice or commit acts in violation of any federal, state
or local law, ordinance, or in any material respect, any written company
policy or procedure. During the term of his employment, Stoll may continue
to serve on the Boards of Directors of St. Jude Medical, Inc. and Ribogene,
Inc.
4. COMPENSATION AND BENEFITS.
a) BASE SALARY. EMPLOYER shall pay EMPLOYEE for all services rendered a
base salary of $541,000 per year, (the "Base Salary"), payable in
accordance with FMC's payroll procedures, subject to customary
withholding and employment taxes. Salary will be reviewed annually.
<PAGE> 2
b) INCENTIVE COMPENSATION. During EMPLOYEE'S employment with FMC,
EMPLOYEE shall be entitled to participate in FMC's Management Bonus
Plan ("MBP") and such other incentive compensation plans as are now
available or may become available to other similarly positioned
officers of FMC. For executives, the target level bonus is forty
percent (40%) and the maximum bonus is one hundred percent (100%) of
base salary, pro-rated for the date employment commences. Funding for
the plan is based upon attainment of specific individual and company
financial objectives.
c) STOCK PLAN. EMPLOYEE shall be entitled to participate in the Fresenius
Medical Care AG ("Fresenius") 1998 Stock Incentive Plan (the "Stock
Plan"), subject to IRS approval of the Stock Plan. EMPLOYEE shall be
recommended to receive options to purchase 90,000 Preference Shares
(equivalent to 270,000 American Depository shares) constituting a
grant under that non-qualified stock plan for employees of Fresenius'
United States subsidiaries. Preference Shares are traded on the
Frankfort Stock Exchange and are Deutsche Mark denominations. A
vesting schedule will be recommended such that 15,000 shares vest on
the date of grant and 15,000 vest on each of the next five
anniversaries of the grant. In the event the 1998 Stock Plan does not
receive IRS approval, Stoll will be recommended to receive options
under the 1996 Stock Plan, as amended, subject to IRS approval of that
Plan. In the event the 1996 Stock Plan, as amended, does not receive
IRS approval, Stoll will be recommended to receive options under the
original 1996 Stock Plan which has been approved by the IRS.
d) BENEFIT PROGRAMS. EMPLOYEE shall be eligible to participate in the FMC
group employee benefits program as now established or which
subsequently becomes available, including all executive benefits.
e) LIFE INSURANCE. EMPLOYEE will be provided with life insurance in
accordance with FMC's policy, currently capped at $400,000. EMPLOYEE
will be provided with the opportunity to purchase supplemental life
insurance in excess of $400,000 but not to exceed $2,000,000 of
coverage at his own expense.
f) AUTOMOBILE. EMPLOYEE will be provided with a company car.
g) TAX PREPARATION. EMPLOYEE will be reimbursed annually for expenses
associated with individual income tax preparation up to a total of Two
Thousand Dollars ($2,000) each year.
h) VACATION. EMPLOYEE shall be eligible to participate in FMC's Paid Time
Off program which provides for thirty-five (35) days of Paid Time-Off
per year.
i) EXPENSE REIMBURSEMENT. EMPLOYEE will be reimbursed for all business
related expenses in accordance with FMC's Reimbursement policy.
5. RELOCATION. EMPLOYEE will relocate from New Canaan, CT to the Lexington, MA
area promptly upon commencement of employment. Relocation will be covered
under existing FMC policy and will include all costs of sale of his
existing residence and purchase of a new residence, all costs for packing,
moving and unpacking of household goods, househunting trips for EMPLOYEE
and his wife, travel to and from New Canaan during any transition
2
<PAGE> 3
period, and other miscellaneous relocation costs. Temporary housing will be
provided if needed for up to six (6) months.
6. TERMINATION OF EMPLOYMENT.
a) TERMINATION BY FMC. This Agreement may be terminated by FMC for cause
immediately upon notice to EMPLOYEE. FMC shall have cause for termination
in the event of:
i) A refusal by EMPLOYEE to perform duties incident to his employment
responsibilities, or violation of any written policy of FMC in any
material respect or failure to abide by the covenants set forth in
Paragraph 3 of this Agreement.
ii) EMPLOYEE'S death.
iii) The final, unappealable conviction of EMPLOYEE of any felony.
No severance benefits are due to EMPLOYEE in the event he is terminated for
cause.
b) TERMINATION BY FMC FOR DISABILITY. FMC may also terminate this Agreement in
the event of the disability of EMPLOYEE during his employment under this
Agreement through any illness, injury, accident or condition of either a
physical or psychological nature and, as a result in the opinion of a
physician mutually agreeable to the parties is expected to be unable to
perform substantially all of his duties and responsibilities hereunder for
one hundred eighty (180) consecutive calendar days during the year
following the physician's examination of EMPLOYEE.
c) TERMINATION BY EMPLOYEE. This Agreement may be terminated by the EMPLOYEE
in the event of a breach by FMC of any of its obligations under this
Agreement, provided EMPLOYEE gives FMC written notice specifying the manner
in which he believes FMC has breached this Agreement, and FMC has thirty
(30) days from receipt of such notice to cure such breach, or in the case
of other than a non-payment of money breach, if such breach cannot be cured
within thirty (30) days, to commence a good faith effort to cure.
Additionally, this Agreement may be terminated by EMPLOYEE if Ben Lipps is
replaced as CEO by any individual other than EMPLOYEE, if there is a
reduction in EMPLOYEE'S position or responsibilities, if EMPLOYEE suffers a
reduction in salary or significant reduction in benefits or FMC experiences
a change in control defined as any of the following: (i) the transfer
(whether by sale, dividend, exchange, lease, merger, consolidation or
otherwise) of greater than 50 percent of the voting power of FMC, within
any 12 month period, (ii) the transfer (whether by sale, dividend,
exchange, lease, merger, consolidation or otherwise) of all or
substantially all the assets or stock of FMC or (iii) any other action
which results in persons other than the current majority shareholders of
FMC, having the voting power to direct the management of FMC or if FMC
relocates its corporate headquarters more than fifty (50) miles from its
present location in Lexington, Massachusetts.
d) PAYMENT UPON TERMINATION. In the event this Agreement is terminated for any
reason, EMPLOYEE shall be entitled to receive all accrued but unpaid annual
base salary earned by EMPLOYEE to the date of termination. In addition, if
FMC terminates this Agreement for any reason other than a reason set forth
in Section 6(a) or 6(b) or if EMPLOYEE terminates
3
<PAGE> 4
this Agreement pursuant to Section 6(c), EMPLOYEE shall also receive (i)
Salary and benefits continuation for a period of two (2) years following
termination of employment. EMPLOYER will at it option pay such severance as
Salary Continuation or in lump sum payment without benefits. If FMC
terminates this Agreement pursuant to Section 6(b), EMPLOYEE shall be
entitled to salary and benefits continuation or an equivalent lump sum
payment without benefits, at EMPLOYER'S option, for a period not to exceed
one and one-half years beginning on the 181st day of disability. In
addition, if EMPLOYEE is terminated other than for reasons set forth in
Section 6(a), EMPLOYER will grant EMPLOYEE one (1) year from date of
termination to exercise any outstanding options and Ben Lipps, or his
successors, with use his best efforts to recommend that EMPLOYEE be granted
up to 10 years from date of grant to exercise any such options.
7. NON-DISCLOSURE/NON-COMPETITION AGREEMENT. EMPLOYEE, as a condition of
employment, agrees to execute a Non-Disclosure/Non-Competition Agreement
which is incorporated by reference herein.
8. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement shall constitute the entire
Agreement between the parties, with the exception of the
Non-Disclosure/Non-Competition Agreement referenced in Paragraph 7 above,
and supersedes all existing agreements between them, whether oral or
written, with respect to the subject matter hereof. Any waiver, alteration,
or modification of any of the provisions of this Agreement, or cancellation
or replacement of this Agreement shall be accomplished in writing and
signed by the respective parities. If subsequent to EMPLOYEE'S employment,
FMC decides to materially modify this Agreement, FMC will reimburse
EMPLOYEE for legal fees he may incur with regard to any such modification
in an amount not to exceed Five Thousand Dollars ($5,000) per occurrence.
9. NOTICES. All notices hereunder shall be in writing and shall be deemed to
be given when sent by certified mail to either party at the address of such
party set forth above or at such other address as shall have been
designated by written notice by such party to the other party.
10. GOVERNING LAW. This Agreement shall be construed in accordance with, and
the rights of the parties shall be governed by, the laws of the
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the
undersigned duly authorized persons as of the day and year first stated above.
FRESENIUS MEDICAL CARE NORTH AMERICA
BY: /s/ Ben J. Lipps /s/ Roger Stoll
------------------------------ -------------------------------
Ben J. Lipps Roger Stoll
Chief Executive Officer
4
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made and entered into this 11th day of November, 1998, by and
between National Medical Care, Inc., d/b/a Fresenius Medical Care North America
("FMC" or the "EMPLOYER"), with principal offices located at 95 Hayden Avenue,
Lexington, MA 02420 and William F. Grieco ("EMPLOYEE") currently residing at 115
Marlborough Street, Boston, MA 02116.
WITNESSETH:
WHEREAS, FMC desires to employ EMPLOYEE as Senior Vice President and General
Counsel of FMC and its affiliated corporations in North America, and
WHEREAS, the parties hereto desire to express the terms and conditions of such
employment.
NOW THEREFORE, it is understood and agreed to between the parties as follows:
1. EMPLOYMENT. FMC hereby employs EMPLOYEE as Senior Vice President and
General Counsel, and EMPLOYEE hereby accepts the employment upon the terms
and conditions of this Agreement.
2. TERM. The term of this Agreement shall commence as of November 11, 1998 and
shall continue thereafter, unless terminated in accordance with the
provisions hereinafter stated.
3. DUTIES AND RESPONSIBILITIES. EMPLOYEE shall serve full time as FMC's Senior
Vice President and General Counsel and will be responsible for the
management and organization of the Law Department and coordination of the
provisions of all legal services, through both in-house counsel reporting
to EMPLOYEE and outside counsel engaged by EMPLOYEE, to FMC and its
affiliated organizations in North America. EMPLOYEE shall report directly
to the Chief Executive Officer of FMC. EMPLOYEE shall to the best of his
ability and experience competently, loyally, diligently and conscientiously
perform all of the duties and obligations expressly or implicitly required
under this Agreement. EMPLOYEE further agrees that, in conducting business
in the interest of the EMPLOYER, he will not engage in, knowingly permit
others under his control to carry on, or induce others to engage in any
practice or commit any acts in violation of any federal or state or local
law or ordinance.
4. COMPENSATION AND BENEFITS.
a) BASE SALARY. EMPLOYER shall pay EMPLOYEE for all services rendered a base
salary of $450,000 per year, (the "Base Salary"), payable in accordance
with FMC's payroll procedures, subject to customary withholding and
employment taxes. At the end of each year of employment hereunder,
EMPLOYEE's performance for the prior year shall be reviewed and evaluated.
If EMPLOYEE's performance is satisfactory, EMPLOYEE shall receive an
increase in his base salary consistent with the percent increase available
to other similarly positioned senior executives of FMC.
<PAGE> 2
b) INCENTIVE COMPENSATION. During EMPLOYEE's employment with FMC, EMPLOYEE
shall be entitled to participate in FMC's Management Bonus Plan and any
other such incentive compensation plans as are now available or may become
available to other similarly positioned senior executives of FMC. EMPLOYEE
will be in the 1998 senior executive eligibility level, wherein the target
level bonus is forty percent (40%) and the maximum bonus is eighty percent
(80%) per plan of base salary. Although funding for the plan is based upon
attainment of specific individual and company financial objectives,
EMPLOYEE will be treated similarly with other senior executives of FMC.
EMPLOYEE's entitlement to a bonus under the Management Bonus Plan will be
governed by terms of that Plan.
Additionally, in consideration of the extraordinary additional demands and
resulting work load imposed by the current investigation being conducted by
the Office of the United States Attorney for the District of Massachusetts
and other United States Government agencies (the "Investigation"), upon the
successful resolution of the Investigation, EMPLOYEE shall be eligible for
a special bonus consideration based upon his performance throughout the
course of the Investigation and its resolution (the "Special Bonus"). Such
Special Bonus shall be determined by Ben Lipps, as the Chief Executive
Officer, or in whatever capacity he may then be serving the EMPLOYER or any
of its affiliates.
c) STOCK PLAN. EMPLOYEE shall be entitled to participate in the current
Fresenius Medical Care AG Stock Incentive Plan, and any future stock
incentive plan (individually a "Stock Plan" and collectively, the "Stock
Plans"), subject to IRS approval of such respective Stock Plans. In
addition to the existing options to purchase Fresenius Medical Care AG
Preference Shares previously granted to EMPLOYEE (the "Existing Options"),
EMPLOYEE shall be entitled to receive additional option grants in amounts
and on such terms as granted to other similarly positioned senior
executives of FMC, as approved by the Fresenius Medical Care AG Managing
Board.
d) BENEFIT PROGRAMS. EMPLOYEE shall continue to be eligible to participate in
the group employee benefits programs at the senior executive level as now
established or which subsequently become available.
e) LIFE INSURANCE. EMPLOYEE will be provided with life insurance in accordance
with FMC's policy, currently capped at Four Hundred Thousand Dollars
($400,000). EMPLOYEE will be provided with the opportunity to purchase
supplemental life insurance of an additional Six Hundred Thousand Dollars
($600,000) beyond the current policy of coverage at his own expense, with
proof of good health.
f) AUTOMOBILE. EMPLOYEE will be provided with a company car allowance.
5. TERMINATION OF EMPLOYMENT.
a) TERMINATION BY FMC. This Agreement may be terminated by FMC for cause
immediately upon notice to EMPLOYEE. FMC shall have cause for termination
in the event of:
i) A default by EMPLOYEE in the performance of any material provision of
this Agreement, and such default continues for a period of thirty (30)
days after written notice to EMPLOYEE from EMPLOYER stating the
specific default, unless such default is cured to the reasonable
satisfaction of EMPLOYER within such thirty (30) day period, or if
such failure cannot be cured within thirty (30) days, EMPLOYEE has
commenced a good faith effort to cure in which case
2
<PAGE> 3
EMPLOYER, within its sole discretion, may extend such period, in which
case the notice of termination shall not be effective, and this
Agreement shall not be terminated. No severance benefits are due to
EMPLOYEE in the event he is terminated for cause.
ii) EMPLOYEE's death.
iii) The final, unappealable conviction of EMPLOYEE of any felony.
b) TERMINATION BY FMC FOR DISABILITY. The disability of EMPLOYEE during his
employment under this Agreement through any illness, injury, accident or
condition of either a physical or psychological nature and, as a result, in
the opinion of a physician mutually agreeable to the parties, is expected
to be unable to perform substantially all of his duties and
responsibilities hereunder for one hundred eighty (180) consecutive
calendar days during the year following the physician's examination of
EMPLOYEE.
c) TERMINATION BY EMPLOYEE. This Agreement may be terminated by EMPLOYEE in
the event of a breach by FMC of any of its obligations under this
Agreement, provided EMPLOYEE gives FMC written notice specifying the manner
in which he believes FMC has breached this Agreement and FMC has thirty
(30) days from receipt of such notice to cure such breach, or in the case
of other than a non-payment of money breach, if such breach cannot be cured
within thirty (30) days, to commence a good faith effort to cure.
Additionally, EMPLOYEE shall be entitled to terminate for "Good Reason."
For purposes of this Agreement, "Good Reason" means the occurrence of any
of the following circumstances: (i) a reduction in salary or significant
reduction in benefits or reduction in EMPLOYEE's position,
responsibilities, duties, or status as a senior executive of FMC; (ii)
change in office location outside of the metropolitan Boston area; (iii)
change in reporting to CEO; (iv) Change in Control of FMC; or (v) change in
reporting to the current CEO. For purposes of this Agreement, a Change in
Control shall be defined as any of the following:
(i) the transfer (whether by sale, dividend, exchange, lease, merger,
consolidation or otherwise) of greater than fifty percent (50%) of the
voting power of FMC, within any twelve (12) month period, (ii) the
transfer (whether by sale, dividend, exchange, lease, merger,
consolidation, or otherwise) of all or substantially all the assets or
stock of FMC, (iii) any other action which results in persons, other
than the current majority shareholders of FMC, having the voting power
to direct the management of FMC, or (iv) FMC relocates its corporate
headquarters more than fifty (50) miles from its present location in
Lexington, Massachusetts.
Upon the occurrence of any of the foregoing circumstances which may
constitute Good Reason for termination by EMPLOYEE, EMPLOYEE shall have
twelve (12) months in which to notify FMC of his intention to terminate for
Good Reason. Failure to do so will constitute a waiver of any right
EMPLOYEE may have had to terminate his employment with Good Reason on the
basis of the specific event at issue. Such waiver will not impair
EMPLOYEE's ability to terminate with Good Reason in response to any
subsequent occurrence of any of the events identified.
3
<PAGE> 4
d) PAYMENT UPON TERMINATION. In the event this Agreement is terminated for any
reason (including termination for Good Reason by EMPLOYEE), EMPLOYEE shall
be entitled to receive all accrued but unpaid base salary and any manner of
bonus compensation earned by EMPLOYEE as of the date of termination (all
such bonus amounts shall be earned on a pro-rata basis for the portion of
the year that EMPLOYEE is employed prior to termination). In addition, if
FMC terminates this Agreement for any reason, other than a reason set forth
in Section 5(a) or 5(b), or if EMPLOYEE terminates this Agreement pursuant
to Section 5(c) (i)-(iv), EMPLOYEE shall also receive (i) salary and
benefits continuation for a period of two (2) years following termination
of employment; (ii) vesting of any unvested Existing Options and any Future
Options as of the date of termination (together with any previously vested
options, the "Vested Options"), and (iii) payout of any accrued
vacation/PTO time. EMPLOYEE shall have three (3) years from any such
termination to exercise the Vested Options. Should he fail to exercise
these options, they will be forfeited at the end of that three (3) year
period. Additionally, Ben Lipps, or his successor, will use his best
efforts to recommend that EMPLOYEE be granted up to ten (10) years from the
date of grant to exercise the Vested Options.
If EMPLOYEE terminates this Agreement pursuant to Section 5(c)(v), EMPLOYEE
shall be entitled to all of the compensation, benefits and rights
referenced in this Section 5(d), except that he shall be entitled to salary
and benefits continuation for a period of one (1) year on a guaranteed
basis and salary and benefits continuation for up to but not to exceed one
(1) additional year or until EMPLOYEE finds full-time employment provided
EMPLOYEE continues to make good faith effort to do so. If EMPLOYER
terminates this Agreement pursuant to Section 5(b), EMPLOYEE shall be
entitled to salary and benefits continuation for a period not to exceed one
and one half (1 1/2 ) years beginning on the 181st day of disability.
EMPLOYEE may elect to receive salary continuation as a lump sum payment and
to forego benefits.
6. NON-DISCLOSURE/NON COMPETITION AGREEMENT. EMPLOYEE acknowledges that during
the term of employment with EMPLOYER, he will have access to and become
acquainted with Confidential Information of the EMPLOYER. Confidential
Information means all information related to the present or planned
business of FMC that has not been released publicly by authorized
representatives of FMC, and shall include but not be limited to, trade
secrets and know-how, inventions, marketing and sales programs, employee,
customer, patient and supplier information, information from patient
medical records, financial data, pricing information, regulatory approval
and reimbursement strategies, data, operations and clinical manuals.
EMPLOYEE agrees not to use or disclose, directly or indirectly, any
Confidential Information of FMC at any time and in any manner, except as
required in the course of his employment with FMC or with the express
written authority of FMC.
EMPLOYEE understands that his non-disclosure obligations will continue
following his termination of employment.
All documents and equipment relating to the business of FMC, whether
prepared by EMPLOYEE or otherwise coming into EMPLOYEE's possession, are
the exclusive property of FMC, and must not be removed from the premises of
FMC except as required in the
4
<PAGE> 5
course of employment. Any such documents and equipment must be returned to
FMC when EMPLOYEE leaves the employment of FMC.
7. EXPENSES. EMPLOYEE will be reimbursed for travel and other expenses related
to the performance of his duties under the Agreement and in accordance with
the EMPLOYER's policies.
8. VACATION/PTO. In recognition of EMPLOYEE'S previous inability over the past
thirty three (33) months to take advantage of available vacation/PTO time,
EMPLOYER will credit EMPLOYEE's Vacation/PTO account with one hundred
twenty (120) additional hours of time and will pay out one hunderd sixty
(160) additional hours of time in the form of a lump sum payment. EMPLOYEE
shall be allowed to carry-over up to two hundred (200) hours from
year-to-year without losing such time. EMPLOYEE shall also accrue PTO days
at the maximum available to senior executives under the Executive Vacation
Policy which currently provides for thirty (30) days of PTO per year.
9. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement shall constitute the entire
agreement between the parties and supersedes all existing agreements
between them, whether oral or written, with respect to the subject matter
hereof. Any waiver, alteration, or modification of any of the provisions of
this Agreement, or cancellation or replacement of this Agreement shall be
accomplished in writing and signed by the respective parties.
10. NOTICES. All notices hereunder shall be in writing and shall be deemed to
be given when sent by certified mail to either party at the address of such
party set forth above or at such other address as shall have been
designated by written notice by such party to the other party.
11. GOVERNING LAW. This Agreement shall be construed in accordance with, and
the rights of the parties shall be governed by, the laws of the
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the
undersigned duly authorized persons as of the day and year first stated above.
NATIONAL MEDICAL, INC. d/b/a
FRESENIUS MEDICAL CARE
WITNESS NORTH AMERICA, EMPLOYER
/s/ Barbara A. Read By: /s/ Ben J. Lipps
- -------------------------- -----------------------------
Barbara A. Read Ben J. Lipps
Chief Executive Officer
WITNESS WILLIAM F. GRIECO, EMPLOYEE
/s/ Susan Zeller-Kent /s/ William F. Grieco
- -------------------------- ---------------------------------
Susan Zeller-Kent William F. Grieco
5
<PAGE> 1
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>
EXHIBIT 11
--------------- --------------- --------------- ---------------
At December 31, At December 31, At December 31, At September 30,
1998 1997 1996 1996
--------------- --------------- --------------- ---------------
<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:
CONTINUING OPERATIONS
------------- ------------- ------------- -------------
Twelve Months Twelve Months Twelve Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------- ------------- ------------- -------------
Net Income from continuing operations $ 51,837 $ 33,920 $ 5,377 $ 62,881
Dividends paid on preferred stocks (520) (520) (130) (390)
--------- -------- ------- --------
Income used in per share computation of earnings $ 51,317 $ 33,330 $ 5,247 $ 62,491
========= ======== ======= ========
Earnings per share $ 0.57 $ 0.37 $ 0.06 $ 0.69
========= ======== ======= ========
DISCONTINUED OPERATIONS
------------- ------------- ------------- -------------
Twelve Months Twelve Months Twelve Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------- ------------- ------------- -------------
Loss from discontinued operations $(105,897) $(13,783) $(1,787) $ 0
Dividends paid on preferred stocks 0 0 0 0
--------- -------- ------- --------
Loss used in per share computation of earnings $(105,897) $(13,783) $(1,787) $ 0
========= ======== ======= ========
Earnings per share $ (1.18) $ (0.15) $ (0.02) $ 0.00
========= ======== ======= ========
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
------------- ------------- ------------- -------------
Twelve Months Twelve Months Twelve Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------- ------------- ------------- -------------
Cumulative effect of accounting change $ 4,890 $ 0 $ 0 $ 0
Dividends paid on preferred stocks 0
0 0 0
---------- -------- ------- --------
Loss used in per share computation of earnings $ (4,890) $ 0 $ 0 $ 0
========== ======== ======= ========
Earnings per share $ (0.05) $ 0.00 $ 0.00 $ 0.00
========== ======== ======= ========
CONSOLIDATED
------------- ------------- ------------- --------------
Twelve Months Twelve Months Twelve Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------- ------------- ------------ --------------
Net Income (loss) $ (58,950) $ 20,137 $ 3,590 $ 62,881
Dividends paid on preferred stock (520) (520) (130) (390)
========== -------- ------- ========
Income (loss) used in per share computation of $ (59,470) $ 19,547 $ 3,460 $ 62,491
earnings ========== ======== ======= ========
Earnings per share $ (0.66) $ 0.22 $ 0.04 $ 0.69
========== ======== ======= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000042872
<NAME> FRESENIUS MEDICAL CARE
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,579
<SECURITIES> 0
<RECEIVABLES> 254,783
<ALLOWANCES> 0
<INVENTORY> 169,789
<CURRENT-ASSETS> 814,665
<PP&E> 603,675
<DEPRECIATION> 174,035
<TOTAL-ASSETS> 4,613,403
<CURRENT-LIABILITIES> 520,256
<BONDS> 0
0
16,318
<COMMON> 90,000
<OTHER-SE> 1,843,116
<TOTAL-LIABILITY-AND-EQUITY> 4,613,403
<SALES> 470,984
<TOTAL-REVENUES> 2,571,406
<CGS> 317,122
<TOTAL-COSTS> 1,707,443
<OTHER-EXPENSES> 474,194
<LOSS-PROVISION> 54,709
<INTEREST-EXPENSE> 208,776
<INCOME-PRETAX> 126,284
<INCOME-TAX> 74,447
<INCOME-CONTINUING> 51,837
<DISCONTINUED> (105,897)
<EXTRAORDINARY> 0
<CHANGES> (4,890)
<NET-INCOME> (58,950)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> 0
</TABLE>
