-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O07JdKQknSY6D3dGUdatYnccsJoi+IuD7s36pp2wR49nvL0r8Otdd3XBXmSod37c dmxhaSBP24nuy2BX0y4NkA== /in/edgar/work/20000809/0000950135-00-003848/0000950135-00-003848.txt : 20000921 0000950135-00-003848.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950135-00-003848 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRESENIUS MEDICAL CARE HOLDINGS INC /NY/ CENTRAL INDEX KEY: 0000042872 STANDARD INDUSTRIAL CLASSIFICATION: [3841 ] IRS NUMBER: 133461988 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03720 FILM NUMBER: 689625 BUSINESS ADDRESS: STREET 1: TWO LEDGEMONT CENTER STREET 2: 95 HAYDEN AVE CITY: LEXINGTON STATE: MA ZIP: 02420 BUSINESS PHONE: 6174029000 FORMER COMPANY: FORMER CONFORMED NAME: FRESENIUS NATIONAL MEDICAL CARE HOLDINGS INC DATE OF NAME CHANGE: 19961015 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /NY/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 10-Q 1 e10-q.txt FRESENIUS MEDICAL CARE HOLDINGS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________________TO__________________ COMMISSION FILE NUMBER: 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New York 13-3461988 - ---------------------------------------------- ------------------------ (State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.) 95 Hayden Avenue, Lexington, MA 02420 - --------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code: 781-402-9000 __________________________________________________________________________ (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicated by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ 1 2 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of the date hereof, 90,000,000 shares of common stock, par value $1.00 per share, are outstanding, all of which are held by Fresenius Medical Care AG. 2 3 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PAGE Unaudited Consolidated Statements of Operations................................4 Unaudited Consolidated Statements of Comprehensive Income......................5 Unaudited Consolidated Balance Sheets..........................................6 Unaudited Consolidated Statements of Cash Flows................................7 Notes to Unaudited Consolidated Financial Statements...........................9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................16 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................................................21 PART II: OTHER INFORMATION ITEM 1: Legal Proceedings..............................................................22 ITEM 6: Exhibits and Reports on Form 8-K...............................................25
3 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- NET REVENUES Health care services .............................................. $ 644,593 $ 573,280 $1,270,670 $1,126,737 Medical supplies .................................................. 116,131 125,186 235,169 243,869 ---------- ---------- ---------- ---------- 760,724 698,466 1,505,839 1,370,606 ---------- ---------- ---------- ---------- EXPENSES Cost of health care services ...................................... 428,246 384,372 848,649 753,180 Cost of medical supplies .......................................... 84,248 87,176 170,703 168,800 General and administrative expenses ............................... 69,850 69,565 141,437 133,552 Provision for doubtful accounts ................................... 14,928 4,671 27,307 19,729 Depreciation and amortization ..................................... 55,420 54,154 110,156 108,088 Research and development .......................................... 1,001 1,013 2,198 2,037 Interest expense, net and related financing costs including $28,821 and $20,967 for the three months and $53,985 and $41,545 for the six months ended, respectively, of interest with affiliates 49,269 52,504 96,387 102,630 Interest expense on settlement of investigation, net .............. 7,666 -- 13,851 -- ---------- ---------- ---------- ---------- 710,628 653,455 1,410,688 1,288,016 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES ........................................... 50,096 45,011 95,151 82,590 PROVISION FOR INCOME TAXES ........................................... 24,927 23,607 46,888 43,559 ---------- ---------- ---------- ---------- NET INCOME ........................................................... $ 25,169 $ 21,404 $ 48,263 $ 39,031 ========== ========== ========== ========== Basic and fully dilutive earnings per share Net Income ........................................................ $ 0.28 $ 0.24 $ 0.53 $ 0.43
See accompanying Notes to Unaudited, Consolidated Financial Statements. 4 5 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- NET INCOME ................................ $ 25,169 $ 21,404 $ 48,263 $ 39,031 Other comprehensive income Foreign currency translation adjustments 21 (81) 141 (473) -------- -------- -------- -------- Total other comprehensive income ....... 21 (81) 141 (473) -------- -------- -------- -------- COMPREHENSIVE INCOME ...................... $ 25,190 $ 21,323 $ 48,404 $ 38,558 -------- -------- -------- --------
See accompanying Notes to Unaudited, Consolidated Financial Statements. 5 6 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ ASSETS (UNAUDITED) - ------ Current Assets: Cash and cash equivalents ............................. $ 15,562 $ 12,563 Accounts receivable, less allowances of $70,581 and $63,012 .............................................. 344,536 295,235 Inventories ........................................... 188,100 183,112 Deferred income taxes ................................. 179,903 219,454 Other current assets .................................. 140,823 130,771 IDPN accounts receivable .............................. 15,567 53,962 ----------- ----------- Total Current Assets ............................... 884,491 895,097 ----------- ----------- Properties and equipment, net ............................ 439,805 428,793 ----------- ----------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $493,514 and $424,704 .. 3,258,235 3,265,491 Other assets and deferred charges ..................... 56,395 49,998 Non-current IDPN accounts receivable .................. -- 5,189 ----------- ----------- Total Other Assets ................................. 3,314,630 3,320,678 ----------- ----------- Total Assets ............................................. $ 4,638,926 $ 4,644,568 =========== =========== LIABILITIES AND EQUITY - ---------------------- Current Liabilities: Note payable for settlement of investigation .......... 127,889 -- Current portion of long-term debt and capitalized lease obligations ........................................ 147,892 142,110 Current portion of borrowing from affiliates .......... 521,318 372,949 Accounts payable ...................................... 110,314 133,337 Accrued settlement .................................... -- 386,815 Accrued liabilities ................................... 251,286 291,358 Accounts payable to affiliates, net ................... 14,041 12,361 Accrued income taxes .................................. 21,419 12,433 ----------- ----------- Total Current Liabilities .......................... 1,194,159 1,351,363 Non-current note payable for settlement of investigation . 25,593 -- Long-term debt ........................................... 784,466 615,065 Non-current borrowings from affiliates ................... 786,864 788,506 Capitalized lease obligations ............................ 1,016 1,190 Deferred income taxes .................................... 126,465 134,310 Accrued settlement ....................................... -- 85,920 Other liabilities ........................................ 50,158 46,153 ----------- ----------- Total Liabilities ..................................... 2,968,721 3,022,507 ----------- ----------- 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 .......................................... 1,943,034 1,943,034 Retained deficit ......................................... (379,700) (427,703) Accumulated comprehensive income ......................... 553 412 ----------- ----------- Total Equity .......................................... 1,670,205 1,622,061 ----------- ----------- Total Liabilities and Equity ............................. $ 4,638,926 $ 4,644,568 =========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements. 6 7 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ----------------------------- 2000 1999 --------- --------- Cash Flows from Operating Activities: Net Income ................................................................. $ 48,263 $ 39,031 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization ........................................... 110,156 108,088 Provision for doubtful accounts ......................................... 27,307 19,729 Deferred income taxes ................................................... 31,706 15,882 Loss on disposal of properties and equipment ............................ 135 189 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable ............................................ (94,092) (65,786) (Increase) decrease in inventories ......................................... (4,166) 3,902 Increase in other current assets ........................................... (8,047) (11,958) Decease in IDPN accounts receivable ........................................ 43,584 -- Decrease in other assets and deferred charges .............................. 4,215 1,351 (Decrease) increase in accounts payable .................................... (23,024) 2,552 Increase in accrued income taxes ........................................... 8,986 21,516 Decrease in accrued liabilities ............................................ (40,072) (30,866) Increase in other long-term liabilities .................................... 4,005 11,592 Net changes due to/from affiliates ......................................... 1,680 (354) Other, net ................................................................. 29 (7,422) --------- --------- Net cash provided by operating activities ..................................... 110,665 107,446 --------- --------- Cash Flows from Investing Activities: Capital expenditures ....................................................... (45,421) (30,856) Payments for acquisitions, net of cash acquired ............................ (82,405) (38,701) --------- --------- Net cash used in investing activities ......................................... (127,826) (69,557) --------- --------- Cash flows from Financing Activities: Payments on settlement of investigation .................................... (319,253) -- Net increase in borrowings from affiliates ................................. 146,727 105,451 Cash dividends paid ........................................................ (260) (260) Proceeds on issuance of debt ............................................... -- 37 Proceeds from receivable financing facility ................................ 17,800 19,400 Net increase (decrease) on debt and capitalized leases ..................... 175,009 (150,898) Other net .................................................................. -- (94) --------- --------- Net cash provided by (used in) financing activities ........................... 20,023 (26,364) --------- --------- Effects of changes in foreign exchange rates .................................. 137 (409) --------- --------- Change in cash and cash equivalents ........................................... 2,999 11,116 --------- --------- Cash and cash equivalents at beginning of period .............................. 12,563 6,579 --------- --------- Cash and cash equivalents at end of period .................................... $ 15,562 $ 17,695 ========= =========
See accompanying Notes to Unaudited, Consolidated Financial Statements 7 8 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------- 2000 1999 -------- -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................... $106,400 $102,467 Income taxes paid, net ..................... 6,736 7,128 Details for Acquisitions: Assets acquired ............................... 82,405 38,722 Liabilities assumed ........................... -- 21 -------- -------- Net cash paid for acquisitions ................ $ 82,405 $ 38,701 ======== ========
See accompanying Notes to Unaudited, Consolidated Financial Statements 8 9 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY Fresenius Medical Care Holdings, Inc., a New York corporation ("the Company") is a subsidiary of Fresenius Medical Care AG, a German corporation ("FMC" or "Fresenius Medical Care"). The Company conducts its operations through five principal subsidiaries, National Medical Care, Inc., a Delaware corporation ("NMC"); Fresenius USA Marketing Inc., and Fresenius USA Manufacturing Inc., Delaware corporations and Fresenius USA Inc., a Massachusetts corporation (collectively, "Fresenius USA" or "FUSA") and SRC Holding Company, Inc., a Delaware corporation ("SRC"). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, NMC, FUSA, and SRC 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, clinical laboratory testing and renal diagnostic services, and (ii) manufacturing and distributing products and equipment for dialysis treatment. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at June 30, 2000 and 1999 and for the three and six month periods then ended are unaudited and should be read in conjunction with the consolidated financial statements in the Company's 1999 report on Form 10-K. Such interim financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented. Certain amounts in the prior periods' consolidated financial statements have been reclassified to conform to the current periods' basis of presentation. The results of operations for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results of operations for the fiscal year ending December 31, 2000. All intercompany transactions and balances have been eliminated in consolidation. 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 90,000 in all periods as there were no potential common shares and no adjustments to income to be considered for purposes of the diluted earnings per shares calculation. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ------------------ 2000 1999 2000 1999 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: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ------------------ 2000 1999 2000 1999 CONSOLIDATED Net earnings...................... $25,169 $21,404 $48,263 $39,031 Dividends paid on preferred stocks........................... (130) (130) (260) (260) ------- ------- ------- ------- Income used in per share computation of earnings.......... $25,039 $21,274 $48,003 $38,771 ======= ======= ======= ======= Basic and fully dilutive earnings per share............... $ 0.28 $ 0.24 $ 0.53 $ 0.43 ======= ======= ======= ======= NEW PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. This statement requires that an entity recognizes 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. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities, which amended the effective date of SFAS No. 133. The amended SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In December 1999, the United States Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues, as well as examples of how the staff applies revenue recognition guidance to specific circumstances. SAB 101 should be implemented in the first quarter of the fiscal year beginning after December 15, 1999. In March 2000, SAB 101A was issued by the SEC delaying the implementation date of SAB 101 for the second quarter of 9 10 the fiscal year beginning after December 15, 1999. In June 2000, SAB 101B was issued by the SEC further delaying the date of SAB 101 until the fourth quarter of the fiscal year beginning after December 15, 1999. The Company believes that SAB 101 will not have a material impact on the Company's financial position and results of operations. In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-014, Accounting for Certain Sales Incentives, which establishes accounting for point of sales coupons, rebates, and free merchandise. This EITF requires that an entity report these sales incentives that reduce the price paid to be netted directly against revenues. EITF 00-014 is effective no later than the fourth quarter of fiscal year beginning after December 15, 1999. The Company is currently reviewing the impact of EITF on its results of operations. NOTE 2. INVENTORIES
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Inventories: Raw materials .............................................. $ 41,371 $ 41,045 Manufactured goods in process .............................. 9,887 8,748 Manufactured and purchased inventory available for sale..... 91,521 90,748 -------- -------- 142,779 140,541 Health care supplies ...................................... 45,321 42,571 -------- -------- Total ................................................. $188,100 $183,112 ======== ========
NOTE 3. DEBT
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ Notes payable and Long-term debt to outside parties consists of: NMC Credit Facility ............................................ $ 917,450 $ 738,150 Note payable for settlement of investigation ................... 153,482 -- Third-party debt, primarily bank borrowings at various interest rates with various maturities .............. 14,478 17,454 ---------- ---------- 1,085,410 755,604 Less amounts classified as current ............................. 275,351 140,539 ---------- ---------- $ 810,059 $ 615,065 ========== ==========
Non current borrowings from affiliates consists of:
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ Fresenius Medical Care AG non-current borrowings primarily at interest rates approximating 7.42 - 7.75%........ $ 30,431 $ 42,949 Fresenius AG non-current borrowing at interest rates approximating 7.42 - 7.46% ................................... 280,000 330,000 Fresenius Medical Care Trust Finance S.a.r.l. at interest rates of 8.43% and 9.25% ...................................... 786,524 786,524 Franconia Acquisition, LLC at interest rates approximating 6.89 - 6.91% .................................................. 210,214 -- Other ............................................................. 1,013 1,982 ---------- ---------- 1,308,182 1,161,455 Less amounts classified as current 521,318 372,949 ---------- ---------- Total ............................................................. $ 786,864 $ 788,506 ========== ==========
10 11 Franconia Acquisition, LLC is a wholly owned subsidiary of Fresenius Medical Care AG. In March 2000, the Company entered into demand notes payable to Franconia Acquisition, LLC totaling $344.2 million. The balance due at June 30, 2000 is $210.2 million and bears interest at rates approximating 6.89% to 6.91%. NOTE 4. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS Since 1995, NMC and certain subsidiaries had been the subject of an investigation (the "OIG Investigation") by the Office of Inspector General ("OIG") of the United States Department of Health and Human Services, the United States Attorney for the District of Massachusetts (the "U.S. Attorney's Office") and other authorities concerning possible violations of federal laws, including the anti-kickback statute and the False Claims Act. On January 18, 2000, the Company, NMC and certain affiliated companies executed definitive agreements (the "Settlement Agreements") with the United States Government (the "Government") to settle (i) the matters covered in the OIG Investigation and (ii) NMC's claims with respect to approximately $153.5 million of outstanding Medicare receivables for nutrition therapy rendered on or before December 31, 1999 (collectively, the "Settlement"). The Settlement was approved by the United States District Court for the District of Massachusetts on February 2, 2000. In anticipation of the Settlement, the Company recorded a special pre-tax charge against its consolidated earnings in 1999 totaling $601 million ($419 million after tax). This special pre-tax charge included (i) a charge of $486.3 million for settlement payment obligations to the Government, (ii) a $94.3 million write-off of the remaining receivables described above, and (iii) a reserve for other related costs of $20.4 million. The settlement payment obligations to the Government and the amounts due to the Company for the outstanding Medicare receivables have been classified in the balance sheet at their expected settlement dates. Under the definitive agreements with the Government, the Company entered into a note payable for the settlement payment obligations to the Government. Interest on installment payments to the Government will accrue at 6.3% on $51.2 million of the obligation and at 7.5% annually on the balance, until paid in full. In February 2000, the Company made initial payments to the Government totaling $286.4 million. The remaining obligations will be paid in six quarterly installments which began in April 2000 and will end in July 2001. The first four quarterly installments will be made in the amount of $35.4 million including interest at 7.5%. The first of these four payments was made in April 2000 to the Government totaling $35.4 million including interest. The remaining two installments of $27.8 million including interest at 6.3% will be made in April and July 2001, respectively. In addition, the Company will receive approximately $59.2 million from the Government related to the Company's claims for outstanding Medicare receivables. In March 2000, the Company received an initial payment from the Government of $38.4 million. The remaining balance will be received by the Company in four quarterly payments which began in May 2000 and will end February 2001. The quarterly receipts from the Government will be for principal of $5.2 million plus interest at 7.5%. The first quarterly receipt from the Government was received in May 2000 totaling $5.2 million plus interest. NOTE 5. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS DISTRICT OF MASSACHUSETTS The remaining portion of a qui tam proceeding filed in the United States District Court for the Middle District of Tennessee on December 15, 1994, transferred to the United States District Court for the District of Massachusetts in 1995, and disclosed to the Company in September 1999 was dismissed in May 2000. As a result, each of the qui tam or "whistleblower" actions which served as the basis for the recently settled federal government investigation has been dismissed. 11 12 COMMERCIAL INSURER LITIGATION In 1997, the Company, NMC, and certain named NMC subsidiaries, were served with civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York. Based in large part on information contained in prior reports filed by the Company with the Securities and Exchange Commission, the lawsuit alleges inappropriate billing practices for nutritional therapy, diagnostic and clinical laboratory tests and misrepresentations. In April 1999, Aetna amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff, and to make certain other limited changes in its pleading. The amended complaint seeks unspecified damages and costs. In February 2000, the Company was served with a similar complaint filed by Connecticut General Life Insurance Company, Equitable Life Assurance Society for the United States, Cigna Employee Benefits Services, Inc. and Guardian Life Insurance Company of America, Inc. (Connecticut General Life Insurance Company et al v. National Medical Care et al, 00-Civ-0932) seeking unspecified damages and costs. However, the Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend both lawsuits. Other private payors have contacted the Company and may assert that NMC received excess payment and, similarly, may join either lawsuit or file their own lawsuit seeking reimbursement and other damages. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. Although the ultimate outcome on the Company of these proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and result of operations. OBRA 93 The Omnibus Budget Reconciliation Act of 1993 affected the payment of benefits under Medicare and employer health plans for dual-eligible ESRD patients. In July 1994, the Health Care Financing Administration issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by that act 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 those provided under Medicare. In April 1995, the Health Care Financing Administration 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. The Health Care Financing Administration further proposed that its new instruction be effective retroactive to August 1993, the effective date of the Omnibus Budget Reconciliation Act of 1993. NMC ceased to recognize the incremental revenue realized under the original instruction as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by the Omnibus Budget Reconciliation Act of 1993 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by the act, and then began to re-bill 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 the Health Care Financing Administration from retroactively enforcing its April 24, 1995 implementation of the Omnibus Budget Reconciliation Act of 1993 provision relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude the Health Care Financing Administration from enforcing its new policy retroactively, that is, to billing 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 the Health Care Financing Administration's retroactive application of the April 1995 rule was legally invalid. The Health Care Financing Administration cross-moved for summary judgment on the grounds that April 1995 rule was 12 13 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 the Health Care Financing Administration's retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also permanently enjoined the Health Care Financing Administration from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on the Health Care Financing Administration's motion for summary judgment pending completion of the outstanding discovery. On October 5, 1998, NMC filed its own motion for summary judgment requesting that the Court declare the Health Care Financing Administration's prospective application of the April 1995 rule invalid and permanently enjoin Health Care Financing Administration from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. The Health Care Financing Administration elected not to appeal the Court's June 1995 and January 1998 orders. The Health Care Financing Administration may, however, appeal all rulings at the conclusion of the litigation. If the Health Care Financing Administration should successfully appeal so that the revised interpretation would be applied retroactively, NMC may be required to refund the payment received from employer health plans for services provided after August 10, 1993 under the Health Care Financing Administration's original implementation, and to re-bill Medicare for the same services, which would result in a loss to NMC of approximately $120 million attributable to all periods prior to December 31, 1995. Also, in this event, the Company's business, financial condition and results of operations would be materially adversely affected. STATE OF FLORIDA In October 1999, NMC received an Antitrust Civil Investigative Demand ("CID") from the Attorney General of the State of Florida ("Florida AG"). The CID was issued by the Florida AG in the course of an investigation to determine whether there is, has been, or may be a violation of federal and Florida laws resulting from the possible monopolization of, or the entering into agreement in restraint of, trade relating to the provision of dialysis products and services in Florida. The Company has cooperated with the Florida AG's investigation by providing documents and other information to them. The Florida AG has indicated that no further information is required at this time. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The ultimate outcome of these matters is not expected to materially affect the Company's financial position, results of operations or cash flows. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the U.S. anti-kickback statute, the False Claims Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. In the U.S., enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates a large number 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. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the False Claims Act, among other laws, and the Company cannot predict whether law enforcement authorities may use such information to initiate further investigations of the business practices disclosed or any of its other business activities. 13 14 Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. 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 Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. CONTINGENT NON-NMC LIABILITIES OF W. R. GRACE & CO. (NOW KNOWN AS FRESENIUS MEDICAL CARE HOLDINGS, INC.) The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co.-Conn. ("Grace Chemicals"). In connection with the Merger, Grace Chemicals 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. The Company remains 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 Grace Chemicals' current 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. 14 15 NOTE 6. INDUSTRY SEGMENTS INFORMATION 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 table below provides information for the three and six months ended June 30, 2000 and 1999 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT SERVICES PRODUCTS SALES TOTAL ---------- ---------- ------------ ---------- NET REVENUES Three Months Ended 6/30/00 $ 648,325 $ 178,415 $ 66,016 $ 760,724 Three Months Ended 6/30/99 576,947 176,699 55,180 698,466 Six Months Ended 6/30/00 $1,278,327 $ 353,357 $ 125,845 $1,505,839 Six Months Ended 6/30/99 1,133,972 345,841 109,207 1,370,606 OPERATING EARNINGS Three Months Ended 6/30/00 $ 103,595 $ 30,093 -- $ 133,688 Three Months Ended 6/30/99 95,663 30,618 -- 126,281 Six Months Ended 6/30/00 $ 202,696 $ 56,345 -- $ 259,041 Six Months Ended 6/30/99 183,465 59,674 -- 243,139 TOTAL ASSETS 6/30/00 $2,055,146 653,314 -- $2,708,460 12/31/99 1,918,612 645,263 -- 2,563,875
Total assets of $4,638,926 is comprised of total assets for reportable segments, $2,708,460; intangible assets not allocated to segments, $1,972,927; financing agreement ($352,800); IDPN accounts receivable $15,567; and other corporate assets $294,772. The table below provides the reconciliations of reportable segment operating earnings to the Company's consolidated totals.
THREE MONTHS ENDED SIX MONTHS ENDED SEGMENT RECONCILIATION JUNE 30, JUNE 30, ---------------------- ------------------------ ------------------------ 2000 1999 2000 1999 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES: Total operating earnings for reportable segments......... $ 133,688 $ 126,281 $ 259,041 $ 243,139 Corporate G&A ........................................... (25,656) (27,753) (51,454) (55,882) Research and development expense ........................ (1,001) (1,013) (2,198) (2,037) Net interest expense .................................... (56,935) (52,504) (110,238) (102,630) --------- --------- --------- --------- Income Before Income Taxes .............................. $ 50,096 $ 45,011 $ 95,151 $ 82,590 ========= ========= ========= =========
15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of 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, the realization of anticipated tax deductions, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this Item 2 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. 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.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---- ---- ---- ---- NET REVENUES Dialysis Services ............................ $ 648 $ 577 $ 1,278 $ 1,134 Dialysis Products ............................ 178 177 353 346 Intercompany Eliminations .................... (65) (55) (125) (109) ------- ------- ------- ------- Total Net Revenues .............................. $ 761 $ 699 $ 1,506 $ 1,371 ======= ======= ======= ======= Operating Earnings: Dialysis Services ............................ $ 104 $ 96 $ 203 $ 184 Dialysis Products ............................ 30 31 56 60 ------- ------- ------- ------- Total Operating Earnings ........................ 134 127 259 244 ------- ------- ------- ------- Other Expenses: General Corporate ............................ $ 26 $ 28 $ 52 $ 56 Research & Development ....................... 1 1 2 2 Interest Expense, Net ........................ 49 53 96 103 Interest Expense on Settlement, Net........... 8 -- 14 -- ------- ------- ------- ------- Total Other Expenses ............................ 84 82 164 161 ------- ------- ------- ------- Earnings Before Income Taxes .................... 50 45 95 83 Provision for Income Taxes ...................... 25 24 47 44 ------- ------- ------- ------- Net Income ...................................... $ 25 $ 21 $ 48 $ 39 ======= ======= ======= =======
16 17 THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 Net revenues from operations for the second quarter of 2000 increased by 9% ($62 million) over the comparable period in 1999. Net income from operations for the second quarter of 2000 increased by 19% ($4 million) over the comparable period in 1999 as a result of increased operating earnings, reduced corporate expenses partially offset by increased interest expense. DIALYSIS SERVICES Dialysis Services net revenues for the second quarter of 2000 increased by 12% ($71 million) over the comparable period in 1999, primarily as a result of a 8% increase in the number of treatments provided, the impact of increased Medicare reimbursement rates, improved anemia management (higher EPO utilization), consolidation of previously managed locations, higher revenues in other ancillary services, and increased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 1999 and 2000 acquisitions. The laboratory testing revenues increased as a result of higher patient volume. Dialysis Services operating earnings for the second quarter of 2000 increased by 8% ($8 million) over the comparable period of 1999 primarily due to increases in treatment volume, the impact of increased Medicare reimbursement rates, higher earnings in other ancillary services, and increased earnings from laboratory testing. These increases were partially offset by higher personnel costs, increased provisions for doubtful accounts, and higher equipment lease expenses. DIALYSIS PRODUCTS Dialysis Products net revenues for the second quarter of 2000 increased by 1% ($1 million) over the comparable period of 1999. This is due to increased sales of dialyzers ($4 million), bloodlines ($1 million), concentrates ($2 million) and other products ($3 million), partially offset by decreased sales of machines ($7 million) and peritoneal products ($2 million). Dialysis Products operating earnings for the second quarter of 2000 decreased by 3% ($1 million) over the comparable period of 1999. This is a result of new product costs as well as higher sales and marketing costs offset by improvements in gross margin. OTHER EXPENSES The Company's other expenses for the second quarter of 2000 increased by 2% (2 million) over the comparable period of 1999. General corporate expenses decreased by $2 million and operating interest expense decreased by $5 million primarily due to the change in the mix of debt instruments at June 30, 2000 versus June 30, 1999. The decreases in general corporate and operating interest expenses for the second quarter of 2000 were offset by the $8 million of interest expense related to the settlement of the OIG investigation in February 2000. INCOME TAX RATE The effective tax rate for the second quarter of 2000 (49.8%) is lower than the rate for the comparable period of 1999 (52.5%) due to higher earnings in relation to the constant amount of non-deductible merger goodwill. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Net revenues from operations for the first six months of 2000 increased by 10% ($135 million) over the comparable period in 1999. Net income from operations for the first six months of 2000 increased by 23% ($9 million) over the comparable period in 1999 as a result of increased operating earnings, reduced corporate expenses partially offset by increased interest expense. DIALYSIS SERVICES Dialysis Services net revenues for the first six months of 2000 increased by 13% ($144 million) over the comparable period in 1999, primarily as a result of a 8% increase in the number of treatments provided, the impact of increased Medicare reimbursement rates, improved anemia management (higher EPO utilization), consolidation of previously managed locations, higher revenues in 17 18 other ancillary services, and increased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 1999 and 2000 acquisitions. The laboratory testing revenues increased as a result of higher patient volume. Dialysis Services operating earnings for the first six months of 2000 increased by 10% ($19 million) over the comparable period of 1999 primarily due to the increase in treatment volume, the impact of increased Medicare reimbursement rates, higher earnings in other ancillary services, and increased earnings from laboratory testing offset by higher personnel costs, provision for doubtful accounts, and rent expense. DIALYSIS PRODUCTS Dialysis Products net revenues for the first six months of 2000 increased by 2% ($7 million) over the comparable period of 1999. This is due to increased sales of dialyzers ($3 million), bloodlines ($2 million), concentrates ($4 million) and other products ($5 million), partially offset by decreased sales of machines ($2 million) and peritoneal products ($5 million). Dialysis Products operating earnings for the first six months of 2000 decreased by 7% ($4 million) over the comparable period of 1999. This is a result of higher freight and distribution expenses as well as higher sales and marketing costs partially offset by improvements in gross margin. OTHER EXPENSES The Company's other expenses for the first six months of 2000 increased by 2% ($3 million) over the comparable period of 1999. General corporate expenses decreased by $4 million and operating interest expense decreased by $8 million primarily due to the change in the mix of debt instruments at June 30, 2000 versus June 30, 1999. The decreases in general corporate and operating interest expenses for the first six months of 2000 were offset by the $14 million of interest expense related to the settlement of the OIG investigation in February 2000. INCOME TAX RATE The effective tax rate for the first six months of 2000 (49.3%) is lower than the rate for the comparable period of 1999 (52.7%) due to higher earnings in relation to the constant amount of non-deductible merger goodwill. 18 19 LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements, including acquisitions, have historically been funded by cash generated from operations. Net cash flows provided by operating activities during the first six months of 2000 totaled $110 million compared to $107 million in the first six months of 1999. This increase is due primarily to a $9 million increase in earnings, $25 million add back of non-cash items, and the collection of $44 million for the IDPN accounts receivable. These increases in cash from net income adjusted for non-cash items and the collection of IDPN receivable were offset by a $76 million change in other working capital primarily related to increases in accounts receivable and inventory; and decreases in accounts payable, accrued income taxes, and accrued liabilities. The increase in accounts receivable balances is primarily due to the increase in days sales outstanding resulting from slower payment patterns from third parties, specifically from managed care plans as well as the impact of new acquisitions. The decrease in accounts payable is primarily due to timing of disbursements and the decrease in accrued liabilities is primarily due to timing of payments for physician compensation, unreconciled payments, and compliance and legal reserve costs. Cash on hand was $16 million at June 30, 2000 compared to $18 million at June 30, 1999. Under the final settlement with the government, the Company is required to make net settlement payments totaling approximately $427 million, of which $14 million had previously been paid prior to 2000. This net amount includes approximately $59.2 million for Medicare receivables from the Government. During the first six months of 2000, the Company has made initial payments to the Government totaling $319 million and has received $43 million from the Government for the Company's outstanding Medicare receivables for the intradialytic parenteral nutrition therapy relating to the Settlement. Under the definitive agreements with the Government, the Company entered into a note payable for the settlement payment obligations to the Government. Interest on installment payments to the Government will accrue at 6.3% on $51.2 million of the obligation and at 7.5% annually on the balance, until paid in full. Under the terms of the note payable, the remaining obligations will be paid in six quarterly installments which began April 2000 and will end July 2001. The first quarterly installment of $35.4 million including interest of 7.5% was made in April 2000. The next three quarterly installments will also be made in the amount of $35.4 million including interest at 7.5%. The remaining two installments of $27.8 million including interest at 6.3% will be made in April and July 2001, respectively. The Government will remit the balance of the Company's outstanding Medicare receivables in four quarterly payments of $5.2 million plus interest at 7.5%. The first quarterly receipt from the Government was received in May 2000 totaling $5.2 million plus interest. Net cash flows used in investing activities of operations during the first six months of 2000 totaled $128 million compared to $70 million in the first six months of 1999. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations and intercompany borrowings. Acquisitions totaled $82 million and $39 million in 2000 and 1999, respectively, net of cash acquired. Capital expenditures of $45 million and $31 million were made for internal expansion, improvements, new furnishings and equipment in 2000 and 1999, respectively. The Company intends to continue to enhance its presence in the U.S. by focusing its expansion on the acquisition of clinics, expansion of existing clinics, and opening of new clinics. Net cash flows provided by financing activities of operations during the first six months of 2000 totaled $20 million compared to net cash flows used of $26 million in the first six months of 1999. During the first six months of 2000, the Company made payments to the government totaling $319 million for the Settlement. Additionally, the net increase in borrowings from affiliates of $147 million is due primarily to an intercompany note payable entered into with Franconia Acquisition, LLC ($210 million), a wholly-owned subsidiary of FMC, offset by payments on other intercompany borrowings. The net increase in notes payable to outside parties of $175 million is primarily a result of the increase in the Company's credit facility of $179 million. The Company expects to use a portion of these borrowings to finance future acquisitions. CONTINGENCIES The Company is a plaintiff in litigation against the federal government with respect to the implementation of OBRA 93 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 19 20 results of operations. Because of the significant complexities and uncertainties associated with these 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 - Note 5, "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 cash flows from operations or availability under existing banking arrangements fall below expectations, the Company may be required to consider other alternatives to maintain sufficient liquidity. There can be no assurance that the Company will be able to do so on satisfactory terms, if at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 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. 20 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. As part of its market risk management strategy, the Company enters into transactions involving derivative financial instruments with investment grade financial institutions as authorized by the management board. These instruments, primarily interest rate swaps and foreign exchange contracts, are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations and purchase commitments. The execution of these transactions is coordinated with the Company's parent company, Fresenius Medical Care AG, which has established guidelines for risk assessment procedures and controls. 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 product 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. 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. At June 30, 2000, the fair value of the Company's interest rate agreements, which consisted of three swaps and one collar, is approximately $14.5 million. The agreements are for a total notional amount of $750 million, with maturity dates ranging from December 2003 through January 2005. At June 30, 2000, the fair value of the Company's foreign exchange contracts, which consisted entirely of forward agreements, is approximately ($3.9 million). The Company had outstanding contracts covering the purchase of approximately 30.4 million Euros ("EUR") at an average contract price of $1.0953 per EUR, for delivery between July 2000 and May 2001. In addition, the Company's Canadian subsidiary, whose functional currency is the Canadian Dollar ("CAD"), had outstanding contracts covering the purchase of 5.0 million United States Dollars ("USD") at an average contract price of 1.4624 CAD per USD, for delivery between July 2000 and November 2000. 21 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS DISTRICT OF MASSACHUSETTS The remaining portion of a qui tam proceeding filed in the United States District Court for the Middle District of Tennessee on December 15, 1994, transferred to the United States District Court for the District of Massachusetts in 1995, and disclosed to the Company in September 1999 was dismissed in May 2000. As a result each of the qui tam or "whistleblower" actions which served as the basis for the recently settled federal government investigation has been dismissed. COMMERCIAL INSURER LITIGATION In 1997, the Company, NMC, and certain named NMC subsidiaries, were served with civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York. Based in large part on information contained in prior reports filed by the Company with the Securities and Exchange Commission, the lawsuit alleges inappropriate billing practices for nutritional therapy, diagnostic and clinical laboratory tests and misrepresentations. In April 1999, Aetna amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff, and to make certain other limited changes in its pleading. The amended complaint seeks unspecified damages and costs. In February 2000, the Company was served with a similar complaint filed by Connecticut General Life Insurance Company, Equitable Life Assurance Society for the United States, Cigna Employee Benefits Services, Inc. and Guardian Life Insurance Company of America, Inc. (Connecticut General Life Insurance Company et al v. National Medical Care et al, 00-Civ-0932) seeking unspecified damages and costs. However, the Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend both lawsuits. Other private payors have contacted the Company and may assert that NMC received excess payment and, similarly, may join either lawsuit or file their own lawsuit seeking reimbursement and other damages. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. Although the ultimate outcome on the Company of these proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and result of operations. OBRA 93 The Omnibus Budget Reconciliation Act of 1993 affected the payment of benefits under Medicare and employer health plans for dual-eligible ESRD patients. In July 1994, the Health Care Financing Administration issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by that act 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 those provided under Medicare. In April 1995, the Health Care Financing Administration 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. The Health Care Financing Administration further proposed that its new instruction be effective retroactive to August 1993, the effective date of the Omnibus Budget Reconciliation Act of 1993. NMC ceased to recognize the incremental revenue realized under the original instruction as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by the Omnibus Budget Reconciliation Act of 1993 through 22 23 December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by the act, and then began to re-bill 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 the Health Care Financing Administration from retroactively enforcing its April 24, 1995 implementation of the Omnibus Budget Reconciliation Act of 1993 provision relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude the Health Care Financing Administration from enforcing its new policy retroactively, that is, to billing 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 the Health Care Financing Administration's retroactive application of the April 1995 rule was legally invalid. The Health Care Financing Administration cross-moved for summary judgment on the grounds that 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 the Health Care Financing Administration's retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also permanently enjoined the Health Care Financing Administration from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on the Health Care Financing Administration's motion for summary judgment pending completion of the outstanding discovery. On October 5, 1998, NMC filed its own motion for summary judgment requesting that the Court declare the Health Care Financing Administration's prospective application of the April 1995 rule invalid and permanently enjoin Health Care Financing Administration from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. The Health Care Financing Administration elected not to appeal the Court's June 1995 and January 1998 orders. The Health Care Financing Administration may, however, appeal all rulings at the conclusion of the litigation. If the Health Care Financing Administration should successfully appeal so that the revised interpretation would be applied retroactively, NMC may be required to refund the payment received from employer health plans for services provided after August 10, 1993 under the Health Care Financing Administration's original implementation, and to re-bill Medicare for the same services, which would result in a loss to NMC of approximately $120 million attributable to all periods prior to December 31, 1995. Also, in this event, the Company's business, financial condition and results of operations would be materially adversely affected. STATE OF FLORIDA In October 1999, NMC received an Antitrust Civil Investigative Demand ("CID") from the Attorney General of the State of Florida ("Florida AG"). The CID was issued by the Florida AG in the course of an investigation to determine whether there is, has been, or may be a violation of federal and Florida laws resulting from the possible monopolization of, or the entering into agreement in restraint of, trade relating to the provision of dialysis products and services in Florida. The Company has cooperated with the Florida AG's investigation by providing documents and other information to them. The Florida AG has indicated that no further information is required at this time. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The ultimate outcome of these matters is not expected to materially affect the Company's financial position, results of operations or cash flows. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the U.S. anti-kickback statute, the False Claims Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. In the U.S., enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by 23 24 regulatory authorities, and continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates a large number 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. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the False Claims Act, among other laws, and the Company cannot predict whether law enforcement authorities may use such information to initiate further investigations of the business practices disclosed or any of its other business activities. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. 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 Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. 24 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and Fresenius AG (incorporated herein by reference to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996).
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Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as 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, Dresdner Bank AG and Bank of America, N.A. (formerly known as 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, Dresdner Bank AG and Bank of America, N.A. (formerly known as 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, Dresdner Bank AG and Bank of America, N.A. (formerly known as 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 September 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, as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of America, N.A. (formerly known as 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 Bank of America, N.A. (formerly known as NationsBank, N.A.). as Managing Agents, (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 9, 1999). Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 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, NationsBank, N.A. as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30,
26 27
2000). Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 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, NationsBank, N.A. as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.12 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 4.13 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 4.14 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 4.15 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* Product Purchase Agreement effective January 1, 2000 between Amgen, Inc. and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.4* Amendment to Product Purchase Agreement between Amgen, Inc. and National Medical Care, Inc. (amending Appendix A), filed herewith. 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
27 28
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 Amended and Restated Transfer and Administration Agreement dated as September 27, 1999 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 10.10 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 10.11 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 10.12 Employment Agreement dated October 23, 1998 by and between Roger G. Stoll and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 9, 1999). Exhibit 10.13 Separation Agreement dated as of September 30, 1999 by and among William F. Grieco and Fresenius Medical Care Holdings, Inc. and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on August 3, 1999). Exhibit 10.14 Employment Agreement dated March 15, 2000 by and between Jerry A. Schneider and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.15 Employment Agreement dated March 15, 2000 by and between Ronald J. Kuerbitz and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.16 Employment Agreement dated March 15, 2000 by and between J. Michael Lazarus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.17 Subordinated Loan Note dated as of May 18, 1999, among National Medical Care, Inc. and certain Subsidiaries with Fresenius AG as lender (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 22, 1999). Exhibit 11 Statement re: Computation of Per Share Earnings. Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K The Company filed no current reports on 8-K during the quarter for which this report is filed. *Confidential treatment has been requested as to certain portions of this Exhibit. 28 29 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fresenius Medical Care Holdings, Inc. DATE: August 9, 2000 /s/ Ben J. Lipps -------------- ------------------------------------------ NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: August 9, 2000 /s/ Jerry A. Schneider -------------- ------------------------------------------ NAME: Jerry Schneider TITLE: Chief Financial Officer 29 EX-10.4 2 ex10-4.txt AMENDMENT #3 TO AGREEMENT NO. 19984813 1 EXHIBIT 10.4 The deleted portions of this Exhibit contain confidential information and have been filed separately with the Securities and Exchange Commission [AMGEN(R) LOGO] AMENDMENT #3 TO AGREEMENT NO. 19984813 - -------------------------------------------------------------------------------- This Amendment #3 to the Product Purchase Agreement No. 19984813 ("Amendment"), by and between Amgen Inc., Amgen Center, Thousand Oaks, California 91320-1789 ("Amgen") and National Medical Care, Inc., Two Ledgemeont Center-95 Hayden Avenue, Lexington, Massachusetts, 02173 ("NMC"). WHEREAS, Amgen and NMC entered into EPOGEN(R) Product Purchase Agreement #19984813, and as subsequently amended (the "Agreement"), and; WHEREAS, the parties now wish to further modify this Agreement to amend the [DELETED], to make such [DELETED] pertain solely to the second and third calendar quarters, and to be reconciled in the fourth calendar quarter;. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations and warranties set forth herein, the parties agree as follows: SECTION 1. DEFINITIONS; REFERENCES. Unless otherwise specifically defined herein, each term used herein, which is defined in the Agreement, shall have the meaning assigned to such term in the Agreement. Except as amended and supplemented hereby, all of the terms of the Agreement are incorporated herein by reference, shall remain and continue in full force and effect and are hereby ratified and confirmed in all respects. SECTION 2. Amendment to Appendix A: Discount Pricing, Schedule, and Terms, Section 5 [DELETED]. Section 5 in Appendix A shall be amended and restated in its entirety as follows: 5. [DELETED]. NMC may qualify for an [DELETED] for the second and third calendar quarters of the year 2000 as described below. a. Calculation: NMC's [DELETED] will be calculated in accordance with the following formula and in accordance with the [DELETED] schedule listed below. [DELETED] = A x B where A = [DELETED] B = [DELETED] C = [DELETED] D = [DELETED] [DELETED] (C - D)/D B --------- --- [DELETED] The [DELETED] will be evaluated and determined based on the aggregate Qualified Purchases of EPOGEN(R) during the second calendar quarter (April 1, 2000 through June 30, 2000) and the third calendar quarter (July 1, 2000 through September 30, 2000). The aggregate Qualified Purchases of EPOGEN(R) during these respective calendar quarters will be compared to the aggregate Qualified Purchases of EPOGEN(R) from the same calendar quarters from the previous year. If the [DELETED] set forth above in this 1 2 AMENDMENT #3 TO AGREEMENT NO. 19984813 - -------------------------------------------------------------------------------- Appendix A Section 5a are attained, the [DELETED] will be paid within [DELETED]. At the end of the Term, and prior to the payment of any other incentives or rebates achieved pursuant to this Agreement, [DELETED]. b. VESTING: NMC's [DELETED] will vest on the last day of the second and third calendar quarters and will be paid [DELETED]. All other terms and conditions of the Agreement remain unchanged. The foregoing change(s), unless otherwise specified, shall be effective from the Commencement Date of the Agreement (January 1, 2000) and will remain in effect for the duration of the Agreement. Please retain one fully executed original for your records and return the other fully executed original to Amgen. THE PARTIES EXECUTED THIS AMENDMENT AS OF THE DATES SET FORTH BELOW. AMGEN INC. NATIONAL MEDICAL CARE, INC. Signature: \s\ Eric Benevich Signature: \s\ Robert J. McGorty Print Name: Eric Benevich Print Name: Robert J. McGorty Print Title: Product Manager Print Title: Vice President of Finance and Administration Date: 7/17/00 Date: 7/14/00 2 EX-11.1 3 ex11-1.txt STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 FRESENIUS MEDICAL CARE NORTH AMERICA WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION (DOLLARS AND SHARES IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- 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:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- CONSOLIDATED Net earnings ........................................... $ 25,169 $ 21,404 $ 48,263 $ 39,031 Dividends paid on preferred stocks ..................... (130) (130) (260) (260) -------- -------- -------- -------- Income used in per share computation of earnings........ $ 25,039 $ 21,274 $ 48,003 $ 38,771 ======== ======== ======== ======== Basic and fully dilutive earnings per share ............ $ 0.28 $ 0.24 $ 0.53 $ 0.43 ======== ======== ======== ========
EX-27 4 ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS DEC-31-2000 DEC-31-2000 APR-01-2000 JAN-01-2000 JUN-30-2000 JUN-30-2000 15,562 15,562 0 0 415,117 415,117 70,581 70,581 188,100 188,100 884,491 884,491 708,694 708,694 268,889 268,889 4,638,926 4,638,926 1,194,159 1,194,159 0 0 0 0 16,318 16,318 90,000 90,000 1,563,887 1,563,887 4,638,926 4,638,926 116,131 235,169 760,724 1,505,839 84,248 170,703 512,494 1,019,352 126,271 253,791 14,928 27,307 56,935 110,238 50,096 95,151 24,927 46,888 25,169 48,263 0 0 0 0 0 0 25,169 48,263 0.28 0.53 0.28 0.53
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