-----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, CVxvQQwJZzzTOBSqe+4af8HX2KigEnpnef8RpItdy+EKxxlMYhWKVC8htyA9/COa f7yhsyfva3ozyRVfS4BHSw== 0000950135-01-001142.txt : 20010409 0000950135-01-001142.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950135-01-001142 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRESENIUS MEDICAL CARE HOLDINGS INC /NY/ CENTRAL INDEX KEY: 0000042872 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 133461988 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03720 FILM NUMBER: 1590972 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-K 1 b38153fme10-k.txt FRESENIUS MEDICAL CARE HOLDINGS INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM_____ TO_____ . COMMISSION FILE NUMBER 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-3461988 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) (JURISDICTION OF INCORPORATION OR ORGANIZATION) 95 HAYDEN AVE., LEXINGTON, MA 02420 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code: 781-402-9000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class D Special Dividend Preferred Stock, par value $.10 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405). $3,384,368 March 23, 2001. 2 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of April 2, 2001, 90,000,000 shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Definitive Information Statement with respect to its 2000 Annual Meeting of Stockholders, to be filed on or before April 30, 2001. (Part III) 2 3 TABLE OF CONTENTS
PART I Item 1. Business ............................................................................. 4 Item 2. Properties ........................................................................... 24 Item 3. Legal Proceedings .................................................................... 25 Item 4. Submission of Matters to a Vote of Security Holders .................................. 27 PART II ...................................................................................... 27 Item 5. Market Price for Registrant's Common Equity and Related Stockholder Matters .......... 27 Item 6. Selected Financial Data .............................................................. 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A Quantitative and Qualitative Disclosures About Market Risks .......................... 37 Item 8. Consolidated Financial Statements and Supplementary Data ............................. 39 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.. 39 PART III ..................................................................................... 39 Item 10. Directors and Executive Officers of the Registrant .................................. 39 Item 11. Executive Compensation .............................................................. 39 Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 39 Item 13. Certain Relationships and Related Transactions ...................................... 39 PART IV ...................................................................................... 39 Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K ....... 39
3 4 PART I ITEM 1. BUSINESS This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of Fresenius Medical Care Holdings, Inc. (collectively with all its direct and indirect subsidiaries, the "Company"), government reimbursement, future plans and management's expectations regarding future performance. Actual results could differ materially from those contained in these forward-looking statements due to certain factors including, without limitation, changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, 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 2000 Form 10-K and in the Company's reports filed from time to time with the Securities and Exchange Commission (the "Commission") could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. Fresenius Medical Care Holdings, Inc., a New York corporation, 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. ("NMC"), Fresenius USA Marketing Inc.; Fresenius USA Manufacturing Inc.; and SRC Holding Company, Inc., all Delaware corporations and Fresenius USA Inc., a Massachusetts corporation. The Company is primarily engaged in (i) providing kidney dialysis services, clinical laboratory testing and renal diagnostic services, and (ii) manufacturing and distributing products and equipment for dialysis treatment, which accounted for 84% and 16% of 2000 net revenues, respectively. - KIDNEY DIALYSIS AND OTHER SERVICES. The Company is the largest private provider in the U.S. of kidney dialysis and related services. At December 31, 2000, the Company owned 921 outpatient dialysis facilities in the U.S. (including Puerto Rico), treating approximately 67,950 chronic patients (24.6% of estimated U.S. patients). The Company operated or managed an additional 33 facilities treating approximately another 3,750 patients (1.4% of estimated U.S. patients). Collectively, these company-operated facilities treated 26.0% of the estimated dialysis patients in the U.S. The Company believes its next largest competitor treated approximately 14.8% of U.S. patients. Additionally, the Company provides inpatient dialysis services, therapeutic apheresis, hemo perfusion, and other services under contract to hospitals in the U.S. - DIALYSIS PRODUCTS. The Company manufactures a comprehensive line of dialysis products, including hemodialysis machines, peritoneal dialysis systems and disposable products. The Company manufactures innovative and technologically advanced products, including the Fresenius Polysulfone(TM) dialyzer, which the Company believes is the best-performing, mass-produced dialyzer on the market, and Delflex(R) peritoneal solutions with Safe-Lock(R) connectors. The Company's principal executive office is located at 95 Hayden Avenue, Lexington, MA 02420-9192. Its telephone number is (781) 402-9000. RENAL INDUSTRY OVERVIEW END-STAGE RENAL DISEASE End-stage renal disease ("ESRD") is the state of advanced chronic kidney disease that is characterized by the irreversible loss of kidney function and requires routine dialysis treatment or kidney transplantation to sustain life. A normally functioning human kidney removes waste products and excess water from the blood, preventing toxin buildup, eventual poisoning of the body and water overload. Chronic kidney disease can be caused by a number of conditions, primarily nephritis, inherited diseases, hypertension and diabetes. Nearly 60% of all people with ESRD acquire the disease as a complication of one or more of these primary conditions. Based on the most recent information published by the Health Care Financing Administration ("HCFA") of the Department of Health and Human Services ("HHS"), the number of patients in the U.S. who received chronic dialysis grew from approximately 66,000 in 1982 to approximately 259,500 at December 31, 1999 or at a compound annual rate of 8.4%. 4 5 The Company attributes the continuing growth in the number of dialysis patients principally to an increase in general life expectancy and, thus, the overall aging of the general population, the shortage of donor organs for kidney transplants and better treatment and survival of patients with hypertension, diabetes and other illnesses that lead to ESRD. Moreover, improved technology has enabled older patients and those who previously could not tolerate dialysis due to other illnesses to benefit from this life-prolonging treatment. There are currently only two methods for the treatment of ESRD: dialysis and kidney transplantation. Transplants are limited by the scarcity of compatible kidneys. Approximately 13,500 patients received kidney transplants in the U.S. during 1999. Therefore, most patients suffering from ESRD must rely on dialysis, which is the removal of toxic waste products and excess fluids from the body by artificial means. There are two major dialysis modalities commonly used today, hemodialysis and peritoneal dialysis. Generally, the method of treatment used by an ESRD patient is chosen by the physician in consultation with the patient, and is based on the patient's medical conditions and needs. According to HCFA data, as of December 31, 1999, there were approximately 3,740 Medicare-certified ESRD treatment centers in the U.S. Ownership of these centers was fragmented. The Company estimates that at that time, the ten largest multi-facility providers accounted for approximately 2,280 facilities (61% of facilities) and 176,000 patients (68% of patients). The remaining 32% of patients were divided among freestanding facilities (many privately owned by physicians) and hospital-affiliated facilities. The Company believes that these proportions remained similar in 2000. The Company estimates that the top ten multi-center providers accounted for approximately 187,000 patients, or 68% of estimated U.S. patents at December 31, 2000. According to HCFA, as of December 31, 1999, approximately 88% of dialysis patients in the U.S. received in-center treatment (virtually all hemodialysis) and approximately 12% were treated at home. Of those treated at home, more than 94% received peritoneal dialysis. TREATMENT OPTIONS FOR ESRD Hemodialysis. Hemodialysis removes waste products and excess fluids from the blood extracorporeally. In hemodialysis, the blood flows outside the body by means of plastic tubes known as bloodlines into a specially designed filter, a dialyzer, which functions as an artificial kidney by separating waste products and excess water from the blood by diffusion and ultrafiltration. Dialysis solution carries away the waste products and excess water, and the cleansed blood is returned to the patient. The movement of the blood and dialysis solution is controlled by a hemodialysis machine, which pumps blood, adds anti-coagulants, regulates the purification process and controls the mixing of dialysis solution and the rate of its flow through the system. This machine may also monitor and record the patient's vital signs. According to HCFA, as of December 31, 1999, hemodialysis patients represented 88% of all dialysis patients in the U.S. Hemodialysis treatments are generally administered to a patient three times per week and typically last from two and one-half to four hours or longer. The majority of hemodialysis patients are referred to outpatient dialysis centers, such as those operated by Fresenius Medical Care, where hemodialysis treatments are performed with the assistance of a nurse or dialysis technician under the general supervision of a physician. Peritoneal Dialysis. Peritoneal dialysis removes waste products and excess fluids from the blood by use of the peritoneum, the membrane lining covering the internal organs located in the abdominal area. Most peritoneal dialysis treatments are self-administered by patients in their own homes and workplaces, either by a treatment known as continuous ambulatory peritoneal dialysis ("CAPD") or by a treatment introduced by Fresenius USA in 1980 known as continuous cycling peritoneal dialysis ("CCPD"). In both of these treatments, the patient has a catheter surgically implanted to provide access to the peritoneal cavity. Using this catheter, a sterile dialysis solution is introduced into the peritoneal cavity and the peritoneum operates as the dialyzing membrane. A typical CAPD peritoneal dialysis program involves the introduction and disposal of solution four times a day. With CCPD a machine is used to "cycle" solution to and from the patient's peritoneum during sleep. In both CAPD and CCPD the patient undergoes dialysis daily, and typically does not experience the buildup of toxins and fluids experienced by hemodialysis patients on the days they are not treated. In addition, because the patient is not required to make frequent visits to a hemodialysis clinic, and because the solution exchanges can be accomplished at convenient (although more frequent) times, a patient on peritoneal dialysis may experience much less disruption to his or her life than a patient on hemodialysis. Certain aspects of peritoneal dialysis, however, limit its use as a long-term therapy for some patients. First, certain patients cannot make the required sterile connections of the peritoneal dialysis tubing to the 5 6 catheter, leading to excessive episodes of peritonitis, a bacterial infection of the peritoneum which can result in serious adverse health consequences, including death. Second, treatment by current forms of peritoneal dialysis may not be as effective as hemodialysis in removing wastes and fluids for some patients. STRATEGY The Company's objective is to focus on generating revenue growth that exceeds market growth of the dialysis industry, as measured by growth in patient population, while maintaining the Company's leading position in the market and increasing earnings at a faster pace than revenue growth. The Company's dialysis services and product businesses have grown faster than the market in terms of revenues over the past five years, and the Company believes that it is well positioned to continue this growth by focusing on the following strategies: - Continue to Provide High Standards of Patient Care. The Company believes that its reputation for providing high standards of patient care is a competitive advantage. The Company believes that NMC's proprietary Patient Statistical Profile ("PSP") database, which contains clinical and demographic data on approximately 73,400 dialysis patients, is the most comprehensive body of information about dialysis patients in the world. The Company believes that this database provides a unique advantage in continuing to improve dialysis treatment outcomes, reduce mortality rates and improve the quality and effectiveness of dialysis products. - Expand Presence in the U.S. Over the past several years, the Company has significantly expanded its U.S. provider operations through the acquisition of existing dialysis clinics as well as the opening of new clinics. In 2000, the Company acquired 30 clinics and opened 51 new clinics. As a result, the Company now has an established presence in each of its targeted markets in the U.S. Prospectively, the Company expects to enhance its presence in the U.S. by focusing its expansion on the acquisition of individual or small groups of dialysis centers in selected markets, expansion of existing clinics, and opening of new centers, although the Company will consider large acquisitions if suitable opportunities become available. - Increase Spectrum of Dialysis Services. One of the Company's objectives is to continue to expand its role within the broad spectrum of services provided to dialysis patients. The Company has begun to implement this strategy by providing expanded and enhanced patient services, including laboratory and diagnostic services, to both its own clinics and those operated by third parties. The Company estimates that Spectra Renal Management provides laboratory services for 40% of the dialysis patients in the United States. The Company has developed disease state management methodologies which involve total patient care for ESRD patients, that it believes are attractive to managed care payors. The Company has formed Optimal Renal Care, LLC, a joint venture with Permanente Medical Group of Southern California, a subsidiary of Kaiser Permanente which has the largest dialysis patient population of any managed care organization, and has formed Renaissance Health Care as a joint venture with certain of the Company's nephrologists. - Continue to Offer Complete Dialysis Product Lines. The Company offers broad and competitive hemodialysis and peritoneal dialysis product lines. These product lines enjoy broad market acceptance and enable customers to purchase all of their dialysis machines, systems and disposable products from a single source. During the year ended December 31, 2000 Fresenius Medical Care's product revenues were derived approximately 18% from machine sales and 82% from sales of disposable products. These disposable products provide FMC with a continuing source of revenue from our installed base of dialysis equipment. - Extend Our Position as an Innovator in Product and Process Technology. The Company is committed to technological leadership in both hemodialysis and peritoneal dialysis products. FMC has a research and development team with approximately 220 members focused on developing dialysis systems that are safer, more effective and easier to use and that can be easily customized to meet the differing needs of customers around the world. The Company believes that its extensive expertise in patient treatment and clinical data will further enhance its ability to develop more effective products and treatment methodologies. The Company's ability to manufacture dialysis products on a cost-effective and competitive basis results in large part from our process technologies. Over the past several years, the Company has reduced 6 7 manufacturing costs per unit through development of proprietary manufacturing technologies that have streamlined and automated its production processes. Fresenius Medical Care intends to further improve its proprietary, highly automated manufacturing system to further reduce product manufacturing costs, while continuing to achieve a high level of quality control and reliability. For a description of other elements of the Company's strategy see " -- Dialysis Services" and " -- Dialysis Products Business." For additional information in respect to the Company's industry segments, see Notes to Consolidated Financial Statements - Note 18, "Industry Segments and Information about Foreign Operations." DIALYSIS SERVICES OVERVIEW The Company is the largest provider in the U.S. of kidney dialysis and related services to patients suffering from chronic kidney disease. The Company also provides clinical laboratory testing and renal diagnostic services for dialysis patients (Company owned and non-Company owned clinics). The Company's provider business is primarily operated through the Dialysis Services business unit ("Dialysis Services"). Clinical laboratory testing and renal diagnostic services are primarily provided by Spectra Renal Management ("SRM") DIALYSIS SERVICES As of December 31, 2000, the Company owned 921 dialysis centers in the U.S. The centers are generally concentrated in areas of high population density. In 2000, the Company acquired 30 existing centers, developed 51 new centers and consolidated or sold 9 centers. The number of patients treated at the Company's centers has increased from approximately 62,000 at December 31, 1999 to approximately 68,000 at December 31, 2000. At the Company's centers, hemodialysis treatments are provided at individual "stations" through the use of dialysis machines. A nurse or dialysis technician attaches the necessary tubing to the patient and monitors the dialysis equipment and the patient's vital signs. The capacity of a center is a function of the number of stations and such factors as the type of treatment, patient requirements, length of time per treatment and local operating practices and ordinances regulating hours of operation. Most of the Company's centers operate two or three patient shifts per day. Each of the Company's dialysis centers is under the general supervision of a medical director ("Medical Director") and, in some cases, one or more Associate Medical Directors, who are physicians. See "Patient, Physician and Other Relationships." Each dialysis center also has an administrator who supervises the day-to-day operations of the facility and the staff. The staff typically consists of registered nurses, licensed practical nurses, patient care technicians, a social worker, a registered dietician, and a unit clerk and biomedical technicians. The Company engages in systematic efforts to measure, maintain and improve the quality of the services that it delivers at its dialysis centers. Each center collects and analyzes quality assurance and patient data, which in turn is regularly reviewed by Dialysis Services and corporate management. At each center, a quality assurance committee is responsible for reviewing quality of care reports generated by the Company's PSP system, setting goals for quality enhancement and monitoring the progress of quality assurance initiatives. The Company believes that it enjoys a reputation of providing superior quality care to dialysis patients. As part of the dialysis therapy, the Company provides various related services to ESRD patients in the U.S. at its dialysis centers, including the administration of erythropoietin ("EPO"), a bioengineered protein that stimulates the production of red blood cells. EPO is used to treat anemia, a medical complication frequently experienced by ESRD patients, and is administered to most of the Company's patients. EPO is produced by a single source manufacturer, Amgen Inc., and any interruption of supply could materially adversely affect the Company's business and results of operations. The Company's current contract with Amgen Inc. covers the period from January 2001 to December 2001 with price guarantees and volume and outcome based discounts. Other services provided to ESRD patients in the U.S. include: the administration of vitamin D, iron, hepatitis vaccine, and blood transfusions; the provision of interdialytic parenteral nutrition ("IDPN"), in which nutrients are added to the 7 8 patient's blood during hemodialysis; the provision, through SRM, of clinical laboratory testing and renal services. These tests and other ancillary services are provided by specific prescription of the patient's attending physician. The Company's centers also offer services for home dialysis patients, the majority of whom are treated with peritoneal dialysis. For such patients, the Company provides certain materials, training and patient support services, including clinical monitoring, supply of EPO, follow-up assistance and arrangements for the delivery of the supplies to the patient's residence. See " - -- Regulatory and Legal Matters -- Reimbursement" and " -- Legal Proceedings" for a discussion of billing for such products and services. The manner in which each center conducts its business is dependent, in large part, upon applicable laws, rules and regulations of the jurisdiction in which the center is located, as well as the Company's clinical policies. However, a patient's attending physician (who may be the center's Medical Director or an unaffiliated physician with staff privileges at the center) has medical discretion as to the particular treatment modality and medications to be prescribed for that patient. Similarly, the attending physician has discretion in selecting the particular medical products prescribed, although equipment, regardless of brand, is typically purchased by the center in consultation with the medical director through the Company's central purchasing operations. The Company also provides dialysis services under contract to hospitals in the U.S. on an "as needed" basis for patients suffering from acute kidney failure and for ESRD patients who are hospitalized. The Company services these patients either at their bedside, using portable dialysis equipment, or at a dialysis site maintained by the hospital. Contracts with hospitals provide for payment at negotiated rates that are higher than the Medicare reimbursement rates for chronic in-center treatments. ACQUISITIONS The Company's growth in revenues and operating earnings in prior years has resulted, in significant part, from its ability to effect acquisitions of health care businesses, particularly dialysis centers, on reasonable terms. In the U.S., owners may be motivated to sell their centers to obtain relief from day-to-day administrative responsibilities and changing governmental regulations, to focus on patient care and to realize a return on their investment. While price is typically the key factor in securing acquisitions, the Company believes that it will be an attractive acquirer or partner to many dialysis center owners due to its reputation for patient treatment, its proprietary PSP database (which contains clinical and demographic data on approximately 73,400 dialysis patients), its comprehensive clinical and administrative systems, manuals and policies, its ability to provide ancillary services to dialysis centers and patients and its reputation for technologically advanced products. The Company believes that these factors will also be advantages when opening new centers. The U.S. health care industry has experienced significant consolidation in recent years, particularly in the dialysis service sectors in which the Company competes, resulting, in some cases, in increased costs of acquisitions in these sectors. Moreover, because of the ongoing consolidation in the dialysis services industry, the availability of acquisitions may decrease. The Company's ability to make acquisitions also will depend, in part, on the Company's available financial resources and the limitations imposed under two credit facilities (collectively, "the NMC Credit Facilities"). See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources." The inability of the Company to continue to effect acquisitions in the provider business on reasonable terms could have an adverse impact on growth in its business and on its results of operations. The Company regularly evaluates and explores opportunities with various other health care companies and other businesses regarding acquisitions and joint business ventures. In 2000, the Company completed new acquisitions and acquisitions of previously managed clinics totaling 30 dialysis facilities in the U.S. providing care to approximately 2,755 patients. These acquisitions and agreements expand the Company's presence in selected key areas of the United States. 8 9 SOURCES OF DIALYSIS SERVICES NET REVENUES The following table provides information for the periods indicated regarding the percentage of the Company's U.S. dialysis treatment services net revenues provided by (a) the Medicare ESRD program, (b) private/alternative payors, such as commercial insurance and private funds, (c) Medicaid and other government sources and (d) hospitals.
YEAR ENDED DECEMBER 31, ----------------------- 2000 1999 1998 ---- ---- ---- Medicare ESRD program ....... 59.1% 60.2% 57.0% Private/alternative payors .. 32.1 30.3 33.8 Medicaid and other government sources..................... 4.2 4.2 4.1 Hospitals ................... 4.6 5.3 5.1 ----- ----- ----- Total ..................... 100.0% 100.0% 100.0% ===== ===== =====
Under the Medicare ESRD program, Medicare reimburses dialysis providers for the treatment of certain individuals who are diagnosed as having ESRD, regardless of age or financial circumstances. When Medicare assumes responsibility as the primary payor, it pays for dialysis and certain specified related services at 80% of the payment methodology commonly referred to as the composite rate method ("Composite Rate"). In addition, subject to various restrictions and co-payment limitations, Medicare pays separately for certain dialysis-related diagnostic and therapeutic services not included in the Composite Rate. A secondary payor, usually a Medicare supplemental insurer, a state Medicaid program or, to a lesser extent, the patient or the patient's private insurer, is responsible for paying any co-payment (typically 20%), other approved services not paid by Medicare and the annual deductible. Most of the states in which the Company currently operates dialysis centers provide Medicaid benefits to qualified recipients to supplement their Medicare entitlement. Prior to the time at which Medicare becomes the primary payor, most dialysis treatments are paid for by another third-party payor, such as the patient's private insurer, or by the patient. ESRD patients under age 65 who are covered by an employer health plan must wait 33 months (consisting of a three-month entitlement waiting period and an additional 30-month "coordination of benefits period") before Medicare becomes the primary payor. During this 33-month period, the employer health plan is responsible for payment as primary payor at its negotiated rate or, in the absence of such a rate, at the Company's usual and customary rates (which generally are higher than the rates paid by governmental payors, such as Medicare), and Medicare is the secondary payor. See " -- Regulatory and Legal Matters -- Reimbursement." A significant portion of the Company's revenues for dialysis services are derived from reimbursement provided by non-governmental third-party payors. A substantial portion of third-party health insurance in the U.S. is now furnished through some type of managed care plan, including health maintenance organizations ("HMOs"). Non-governmental payors generally reimburse for dialysis treatments at higher rates than governmental payors such as Medicare. However, managed care plans have been more aggressive in selectively contracting with a smaller number of providers willing to furnish services for lower rates and subject to a variety of service restrictions. For example, managed care plans and traditional indemnity third-party payors increasingly are demanding alternative fee structures, such as capitation arrangements whereby a provider receives a fixed payment per month per enrollee and bears the risk of loss if the costs of treating such enrollee exceed the capitation payment. These market forces have resulted in pressures to reduce the reimbursement the Company receives for its services and products. The Company's ability to secure rates with indemnity and managed care plans has largely been due to the relatively small number of ESRD patients which any single HMO has enrolled. By regulation, ESRD patients have been prohibited from joining an HMO unless they are otherwise eligible for Medicare coverage, due to age or disability, and are members of a managed care plan when they first experience kidney failure. HCFA has a pilot evaluation underway for treatment of Medicare ESRD patients by managed care companies under capitated contracts. If successful, this pilot program could result in the elimination of the regulation that precludes ESRD patients from enrolling in managed care organizations. If Medicare HMO enrollments increase and the number of ESRD patients in managed care plans also increases, managed care plans' leverage to negotiate lower rates or reduce services provided by the Company may become greater. The Company has formed two joint ventures seeking to contract "at risk" with managed care organizations for the care of ESRD patients. Renaissance Health Care, Inc. is a joint venture between the Company and participating nephrologists throughout the U.S. Optimal Renal Care, LLC is a joint venture between Permanente Medical Group of Southern California, a subsidiary of Kaiser Permanente and the Company. The Company believes a significant increase in the number of patients enrolled in managed care plans, and might also cause these plans to look closer at outsourcing ESRD care to ESRD companies such as the Company's joint decrease state management ventures. 9 10 As managed care programs expand market share and gain greater bargaining power vis-a-vis health care providers, there will be increasing pressure to reduce the amounts paid for services and products furnished by the Company. These trends would be accelerated if future changes to the Medicare ESRD program require private payors to assume a greater percentage of the cost of care given to dialysis patients. The Company is presently seeking to expand the portion of its revenues attributable to non-governmental private payors. However, the Company believes that the historically higher rates of reimbursement paid by non-governmental payors may not be maintained at such levels. If substantially more patients of the Company join managed care plans or such plans reduce reimbursements to the Company, the Company's business and results of operations could be adversely affected, possibly materially. See " -- Regulatory and Legal Matters -- Reimbursement," " -- Anti-Kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse Laws -- Changes in the Health Care Industry PATIENT, PHYSICIAN AND OTHER RELATIONSHIPS The Company believes that its success in establishing and maintaining dialysis centers, in the U.S. depends in significant part upon its ability to obtain the acceptance of, and referrals from, local physicians, hospitals and managed care plans. A dialysis patient generally seeks treatment at a center that is convenient to the patient and at which the patient's nephrologist has staff privileges. Virtually all of the Company's clinics maintain open staff privileges for local nephrologists. The Company's ability to provide quality dialysis care and otherwise to meet the needs of local patients and physicians is central to its ability to attract nephrologists to the Company's centers and to receive referrals from such physicians. See " -- Anti- kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse Laws." The conditions for coverage under the Medicare ESRD program require that treatment at a dialysis center be under the general supervision of a Medical Director. Generally, the Medical Director must be board certified or board eligible in internal medicine and have at least 12 months of training or experience in the care of patients at ESRD centers. The Company's Medical Directors maintain their own private practices. The Company has written agreements with the physicians who serve as Medical Directors at its centers. The Medical Director agreements entered into by the Company generally have terms of three years, although some have terms of as long as five to ten years. The compensation of Medical Directors and other physicians under contract with the Company is individually negotiated and generally depends upon competitive factors in the local market, the physician's professional qualifications, experience and responsibilities and the size of and services provided by the center. The aggregate compensation of the Medical Directors and other physicians under contract is fixed in advance for a period of one year or more and is based in part on various efficiency and quality incentives. The Company believes that compensation is paid at fair market value. Virtually all of the Medical Director agreements, as well as the typical contract under which the Company acquires existing dialysis centers, include noncompetition covenants covering specified activities within specified geographic areas for specified periods of time, although they do not prohibit the physicians from providing direct patient care services at other locations and, consistent with law, do not require a physician to refer patients to the Company or particular centers or to buy or use specific medical products. In certain states, non-competition covenants may not be enforceable. COMPETITION Dialysis Services. The dialysis services industry is highly competitive. Ownership of dialysis centers in the U.S. is fragmented, with a large number of operators each owning 10 or fewer centers and a small number of larger providers, the largest of which is the Company. Consolidation of the industry has been ongoing over the last decade. In urban areas, where many of the Company's dialysis centers are located, there frequently are many competing centers in proximity to the Company's centers. The Company experiences direct competition from time to time from former Medical Directors, former employees or referring physicians who establish their own centers. Furthermore, other health care providers or product manufactures, some of which have significant operations or resources, may decide to enter the dialysis services business in the future. Because services to the majority of patients in the U.S. are primarily reimbursed under government programs, competition for patients is based primarily on quality and accessibility of service and the ability to obtain referrals from physicians and hospitals. However, extension of periods during which commercial insurers are primarily responsible for reimbursement and the growth of managed care has placed greater emphasis on service costs. The Company believes that it competes effectively in all of these areas. In particular, based upon the Company's knowledge and understanding of other 10 11 providers of dialysis treatments, as well as from information obtained from publicly available sources, the Company believes that it is among the most cost-efficient providers of kidney dialysis services. In addition, as a result of its large size relative to most other dialysis service providers, the Company enjoys economies of scale in areas such as purchasing, billing, collections and data processing. LABORATORY AND RENAL DIAGNOSTIC SERVICES The Company provides clinical laboratory testing and renal services through its business unit known as Spectra Renal Management ("SRM"). SRM is the leading U.S. dialysis clinical laboratory providing blood, urine and other bodily fluid testing services to assist physicians in determining whether a dialysis patient's therapy regimen, diet and medicines remain optimal. SRM laboratories are located in New Jersey, Illinois, and Northern California. In 2000, SRM performed approximately 37 million tests for more than 100,000 dialysis patients across the United States. SRM also provided testing services to clinical research projects and others. The Company plans to expand SRM into related markets such as hospital dialysis units and physician office practices to offer assistance with the pre-ESRD patient base. The Company's clinical laboratory results have been a critical element in the development of the Company's proprietary PSP database, which contains clinical, laboratory and demographic data on the 73,400 dialysis patients currently receiving treatment. The Company uses PSP to assist physicians in providing quality care to dialysis patients. In addition, PSP is a key resource in ongoing research, both within the Company and at outside research institutions, to decrease mortality rates among dialysis patients and improve their quality of life. COMPETITION SRM competes in the U.S. with large nationwide laboratories, dedicated dialysis laboratories and numerous local and regional laboratories, including hospital laboratories. In the laboratory services market, companies compete on the basis of performance, including quality of laboratory testing, timeliness of reporting test results and cost-effectiveness. The Company believes that SRM's services are competitive in these areas. While the main competition is local hospitals, SRM is competitive based upon the quality and accessibility of the service. DIALYSIS PRODUCTS The Company manufactures and distributes equipment and disposable products for the treatment of kidney failure using both hemodialysis and peritoneal dialysis. Such products include hemodialysis machines, peritoneal dialysis cyclers and related equipment, dialyzers, peritoneal dialysis solutions in flexible plastic bags, hemodialysis concentrates and solutions, granulate mixes, bloodlines, disposable tubing assemblies and equipment for water treatment in dialysis centers. Other products manufactured by third parties and distributed by the Company include dialyzers, special blood access needles, heparin (used to prevent blood clotting) and commodity supplies such as bandages, clamps and syringes. OVERVIEW The following table shows for 2000, 1999 and 1998 actual net revenues of the Company's products business related to hemodialysis products, peritoneal dialysis products and other activities, principally technical service:
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------- Total % of Total % of Total % of Revenues Total Revenues Total Revenues Total --------- ---------- --------- ---------- ----------- --------- Hemodialysis Products $334,447 70% $329,561 67% $296,361 63% Peritoneal Dialysis Products 93,742 20 108,145 22 123,389 26 Other 51,878 10 53,205 11 51,234 11 --------- ---------- --------- ---------- ----------- --------- Total $480,067 100% $490,911 100% $470,984 100% ========= ========== ========= ========== =========== =========
11 12 HEMODIALYSIS PRODUCTS The Company believes that Fresenius Medical Care is a leader in the hemodialysis product field and continually strives to extend and improve the capabilities of its hemodialysis systems to offer an advanced treatment mode at reasonable cost. The Company, through its Dialysis Products business unit ("Dialysis Products"), offers a comprehensive hemodialysis product line, consisting of hemodialysis machines, modular accessories for dialysis machines, polysulfone dialyzers, bloodlines, dialysis solutions and concentrates, fistula needles, connectors, data management systems, machines and supplies for the reuse of dialyzers. Dialysis Machines. The Company assembles, tests and calibrates hemodialysis machines and sells these machines in the U.S., Canada and Mexico. Components for these machines are provided by Fresenius Medical Care and other vendors. Hemodialysis machines manufactured by the Company provide a unique volumetric dialysate balancing and ultrafiltration control system. This system, first developed and introduced by FMC in 1977, provides for the safe and more efficient use of highly permeable dialyzers. The Company also provides machine upgrade kits to allow for advanced therapy modes, thus offering the customer maximum performance with highly permeable polysulfone dialyzers. The Company's hemodialysis machines are capable of operating with dialyzers manufactured by all manufacturers, and are compatible with a wide variety of bloodlines and dialysis concentrates. Dialyzers. All dialyzers manufactured by the Company use hollow fiber polysulfone membranes, a synthetic material. The Company believes that the Fresenius Medical Care Polysulfone(TM) dialyzer is the best-performing mass-produced dialyzer on the market. Fresenius Medical Care is the leading worldwide producer of polysulfone dialyzers. While competitors currently sell polysulfone membranes in the market, FMC developed and is the only manufacturer with more than 13 years' experience in applying the technology required to mass produce polysulfone membranes. The Company believes that polysulfone has superior performance characteristics compared to other materials used in dialyzers, including a higher biocompatibility and greater clearing capacities for uremic toxins. FMC's Polysulfone(TM) dialyzer line consists of a complete range of permeability (high, medium and low flux) to allow tailoring of the dialysis therapy to the individual patient. FMC's Polysulfone(TM) dialyzers are available in both reuse and non reuse series. The Company also sells dialyzer reprocessing and rinse. These machines cleanse dialyzers after dialysis, permitting multiple usage for the same patient before disposal of the dialyzer. The machines facilitate the reuse of disposable dialyzers and, therefore, permit hemodialysis providers to reduce operating costs. Other Hemodialysis Products. The Company manufactures and distributes arterial, venous, single needle and pediatric bloodlines. The Company produces both liquid and dry dialysate concentrates. Liquid dialysate concentrate is mixed with purified water by the hemodialysis machine to produce dialysis solution, which is used in hemodialysis treatment to remove the waste products and excess water from the patient's blood. Dry acid concentrate, developed more recently, requires less storage space. The Company also produces dialysis solutions in bags, including solutions for priming and rinsing hemodialysis bloodlines, as well as connection systems for central concentrate supplies and devices for mixing dialysis solutions and supplying them to hemodialysis machines. Other distributed products include solutions for priming bloodlines, disinfecting and decalcifying hemodialysis machines, fistula needles, hemodialysis catheters, and products for acute renal treatment. The Company has developed the Fresenius Data System FDS08(TM) ("FDS08") computerized treatment monitoring and documentation system. The FDS08 can automatically monitor and record machine and treatment information from as many as 32 hemodialysis machines. The FDS08 is a PC-based system which has found many applications for improving record keeping and increasing staff efficiency. The FDS08 system has been used to pioneer new therapies such as remote monitoring of patients during nightly home hemodialysis, which enables a patient to be dialyzed at home while a staff caregiver monitors the machine performance via a modem link. Additionally the FDS08 system can be linked to the Company's Hypercare(TM) Medical Records System. The Hypercare(TM) Medical Records System is a medical records system which can record and analyze trends in medical outcome factors in hemodialysis patients. New Hemodialysis Products. The Company has introduced the FX-class and Optiflux dialyzers. Both of these dialyzers use polysulfone-based Helixone membranes, which significantly increase clearance. FX-class dialyzers provide simplified handling and more secure treatment and improve waste management, logistics and handling through weight reduction and environmentally improved materials. Optiflux polysulfone dialyzers deliver small and middle molecular weightsolute clearance. Both dialyzers have outstanding biocompatibility, continuing the Company's efforts to provide patient care in the most biocompatible way. The Company has also introduced the 2008K hemodialysis machine, which provides innovative elements such as improved operator interface, an improved blood pump, level detector and heparin pump modules, and fluid removal measurement combined with a feedback control mechanism to monitor and avoid sudden declines in blood pressure and resulting complications. PERITONEAL DIALYSIS PRODUCTS The Company offers a full line of products for peritoneal dialysis patients. Peritoneal dialysis products manufactured by the Company include peritoneal dialysis solutions in bags, peritoneal dialysis cycling machines for CCPD and disposable products for both CAPD and CCPD, such as tubing, sterile solutions and sterile kits to prepare patients for dialysis. The Company also distributes (primarily to its own dialysis centers) other manufacturers' peritoneal dialysis products. 12 13 Peritoneal Dialysis Systems. The Company manufactures a range of peritoneal dialysis solutions. The Company believes that its peritoneal solution products with Safe-Lock(R)connection systems offer significant advantages for CAPD and CCPD home patients, including ease of use and greater protection against touch contamination than other peritoneal dialysis systems presently available. The Safe-Lock(R)standard system involves the connection procedure of introducing and draining the dialysis solution into and from the abdominal cavity through the use of the same bag for introduction and drainage. To use Safe-Lock(R)products, a catheter that has been surgically implanted in the patient is fitted with one part of the Safe-Lock(R)connector, and the peritoneal dialysis solution bag and tubing are fitted with the other part of the Safe-Lock(R)connector. The Company also manufactures disposable double bag systems utilizing a special drainage bag and a snap-off Y-shaped piece that is connected to the Safe-Lock(R)connector at the catheter. These double bag systems further reduce possible entry of contaminants during peritoneal dialysis. Cyclers. While there are two main forms of peritoneal dialysis therapy, the Company believes that CCPD therapy offers benefits over CAPD therapy for patients who need more therapy due to body size, ultrafiltration loss or any other similar reasons. In a standard CAPD program, a patient typically undergoes four manual two-liter exchanges of peritoneal dialysis solution over a 24-hour period, with treatment occurring seven days per week. CAPD must be performed by the patient when he or she is awake. With CCPD therapy, peritoneal dialysis cyclers provide automated dialysis solution exchange. The cycler delivers a prescribed volume of dialysis solution into the peritoneal cavity through an implanted catheter, allows the solution to dwell for a specified time, and completes the process by draining the solution. Cycling may be performed by patients at home throughout the night while sleeping. CCPD delivers more effective therapy than CAPD due to the supine position of the patient during the night, higher volume exchanges and preferable cycle management. The Company's cycling equipment incorporates microprocessor technology, that can be easily programmed by the patient, hospital or clinic staff to perform specific prescribed therapy for a given patient. Since all components are monitored and programmable, these machines allow the physician to prescribe any of a number of current therapy procedures. With nighttime cycling, the patient has complete daytime freedom, wearing only the surgically-implanted catheter and capping device. In addition, the Company believes that CCPD reduces the risk of peritonitis due to less frequent handling of the catheter. The Company introduced the first CCPD machine in 1980 and, in 1994, introduced a new variant on CCPD therapy, PD-Plus(TM), that is offered by the Company in other parts of the world. Normally, a CCPD patient undergoes five or six two-liter solution exchanges at night, and carries no solution during the day. PD-Plus(TM) therapy provides a more tailored therapy using a simpler nighttime cycler, and, where necessary, one exchange during the day. Compared with typical CCPD therapy, the Company believes that PD-Plus(TM) therapy is less costly and easier to administer. In addition, compared with CAPD therapy, the Company believes that PD-Plus(TM) therapy improves toxin removal by more than 40% and therefore is attractive to patients and physicians alike. By increasing the effectiveness of peritoneal dialysis treatments, at an acceptable increase in cost over CAPD therapy, PD-Plus(TM) therapy may also effectively prolong the time period during which a patient will be able to remain on peritoneal dialysis before requiring hemodialysis. PD-Plus(TM) therapy, as developed by the Company, can only be performed using the Fresenius Freedom Cycler(TM) and special tubing using Safe-Lock(R)connectors. FMC has also developed a new CAPD system, comprising tubing, connectors and a peritoneal dialysis double bag, together with the process technology for the manufacture of the system. The FMC Stay-Safe(TM) peritoneal dialysis system utilizes a single switching mechanism that replaces the three tubing clamps to control drainage of solution, flushing of tubes that connect solution bags to catheters, the introduction of new solution, and the tight closure of the line. The control device also further reduces the possibility of catheter contamination during connection and disconnection by sealing the catheter access and surrounding the catheter adapter with a disinfectant solution. Other Peritoneal Dialysis Products. The Company also manufactures and distributes pediatric treatment systems for administration of low volumes of dialysis solutions, assist devices to facilitate automated bag exchange for handicapped patients, catheters, catheter implantation instruments, silicon glue, Pack-PD(TM) (a computer program which analyzes patient and peritoneal characteristics to present a range of treatment options for individual therapies), disinfectants, bag heating plates, adapters, and products to assist and enhance connector sterility. The Company also provides scientific and patient information products, including support materials, such as brochures, slides, videos, instructional posters and training manuals. New Peritoneal Dialysis Products. The Company has introduced the IQcard(TM) system which has been developed to monitor patient compliance in Automated Peritoneal Dialysis Therapy. The IQcard is used with the Freedom(TM) Cycler PD+ to monitor the delivered dose of APD Therapy and record a full treatment history for each patient. It is estimated that patient non-compliance with prescribed Peritoneal Dialysis Therapy varies from 11% to 80%. Lack of compliance may be the most 13 14 significant cause of inadequate dialysis and poor clinical outcomes. With IQcard, the physician has a tool for assessing patient compliance and making adjustments to the prescription as necessary to meet therapy goals. The Company also manufactures the Premier Plus twin bag CAPD system. This system comprises a single product, the Delflex(R) solution bag and the tubing and drainage set necessary for CAPD exchanges. The Premier Plus twin bag system also utilizes Safe-Lock(R) connectors and, because fewer connections are required, may help to reduce patient complications associated with peritoneal dialysis therapy. The Premier Plus twin bag system offers the physician the ability to prescribe larger dosages without requiring the patient to do more exchanges during the day. MARKETING, DISTRIBUTION AND SERVICE Most of the Company's products are sold to hospitals, clinics and specialized treatment centers. With its comprehensive product line and years of experience in dialysis, the Company believes that it has been able to establish and maintain very close relationships with its clinic customer base . Close interaction among the Company's sales force and FMC research and development personnel enables concepts and ideas that develop in the field to be considered and integrated into product development. The Company maintains a direct sales force of trained salespersons engaged in the sale of both hemodialysis and peritoneal dialysis products. This sales force engages in direct promotional efforts, including visits to physicians, clinical specialists, hospitals, clinics and dialysis centers, and represents the Company at industry trade shows. The Company also sponsors medical conferences and scientific symposia as a means for disseminating product information. The sales force is assisted by clinical nurses who provide clinical support, training and assistance to customers. The Company offers customer service, training and education, and technical support such as field service, spare parts, repair shops, maintenance, and warranty regulation. The Company also provides training sessions on the Company's equipment. The Company provides supportive literature on the benefits of its core business products. The Company's management believes its service organizations have a reputation for reliability and high quality service. MANUFACTURING OPERATIONS The Company assembles, tests, and calibrates equipment, including hemodialysis machines, dialyzer reuse devices and peritoneal dialysis cyclers, at its facility in Walnut Creek, California. Components of the Company's hemodialysis machines are supplied by FMC as well as other suppliers. The Company has experienced no difficulties in obtaining sufficient quantities of such components. In connection with the sale and installation of the machines, Company technicians and engineers calibrate the machines and add computer software for record keeping and monitoring. The Company owns a 450,000 square-foot facility in Ogden, Utah which operates as a fully integrated manufacturing and research and development facility for polysulfone dialyzers and peritoneal dialysis solutions. This facility uses automated equipment for the production of polysulfone dialyzers and sterile solutions in flexible plastic containers. The Company, also has the capability to purchase dialyzers and polysulfone bundles from FMC. The Company believes that it is the principal manufacturer of polysulfone dialyzers in the U.S. While the Company obtains the film used in the manufacture of its plastic bags used with its peritoneal solutions from one supplier located in the Netherlands, the Company believes that there are readily available alternative sources of supply for which the FDA could grant expedited approval. The Company also intends to manufacture its own plastic film for peritoneal dialysis solution bags. The Company also manufactures dialysis products at additional plants in the U.S. Bloodlines and PD sets are produced at a facility in Reynosa, Mexico, and concentrates are produced at four facilities in the U.S. Each step in the manufacture of the Company's products, from the initial processing of raw materials through the final packaging of the completed product, is carried out under controlled quality assurance procedures required by law and under Good Manufacturing Practices ("GMP"), as well as under comprehensive quality management systems, such as the internationally recognized ISO 9000-9004 and CE Mark standards, which are mandated by regulatory authorities in the countries in which the Company operates. The facilities in Ogden, Utah and Reynosa, Mexico received ISO 9001 certification in 1999. The facility in Walnut Creek, California received ISO 9001 Certification in 2000. 14 15 SOURCES OF SUPPLY Raw materials essential to the Company's dialysis products business are purchased worldwide from numerous suppliers and no serious shortages or delays in obtaining raw materials have been encountered. To assure continuous high quality, FMC has single supplier agreements for many of its polymers, including polysulfone, polyvinylpyrrolidone, and polyurethane for dialyzer production, and for certain other raw materials. Wherever single supplier agreements exist, the Company believes alternative suppliers are available. However, use of raw materials obtained from alternative suppliers could cause costs to rise due to necessary adjustments in the production process or interruptions in supply. The Company obtains bloodlines under an agreement with Medisystems Corporation as a secondary source of supply to the Company's self manufactured blood lines from Reynosa, Mexico. The new agreement expires in 2002. RESEARCH AND DEVELOPMENT Current research and development activities of the Company are primarily conducted through FMC and are strongly focused on the development of new products, technologies and treatment concepts to optimize the quality of treatment for dialysis patients, and on process technology for the manufacture of the Company's products. FMC intends to continue to maintain its central research and development operations for disposable products, at its St. Wendel facility and for durable products at its facilities in Schweinfurt and Bad Homburg, Germany. It expects that as its dialysis products business continues to expand internationally, research and development activities by its international operations, including the Company, will rely primarily on the research and development activities conducted at St. Wendel, Schweinfurt, and Bad Homburg which will transfer production technology FMC develops to FMC production centers. Local activities focusing on cooperative efforts with those facilities to develop new products and product modifications for local markets. The Company's product development staff works closely with the Fresenius Medical Care research and development group in this regard. FMC employs approximately 220 persons in research and development (including medical doctors, engineers, technicians and research scientists), and conducts its activities at three locations in Germany (at the St. Wendel facility, the Schweinfurt facility and the Bad Homburg facility), and in Walnut Creek, California and Ogden, Utah. FMC's research and development expenses were $32 million in 2000. The Company seeks to maintain its profile in scientific circles through articles in scientific and medical journals, participation in academic symposia, relationships with scientists and physicians in relevant fields and the organization of scientific meetings and workshops. The Company will continue to establish scientific advisory boards and works with medical and other consultants. PATENTS, TRADEMARKS AND LICENSES As the owner of or licensee under patents and trademarks throughout the world, FMC holds rights under more than 997 patents and patent applications relating to dialysis technology in major markets. Patented technologies that relate to dialyzers include polysulfone hollow fiber, in-line sterilization method, and sterile closures for in-line sterilized medical devices. For dialysis machines, patents include the location for a filter device for sterile filtering dialysate in the dialysis machine circuit, the safety concept for the ultrafiltration device in a dialysis machine used for high flux dialysis, a process for the on-line preparation of substitution fluid in hemodiafiltration machine, conductivity sensor arrangements in the dialysis machine circuit, conductivity sensor devices and mathematical algorithms for using such devices, patents relating to controlled bicarbonate dialysis and patents related to control thermal balance during dialysis. The connector system for the Fresenius Medical Care biBag(TM) has been patented in the U.S., Norway, and Europe. Other pending patents include the new generation of "DIASAFE plus"(R) filters. For peritoneal dialysis, FMC holds rights on the Safe-Lock(R)system. Pending patents include non-PVC film (Biofine(TM)) for general use in intravenous and peritoneal dialysis applications and a special film for a peelable, non-PVC double bag for peritoneal dialysis solutions. The Company's intellectual property includes the Inpersol(R)trademark and rights to certain manufacturing know-how, and a paid-up non-exclusive global sublicense from Baxter, Inc. to certain CAPD and connector technology. The Company believes that its success will depend, in large part, on FMC's technology. While FMC, as a standard practice, obtains such legal protections it believes are appropriate for its intellectual property, such intellectual property is subject to infringement or invalidation claims. In addition, technological developments in ESRD therapy 15 16 could reduce the value of FMC's existing intellectual property, which reduction could be rapid and unanticipated. COMPETITION The markets in which the Company sells its dialysis products are highly competitive. Among the Company's competitors in the sale of hemodialysis and peritoneal dialysis products are Gambro AB, Baxter International Inc., Asahi Medical Co., Ltd., Bellco S.p.A. (a subsidiary of Sorin Biomedica S.p.A.), Bieffe Medital S.p.A., ( an affiliate of Baxter, Inc.), B. Braun Melsungen AG, Nissho Corporation (including Nissho Nipro Corporation Ltd.), Nikkiso Co., Ltd., Terumo Medical Corporation and Toray Medical Co., Ltd. Some the Company's competitors possess greater financial, marketing and research and development resources than the Company. The Company believes that in the dialysis product market, companies compete primarily on the basis of product performance, cost-effectiveness, reliability, assurance of supply and service and continued technological innovation. The Company believes its products are highly competitive in all of these areas. Dialysis centers acquired by other product manufacturers may elect to limit or terminate their purchases of the Company's dialysis products in order to avoid purchasing products manufactured by a competitor. The Company believes, however, that customers will continue to consider its long-term customer relationships and reputation for product quality in making product purchasing decisions, and the Company intends to compete vigorously for such customers. EMPLOYEES At December 31, 2000, the Company employed approximately 26,732 employees, including part-time and per diem employees. Such persons are employed by the Company's principal businesses as follows: dialysis treatment and laboratory services, approximately 23,195 employees; and dialysis products, approximately 3,537 employees. Medical Directors of the Company's dialysis centers are retained as independent contractors and are excluded from the employee total. Management believes that its relations with its employees are good. Approximately 600, or 2% of the Company's employees are covered by union agreements. 16 17 REGULATORY AND LEGAL MATTERS REGULATORY OVERVIEW The operations of the Company are subject to extensive governmental regulation at the federal, state and local levels regarding the operation of dialysis centers, laboratories and manufacturing facilities, the provision of quality health care for patients, the maintenance of occupational, health, safety and environmental standards and the provision of accurate reporting and billing for governmental payments and/or reimbursement. In addition, some states prohibit ownership of health care providers by for-profit corporations or establish other regulatory barriers to direct ownership by for-profit corporations. In those states, the Company works within the framework of local laws to establish alternative contractual arrangements for the provision of services to those facilities. Any failure by the Company or its subsidiaries to receive required licenses, certifications or other approvals for new facilities, significant delays in such receipt, loss of its various federal certifications, termination of licenses under the laws of any state or other governmental authority or changes resulting from health care reform or other government actions that reduce reimbursement or reduce or eliminate coverage for particular services rendered by the Company or its subsidiaries could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company must comply with legal and regulatory requirements under which it operates, including the federal Medicare and Medicaid Fraud and Abuse Amendments of 1977, as amended (the "anti-kickback statute"), the federal restrictions on certain physician referrals (commonly known as the "Stark Law") and other fraud and abuse laws and similar state statutes, as well as similar laws in other countries. Moreover, there can be no assurance that applicable laws, or the regulations thereunder, will not be amended, or that enforcement agencies or the courts will not make interpretations inconsistent with those of the Company, any one of which could have a material adverse effect on its business, reputation, financial condition and results of operations of the Company. Sanctions for violations of these statutes may include criminal or civil penalties, such as imprisonment, fines or forfeitures, denial of payments, and suspension or exclusion from the Medicare and Medicaid programs. In the U.S., these laws have been broadly interpreted by a number of courts, and significant government funds and personnel have been devoted to their enforcement because such enforcement has become a high priority for the federal government and some states. The Company, and the health care industry in general, will continue to be subject to extensive federal, state and foreign regulation, the full scope of which cannot be predicted. The Company has entered into a corporate integrity agreement with the U.S. government which requires that the Company staff and maintain a comprehensive compliance program, including a written code of conduct, training program and compliance policies and procedures. The corporate integrity agreement requires annual audits by an independent review organization and periodic reporting to the government. The corporate integrity agreement permits the U.S. government to exclude the Company and its subsidiaries from participation in U.S. federal health care programs if there is a material breach of the agreement that is not cured by the Company within thirty days after the Company receives written notice of the breach. PRODUCT REGULATION In the U.S., the FDA and comparable state regulatory agencies impose requirements on certain subsidiaries of the Company as a manufacturer and a seller of medical products and supplies under their jurisdiction. These require that products be manufactured in accordance with GMP and that the Company comply with FDA requirements regarding the design, safety, advertising, labeling, recordkeeping and reporting of adverse events related to the use of its products. In addition, in order to clinically test, produce and market certain medical products and other disposables (including hemodialysis and peritoneal dialysis equipment and solutions, dialyzers, bloodlines and other disposables) for human use, the Company must satisfy mandatory procedures and safety and efficacy requirements established by the FDA or comparable state and foreign governmental agencies. Such rules generally require that products be approved by the FDA as safe and effective for their intended use prior to being marketed. The Company's peritoneal dialysis solutions have been designated as drugs by the FDA and, as such, are subject to additional FDA regulation under the Food, Drug and Cosmetic Act of 1938 ("FDC Act"). The approval process is expensive, time consuming and subject to unanticipated delays. The FDA may also prohibit the sale or importation of products, order product recalls or require post-marketing testing and surveillance programs to monitor a product's effects. The Company believes that it has filed for or obtained all necessary approvals for the manufacture and sale of its products in jurisdictions in which those products are currently produced or sold. There can be no assurance that the Company will obtain necessary regulatory approvals or clearances within reasonable time frames, if at all. Any such delay or failure to 17 18 obtain regulatory approval or clearances could have a materially adverse effect on the business, financial condition and results of operations of the Company. FACILITIES AND OPERATIONAL REGULATION The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") subject virtually all clinical laboratory testing facilities, including those of the Company, to the jurisdiction of HHS. CLIA establishes national standards for assuring the quality of laboratories based upon the complexity of testing performed by a laboratory. Certain operations of the Company are also subject to federal laws governing the repackaging and dispensing of drugs and the maintenance and tracking of certain life sustaining and life-supporting equipment. The operations of the Company are subject to various U.S. Department of Transportation, Nuclear Regulatory Commission and Environmental Protection Agency requirements and other federal, state and local hazardous and medical waste disposal laws. As currently in effect, laws governing the disposal of hazardous waste do not classify most of the waste produced in connection with the provision of dialysis, or laboratory services as hazardous, although disposal of nonhazardous medical waste is subject to specific state regulation. However, the Company's laboratory businesses do generate hazardous waste which is subject to specific disposal requirements. The operations of the Company are also subject to various air emission and wastewater discharge regulations. Federal, state and local regulations require the Company to meet various standards relating to, among other things, the management of facilities, personnel qualifications and licensing, maintenance of proper records, equipment, quality assurance programs, the operation of pharmacies, and dispensing of controlled substances. All of the operations of the Company in the U.S. are subject to periodic inspection by federal and state agencies and other governmental authorities to determine if the operations, premises, equipment, personnel and patient care meet applicable standards. To receive Medicare reimbursement, the Company's dialysis centers, renal diagnostic support business and laboratories must be certified by HCFA. All of the Company's dialysis centers, and laboratories that furnish Medicare services are so certified. Certain facilities of the Company and certain of their employees are also subject to state licensing statutes and regulations. These statutes and regulations are in addition to federal and state rules and standards that must be met to qualify for payments under Medicare, Medicaid and other government reimbursement programs. Licenses and approvals to operate these centers and conduct certain professional activities are customarily subject to periodic renewal and to revocation upon failure to comply with the conditions under which they were granted. The Occupational Safety and Health Administration ("OSHA") regulations require employers to provide employees who work with blood or other potentially infectious materials with prescribed protections against blood-borne and air-borne pathogens. The regulatory requirements apply to all health care facilities, including dialysis centers, laboratories and renal diagnostic support business, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide hepatitis B vaccinations, personal protective equipment, blood-borne pathogens training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, engineering and work practice controls and other OSHA-mandated programs for blood-borne and air-borne pathogens. Some states in which the Company operates have Certificate of Need ("CON") laws that require any person or entity seeking to establish a new health care service or to expand an existing service to apply for and receive an administrative determination that the service is needed. The Company currently operates in 13 states, including the District of Columbia and Puerto Rico that have CON laws applicable to dialysis centers. These requirements may provide a barrier to entry to new companies seeking to provide services in these states, but also may constrain the Company's ability to expand its operations in these states. REIMBURSEMENT Dialysis Services. The Company's dialysis centers provide outpatient hemodialysis treatment and related services for ESRD patients. In addition, some of the Company's centers offer services for the provision of peritoneal dialysis and hemodialysis treatment at home. 18 19 The Medicare program is the primary source of Dialysis Services revenues from dialysis treatment. For example, in 2000, approximately 59% of Dialysis Services revenues resulted from Medicare's ESRD program. As described below, Dialysis Services is reimbursed by the Medicare program in accordance with the Composite Rate for certain products and services rendered at the Company's dialysis centers. As described in the next paragraph, other payment methodologies apply to Medicare reimbursement for other products and services provided at the Company's dialysis centers and for products (such as those sold by the Company) and support services furnished to ESRD patients receiving dialysis treatment at home (such as those of Dialysis Products). Medicare reimbursement rates are fixed in advance and are subject to adjustment from time to time by the U.S. Congress. Although this form of reimbursement limits the allowable charge per treatment, it provides the Company with predictable per treatment revenues. When Medicare assumes responsibility as primary payor (see "Reimbursement -- Coordination of Benefits"), Medicare is responsible for payment of 80% of the Composite Rates set by HCFA for dialysis treatments. The Composite Rates govern the Medicare reimbursement available for a designated group of dialysis services, including the dialysis treatment, supplies used for such treatment, certain laboratory tests and certain medications. The Composite Rates consists of labor and non labor components with adjustments made for regional wage costs subject to a national payment rate schedule. The Composite Rates for 2001 were increased by an average of 2.4% (as a result of set increases over the year), with a new payment ceiling of $144 per treatment. Some exceptions based on specified criteria are paid at a higher rate. The method under which the Company is reimbursed for home dialysis is based on which supplier is selected to provide dialysis supplies and equipment. If the center is designated as the supplier ("Method I"), the center provides all dialysis treatment related services, including equipment and supplies, and is reimbursed using a methodology based on the Composite Rate. If Dialysis Products is designated as the direct supplier ("Method II"), Dialysis Products provides the patient directly with all necessary equipment and supplies and is reimbursed by Medicare subject to a capitated ceiling. Clinics provide home support services to Method II patients and these services are reimbursed at a monthly fee for service basis subject to a capitated ceiling. The reimbursement rates under Method I and Method II differ, although both are prospectively determined and are subject to adjustment from time to time by Congress. Certain items and services that the Company furnishes at its dialysis centers are not included in the Composite Rate and are eligible for separate Medicare reimbursement, typically on the basis of established fee schedule amounts. Such items and services include certain drugs (such as EPO), blood transfusions and certain diagnostic tests. Medicare payments are subject to change by legislation and pursuant to deficit reduction measures. The Composite Rate was unchanged from commencement of the ESRD program in 1972 until 1983. From 1983 through December 1990, numerous congressional actions resulted in a net reduction of the average reimbursement rate from $138 per treatment in 1983 to approximately $125 per treatment in 1990. Congress increased the ESRD reimbursement rate, effective January 1, 1991, to an average rate of $126 per treatment. The Company is unable to predict what, if any, future changes may occur in the rate of Medicare reimbursement. Any significant decreases in the Medicare reimbursement rates could have a material adverse effect on the Company's provider business and, because the demand for products is affected by Medicare reimbursement, on its products business. Increases in operating costs that are affected by inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, also may adversely affect the Company's business and results of operations. The patient or third-party insurance payors, including employer-sponsored health insurance plans, commercial insurance carriers and the Medicaid program, are responsible for paying any co-payment amounts for approved services not paid by Medicare (typically the annual deductible and 20% co-insurance), subject to the specific coverage policies of such payors. The extent to which the Company is actually paid the full co-payment amounts depends on the particular responsible party. Each third-party payor, including Medicaid, makes payment under contractual or regulatory reimbursement provisions which may or may not cover the full 20% co-payment or annual deductible. Where the patient has no third-party insurance or the third party insurance does not cover copayment or deductible and the patient is responsible for paying the co-payments or the deductible, which the Company frequently does not collect fully despite reasonable collection efforts. Under an advisory opinion from the Office of the Inspector General, subject to specified conditions, the Company and the other similarly situated providers may make contributions to a non-profit organization that has volunteered to make premium payments for supplemental medical insurance and/or medigap insurance on behalf of indigent ESRD patients, including patients of the Company. 19 20 Laboratory Tests. A substantial portion of SRM's net revenues are derived from Medicare, which pays for clinical laboratory services provided to dialysis patients in two ways. First, payment for certain routine tests is included in the Composite Rate paid to the centers. As to such services, the dialysis centers obtain the services from a laboratory and pay the laboratory for such services. In accordance with industry practice, SRM usually provides such testing services under capitation agreements with its customers pursuant to which it bills a fixed amount per patient per month to cover the laboratory tests included in the Composite Rate at the designated frequencies. In October 1994, the OIG issued a special fraud alert in which it stated its view that the industry practice of providing tests covered by the Composite Rate at below fair market value raised issues under the anti-kickback statutes, as such an arrangement with an ESRD facility appeared to be an offer of something of value (Composite Rate tests at below market value) in return for the ordering of additional tests billed directly to Medicare. See " -- Anti-kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse Laws" for a description of this statute. Second, laboratory tests performed by SRM for Medicare beneficiaries that are not included in the Composite Rate are separately billable directly to Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts, which are limited by national ceilings on payment rates, called National Limitation Amounts ("NLAs"). Congress has periodically reduced the fee schedule rates and the NLAs, with the most recent reductions in the NLAs occurring in January 1998. (As part of the Balanced Budget Act of 1997, Congress lowered the NLAs from 76% to 74% effective January 1, 1998.) Congress has also approved a five year freeze on the inflation updates based on the Consumer Price Index (CPI) for 1998-2002. Medicare carriers have aggressively implemented Local Medical Review Policies (LMRPs) limiting the coverage of certain clinical laboratory services to an established list of diagnosis codes supporting medical necessity. These LMRPs set forth medical necessity criteria based on diagnosis coding as well as frequency of service provisions. Provisions in the Balanced Budget Act of 1997, require the Secretary of HHS to adopt uniform coverage and payment policies for laboratory testing by July 1, 1999. The adoption of additional coverage policies would reduce the number of covered services and could materially affect the Company's revenues. Laboratory tests are ordered only by physicians based on the needs of their patients. IDPN. Among its other services, SRM administers IDPN to chronic dialysis patients who suffer from gastrointestinal malfunctions. These services are covered by the Medicare program under the Medicare Parenteral and Enteral Nutrition ("PEN") benefit, which requires extensive documentation and individual physician certification of medical necessity for each patient. The provision of IDPN has been shown to increase the body content of vital, high biologic-value proteins like albumin. Deficiency of such proteins has been shown to be associated with substantially higher risk of death, among dialysis patients. Under the corporate integrity agreement, the Company agreed to submit claims for payment of IDPN and other PEN therapies in accordance with coverage criteria of the Health Care Financing Administration as in effect from time to time. EPO. In 1999, the Office of the Inspector General and the Clinton Administration announced their intention to seek a 10% reduction in Medicare reimbursement for EPO, although this proposal was not enacted. Future changes in the EPO reimbursement rate, inclusion of EPO in the Medicare Composite Rate, changes in the typical dosage per administration or increases in the cost of EPO purchased by NMC could adversely affect the Company's business and results of operations, possibly materially. Coordination of Benefits. Medicare entitlement begins for most patients in the fourth month after the initiation of chronic dialysis treatment at a dialysis center. During the first three months, considered to be a waiting period, the patient or patient's insurance, Medicaid or a state renal program are responsible for payment. 20 21 Patients who are covered by Medicare and are also covered by an employer group health plan ("EGHP") are subject to a 30 month coordination period during which the EGHP is the primary payor and Medicare the secondary payor. During this coordination period the EGHP pays a negotiated rate or in the absence of such a rate, the Company's standard rate or a rate defined by its plan documents. The payments are generally higher than the Medicare Composite Rate. insurance will therefore generally cover a total of 33 months, the 3 month waiting period plus the 30 month coordination period. Patients who already are eligible for Medicare based on age when they become ESRD patients are dual eligible patients. If these patients are covered under an EGHP that is their primary payor for covered services, then these patients will have a 30 month coordination period. If Medicare is already the primary payor when ESRD entitlement begins, Medicare remains the primary payor, the EGHP is the secondary payor and no coordination period will apply. All ESRD patients or patients over 65 who do not have a health insurance retirement benefit plan can purchase Medigap plans. Possible Changes in Medicare. Because the Medicare program represents a substantial portion of the federal budget, the U.S. Congress takes action in almost every legislative session to modify the Medicare program by refining the amounts payable to health care providers. Legislation or regulations may be enacted in the future that could substantially modify or reduce the amounts paid for services and products offered by the Company and its subsidiaries. It is also possible that statutes may be adopted or regulations may be promulgated in the future that impose additional eligibility requirements for participation in the federal and state health care programs. Such new legislation or regulations may adversely affect the Company's businesses and results of operations. ANTI-KICKBACK STATUTES, FALSE CLAIMS ACT, STARK LAW AND FRAUD AND ABUSE LAWS Various operations of the Company are subject to federal and state statutes and regulations governing financial relationships between health care providers and potential referral sources and reimbursement for services and items provided to Medicare and Medicaid patients. Such laws include the anti-kickback statutes, health care fraud statutes, the False Claims Act, the Stark Law, other federal fraud and abuse laws and similar state laws. These laws apply because the Company's Medical Directors and other physicians with whom the Company has financial relationships refer patients to, and order diagnostic and therapeutic services from, the Company's dialysis centers and other operations. As is generally true in the dialysis industry, at each dialysis facility a small number of physicians account for all or a significant portion of the patient referral base. An ESRD patient generally seeks treatment at a center that is convenient to the patient and at which the patient's nephrologist has staff privileges. Virtually all of the Company's centers maintain open staff privileges for local nephrologists. The ability of the Company to provide quality dialysis care and to otherwise meet the needs of patients and local physicians is central to its ability to attract nephrologists to dialysis facilities and to receive referrals from such physicians. The U.S. federal government, many states and private third-party insurance payors have made combating health care waste, fraud and abuse one of their highest enforcement priorities, resulting in increasing resources devoted to this problem. Consequently, the OIG and other enforcement authorities are increasing scrutiny of arrangements between physicians and health care providers for possible violations of the anti-kickback statutes or other federal laws. ANTI-KICKBACK STATUTES The federal anti-kickback statutes establish criminal prohibitions against and civil penalties for the knowing and willful solicitation, receipt, offer or payment of any remuneration, whether direct or indirect, in return for or to induce the referral of patients or the ordering or purchasing of items or services payable in whole or in part under Medicare, Medicaid or other federal health care programs. Sanctions for violations of the anti-kickback statutes include criminal and civil penalties, such as imprisonment or criminal fines of up to $25,000 per violation, and civil penalties of up to $50,000 per violation, and exclusion from the Medicare or Medicaid programs and other federal programs. In addition, certain provisions of federal criminal law that may be applicable provide that if a corporation is found guilty of a criminal offense it may be fined no more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Some states also have enacted statutes similar to the anti-kickback statutes, which may include criminal penalties, applicable to referrals of patients regardless of payor source, and may contain exceptions different from state to state and from those contained in the federal anti-kickback statutes. 21 22 FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS The federal False Claims Act (the "False Claims Act") imposes civil penalties for making false claims with respect to governmental programs, such as Medicare and Medicaid, for services not rendered, or for misrepresenting actual services rendered, in order to obtain higher reimbursement. Moreover, private individuals may bring qui tam or "whistle blower" suits against providers under the False Claims Act, which authorizes the payment of a portion of any recovery to the individual bringing suit. Such actions are initially required to be filed under seal pending their review by the Department of Justice. A few federal district courts have recently interpreted the False Claims Act as applying to claims for reimbursement that violate the anti- kickback statutes under certain circumstances. The False Claims Act generally provides for the imposition of civil penalties of $5,000 to $10,000 per claim and for treble damages, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed to be a separate violation of the False Claims Act. Criminal provisions that are similar to the False Claims Act provide that if a corporation is convicted of presenting a claim or making a statement that it knows to be false, fictitious or fraudulent to any federal agency it may be fined not more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Some states also have enacted statutes similar to the False Claims Act which may include criminal penalties, substantial fines, and treble damages. THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 HIPAA was enacted in August 1996 and substantively changed federal fraud and abuse laws by expanding their reach to all federal health care programs, establishing new bases for exclusions and mandating minimum exclusion terms, creating an additional exception to the anti-kickback penalties for risk-sharing arrangements, requiring the Secretary of HHS to issue advisory opinions, increasing civil money penalties to $10,000 (formerly $2,000) per item or service and assessments to three times (formerly twice) the amount claimed, creating a specific health care offense and related health fraud crimes, and expanding investigative authority and sanctions applicable to health care fraud. It also prohibits provider payments which could be deemed an inducement to patient selection of a provider. The law expands criminal sanctions for health care fraud involving any governmental or private health benefit program, including freezing of assets and forfeiture of property traceable to commission of a health care offense. BALANCED BUDGET ACT OF 1997 The Balanced Budget Act of 1997 ("the BBA") contained sweeping adjustments to both the Medicare and Medicaid programs, as well as further expansion of the fraud and abuse laws. Specifically, the BBA created a civil monetary penalty for violations of the federal anti-kickback statute whereby violations will result in damages equal to three times the amount involved as well as a penalty of $50,000 per violation. In addition, the new provisions expanded the exclusion requirements so that any person or entity convicted of three health care offenses is automatically excluded from federally funded health care programs for life. Individuals or entities convicted of two offenses are subject to mandatory exclusion of 10 years, while any provider or supplier convicted of any felony may be denied entry into the Medicare program by the Secretary of HHS if deemed to be detrimental to the best interests of the Medicare program or its beneficiaries. The BBA also provides that any person or entity that arranges or contracts with an individual or entity that has been excluded from a federally funded health care program will be subject to civil monetary penalties if the individual or entity "knows or should have known" of the sanction. Finally, the BBA creates a Medicare+Choice Program that is designed to provide a variety of options to Medicare beneficiaries, almost all of whom may enroll in a Medicare+Choice Plan. The options include provider sponsored organizations, coordinated care plans, HMOs with and without point of service options involving out-of-network providers, and medical savings accounts offered as a demonstration project. STARK LAW The original Stark Law, known as "Stark I" and enacted as part of the Omnibus Budget Reconciliation Act of 1989, prohibits a physician from referring Medicare patients for clinical laboratory services to entities with which the physician (or an immediate family member) has a financial relationship, unless certain exceptions apply. Sanctions for violations of the Stark Law may include denial of payment, refund obligations, civil monetary penalties and exclusion of the provider from the Medicare and Medicaid programs. The Stark Law prohibits the entity receiving the referral from filing a claim or billing for services arising out of the prohibited referral. 22 23 Provisions of OBRA 93, known as "Stark II," amended Stark I to revise and expand upon various statutory exceptions, to expand the services regulated by the statute to a list of "Designated Health Services," and to prohibit Medicaid referrals where a financial relationship exists. The provisions of Stark II generally became effective on January 1, 1995. The additional Designated Health Services include: physical therapy services; occupational therapy services; radiology services, including magnetic resonance imaging, computer axial tomography scans and ultrasound services; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. Pursuant to proposed regulations implementing Stark I and II, erythropoietin (EPO) provided to ESRD patients as part of a renal dialysis treatment plan is specifically exempted as a Designated Health Service. Further, in the proposed regulations discussing Durable Medical Equipment, ESRD equipment and supplies are excluded from coverage as a Designated Health Service because the ESRD benefit is distinguished under Medicare from the DME benefit. Outpatient prescription drugs and in-hospital treatments would also be excluded. Several states in which the Company operates have enacted self-referral statutes similar to the Stark Law. Such state self-referral laws may apply to referrals of patients regardless of payor source and may contain exceptions different from each other and from those contained in the Stark Law. OTHER FRAUD AND ABUSE LAWS The Company's operations are also subject to a variety of other federal and state fraud and abuse laws, principally designed to ensure that claims for payment to be made with public funds are complete, accurate and fully comply with all applicable program rules. The civil monetary penalty provisions are triggered by violations of numerous rules under the statute, including the filing of a false or fraudulent claim and billing in excess of the amount permitted to be charged for a particular item or service. Violations may also result in suspension of payments, exclusion from the Medicare and Medicaid programs, as well as other federal health care benefit programs, or forfeiture of assets. In addition to the statutes described above, other criminal statutes may be applicable to conduct that is found to violate any of the statutes described above. HEALTH CARE REFORM Health care reform is considered by many in the U.S. to be a national priority. Members of Congress from both parties and the executive branch are continuing to consider many health care proposals, some of which are comprehensive and far-reaching in nature. Several states are also currently considering health care proposals. It cannot be predicted what additional action, if any, the federal government or any state may ultimately take with respect to health care reform or when any such action will be taken. Health care reform may bring radical changes in the financing and regulation of the health care industry, which could have a material adverse effect on the business of the Company and the results of its operations. 23 24 ITEM 2. PROPERTIES The table below describes the Company's principal facilities as of the date hereof.
FLOOR AREA (APPROXIMATE CURRENTLY OWNED LOCATION SQUARE FEET) OR LEASED USE -------- ------------ --------- --- Lexington, Massachusetts 200,000 leased Corporate headquarters and administration. Walnut Creek, California 85,000 leased Manufacture of hemodialysis machines and peritoneal dialysis cyclers; research and development. 17,500 leased Warehouse Space - Machine components Ogden, Utah 450,000 owned (1) Manufacture polysulfone membranes and dialyzers and peritoneal dialysis solutions; research and development. Delran, New Jersey 42,000 leased Manufacture of liquid hemodialysis concentrate solutions. Perrysburg, Ohio 35,000 leased Manufacture of dry hemodialysis concentrates. Livingston, California 32,000 leased Manufacture of liquid hemodialysis concentrates. Irving, Texas 70,000 leased Manufacture of liquid hemodialysis solution. Reynosa, Mexico 150,000 leased Manufacture of bloodlines. Fremont, California 72,000 leased Clinical laboratory testing Chicago, Illinois 670 leased Clinical laboratory testing Rockleigh, New Jersey 85,000 leased Clinical Laboratory testing
(1) Land and majority of equipment is leased, building is owned. The lease on the Walnut Creek facility expires in 2002. The Company leases 17 warehouses throughout the U.S. These warehouses are used as regional distribution centers for the Company's peritoneal dialysis products business. All such warehouses are subject to leases with remaining terms not exceeding ten years. At December 31, 2000, the Company distributed its products through all these 17 warehouse facilities The Company leases its corporate headquarters in Lexington, Massachusetts. This lease expires on October 31, 2007. The Company's subsidiaries lease most of the dialysis centers, manufacturing, laboratory, distribution and administrative and sales facilities in the U.S. on terms which the Company believes are customary in the industry. 24 25 ITEM 3. LEGAL PROCEEDINGS COMMERCIAL INSURER LITIGATION In 1997, the Company, NMC, and certain named NMC subsidiaries, were served with a civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York. 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 the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding 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 25 26 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. In July, 2000, NMC filed a complaint in the U.S. District Court for the Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S. Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S. Healthcare and health plans administered by Aetna U.S. Healthcare for claims related to primary payor liability for dual eligible ESRD patients under the Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed the action pending resolution of the District of Columbia Court action. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other 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, 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. 26 27 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. On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al. (Sup. Court of Calif., S.F. County, #315465) was filed as a class action against Grace Chemicals, the Company, and other defendants, principally alleging that the Merger was a fraudulent transfer, violated the uniform fraudulent transfer act, and constituted a conspiracy. An amended complaint was filed subsequently with substantially similar allegations (Abner et al. v. W. R. Grace & Company, et al.). The Company has requested indemnification from Grace Chemicals pursuant to the Merger agreement. If the Merger is determined to have been a fraudulent transfer, if material damages are proved by the plaintiffs and if the Company is not able to collect, in whole or in part, on the indemnity, a judgment could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that no fraudulent transfer or conspiracy occurred and intends to defend the case vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's common stock is held by FMC. The NMC Credit Facilities and the indentures pertaining to the Senior Subordinated Notes of FMC and one of its subsidiaries impose certain limits on the Company's payment of dividends. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations". FRESENIUS MEDICAL CARE HOLDINGS CLASS D PREFERRED SHARES The Company, distributed its Class D Preferred Shares exclusively to W.R. Grace ("Grace") common shareholders in connection with the 1996 reorganization involving Grace and FMC. The Class D Preferred Shares trade over-the counter only in the United States under the symbol FSMEP.OB. Holders of the Company's Class D Preferred Shares may be entitled to a one-time special dividend if (but only if) conditions specified in the Company's Certificate of Incorporation are met. The Class D Preferred Shares are not entitled to receive any dividends other than this special dividend. In particular, the Company's Class D Preferred Shares are not entitled to any dividend that FMC may pay on their Preference shares or their ADSs. The special dividend is payable only if the cumulative adjusted cash flow to FMC's ordinary shareholders (defined as the Company's net income plus depreciation and amortization) from January 1, 1997 through December 31, 2001 exceeds US$3.7 billion. If FMC's cumulative adjusted cash flow meets that threshold, 44.8% of any amount exceeding US$3.7 billion will be distributed as a special dividend on the Company's Class D Preferred Shares. For the period from January 1, 1997 through the end of 2000, FMC's cumulative adjusted cash flow for the purpose of the Class D Preferred Shares special dividend calculation was approximately US $1.2 billion. The Company must make a public announcement of the amount, if any, of the special dividend by May 1, 2002. Payment of a special dividend on the Class D Preferred Shares that is earned, if any, would commence in October 2002. FMC does not have any obligation to contribute any amount to the Company to enable it to pay any special dividend. The Class D Preferred Shares are redeemable at the Company's sole option after the date it makes its public announcement of the amount of the special dividend (if any) in 2002. The redemption price is the greater of the liquidation preference ($0.10 cents per Class D Preferred Share) and any unpaid special dividend amount. The Company is not, however, required to redeem the Class D Preferred Shares. This description of the material terms of the Company's Class D Preferred Shares is not complete and is qualified in its entirety by the terms of the Company's Certificate of Incorporation. The Company's Certificate of incorporation is on file with the Securities and Exchange Commission. 27 28 ITEM 6. SELECTED FINANCIAL DATA
SUCCESSOR YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------- --------------- (Dollars in Millions, Except Shares and Per Share Data) 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------- --------------- Statement of Operations Data Continuing Operations Net sales $ 3,089 $ 2,815 $ 2,571 $ 2,166 Cost of Sales 2,109 1,880 1,707 1,456 -------- -------- -------- -------- Gross Profit 980 935 864 710 Selling, general and administrative and research and development 560 540 529 452 Special charge for settlement of investigation and related costs -- 601 -- -- -------- -------- -------- -------- Operating income (loss) 420 (206) 335 258 Interest expense (net) 187 202 209 178 Interest expense on settlement of investigation (net) 30 -- -- -- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and cumulative effect of changes in accounting for start up costs 203 (408) 126 80 Income tax (benefit) expense 98 (81) 74 46 -------- -------- -------- -------- Income (loss) from continuing operations before cumulative effect of change in accounting for start up costs $ 105 $ (327) $ 52 $ 34 -------- -------- -------- -------- Discontinued Operations Loss from discontinued operations, net of income taxes -- -- (9) (14) Loss on disposal of discontinued operations, net of income tax benefit -- -- (97) -- -------- -------- --------- -------- Loss from discontinued operations -- -- (106) (14) -------- -------- --------- --------- Cumulative effect of change in accounting for start up costs, net of tax benefit -- -- (5) -- -------- -------- --------- Net income (loss) $ 105 $ (327) $ (59) $ 20 ======== ======== ========= ======== Net Income (loss) Per Common and Common Equivalent Share: Continuing Operations $ 1.16 $ (3.64) $ 0.57 $ 0.37 Discontinued Operations -- -- (1.18) (0.15) Cumulative effect of accounting change -- -- (0.05) -- Net Income 1.16 (3.64) (0.66) 0.22 Weighted average number of shares of Common stock and common stock equivalents: Primary (000's) 90,000 90,000 90,000 90,000
SUCCESSOR PREDECESSOR THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, SEPTEMBER 30, - -------------------------------------------------------------- -------------- --------------- (Dollars in Millions, Except Shares and Per Share Data) 1996 1996 - -------------------------------------------------------------- -------------- --------------- Statement of Operations Data Continuing Operations Net sales $ 505 $ 1,615 Cost of Sales 340 969 -------- ------- Gross Profit 165 646 Selling, general and administrative and research and development 106 501 Special charge for settlement of investigation and related costs -- -- -------- ------- Operating income (loss) 59 145 Interest expense (net) 43 16 Interest expense on settlement of investigation (net) -- -- -------- ------- Income (loss) from continuing operations before income taxes and cumulative effect of changes in accounting for start up costs 16 129 Income tax (benefit) expense 11 66 -------- ------- Income (loss) from continuing operations before cumulative effect of change in accounting for start up costs $ 5 $ 63 -------- ------- Discontinued Operations Loss from discontinued operations, net of income taxes (2) -- Loss on disposal of discontinued operations, net of income tax benefit -- -- -------- ------- Loss from discontinued operations (2) -- --------- ------- Cumulative effect of change in accounting for start up costs, net of tax benefit -- -- Net income (loss) $ 3 $ 63 ======== ======= Net Income (loss) Per Common and Common Equivalent Share: Continuing Operations $ 0.06 $ 0.66 Discontinued Operations (0.02) -- Cumulative effect of accounting change -- -- Net Income 0.04 0.66 Weighted average number of shares of Common stock and common stock equivalents: 90,000 95,188 Primary (000's)
SUCCESSOR AT DECEMBER 31, --------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- --------------- ------------ ------------- -------------- Balance Sheet Data: Working capital $ (154) $ (456) $ 294 $ 394 $ 282 Total assets 4,553 4,645 4,613 4,771 4,370 Total long term debt and capital lease obligations 589 616 1,014 1,622 1,438 Mandatorily redeemable preferred securities 305 -- -- -- -- Stockholders' equity 1,726 1,622 1,949 1,987 1,764
28 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company. The discussion should be read in conjunction with the consolidated 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 7 and in the Company's reports filed from time to time with the Commission, could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. OVERVIEW The Company is primarily engaged in (a) providing kidney dialysis services, clinical laboratory testing and renal diagnostic services and (b) manufacturing and distributing products and equipment for dialysis treatment. Throughout the Company's history, a significant portion of the Company's growth has resulted from the development of new dialysis centers and the acquisition of existing dialysis centers, as well as from the acquisition and development of complementary businesses in the health care field. The Company derives a significant portion of its net revenues from Medicare, Medicaid and other government health care programs (approximately 55% in 2000). The reimbursement rates under these programs, including the Composite Rate, the reimbursement rate for EPO, and the reimbursement rate for other dialysis and non-dialysis related services and products, as well as other material aspects of these programs, have in the past and may in the future be changed as a result of deficit reduction and health care reform measures. The Company also derives a significant portion of its net revenues from reimbursement by non-government payors. Historically, reimbursement rates paid by these payors generally have been higher than Medicare and other government program rates. However, non-government payors are imposing cost containment measures that are creating significant downward pressure on reimbursement levels that the Company receives for its services and products. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS 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) matters concerning violations of federal laws and (ii) NMC's claims with respect to outstanding Medicare receivables for nutrition therapy (collectively, the "Settlement"). Under the Settlement 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 obligation is payable in six quarterly installments which began in April 2000 and will end in July 2001. The first four quarterly installments were in the amount of $35.4 million including interest at 7.5%. The first three of these four payments were made in April, July, and October 2000 to the Government totaling $106.2 million including interest. The fourth installment was made in January 2001. 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 received approximately $59.2 million from the Government related to the Company's claims for outstanding Medicare receivables The Company received $54.0 million in 2000 and a final payment of $5.2 million in February 2001. 29 30 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.
YEAR ENDED DECEMBER 31, ------------------------------------- (DOLLARS IN MILLIONS) 2000 1999 1998 ---- ---- ---- NET REVENUES Dialysis Services .................. $ 2,625 $ 2,339 $ 2,116 Dialysis Products .................. 717 707 662 Intercompany Eliminations .......... (253) (231) (207) -------- -------- -------- Net Revenues .................................. $ 3,089 $ 2,815 $ 2,571 ======= ======= ======= Operating Earnings: Dialysis Services .................. $ 403 $ 386 $ 344 Dialysis Products .................. 118 126 103 ------- ------- ------- Operating Earnings ............................ 521 512 447 ======= ======= ======= Other Expenses: General Corporate .................. $ 97 $ 113 $ 108 Research & Development ............. 4 4 4 Interest Expense, Net .............. 187 202 209 Interest Expense on Settlement, Net 30 -- -- Special Charge for OIG Settlement .. -- 601 -- ------- ------- ------- Total Other Expenses .......................... 318 920 321 ======= ======= ======= Income (Loss) Before Income Taxes and cumulative effect of change in accounting for start up costs ....................... 203 (408) 126 Provision for Income Taxes .................... 98 (81) 74 ------- ------- ------- Income (loss) from continuing operations before cumulative effect of change in accounting for start up costs ............ $ 105 $ (327) $ 52 ------- ------- ------- Discontinued Operations: Net Revenues ....................... $ -- $ -- $ 121 ======= ======= ======= Loss before income taxes ........... -- -- (14) Benefit for income Taxes ........... -- -- (5) ------- ------- -------- Loss from operations ............... -- -- (9) ------- ------- -------- Loss on disposal before income taxes -- -- (140) Income tax benefit ................. -- -- (43) ------- ------- -------- Loss on disposal ................... -- -- (97) ------- ------- ------- Loss on Discontinued Operations ............... $ -- $ -- $ (106) ======= ======= ======== Cumulative effect of change in accounting for start up costs, net of tax benefits ...... -- -- (5) ------- -------- -------- ------- -------- -------- Net Income/(loss) ............................. $ 105 $ (327) $ (59) ======= ======== ========
30 31 2000 COMPARED TO 1999 Net revenues from continuing operations for 2000 increased by 10% ($274 million) over 1999. Income from continuing operations increased by $432 million over 1999 as a result of increased operating earnings ($9 million), reduced corporate expense ($4 million), and no comparable 2000 expense relating to the special charge for settlement of investigation and related costs ($419 million, after income taxes) recorded in 1999, partially offset by increased interest expense. Excluding the effect of the special charge for settlement of investigation and related costs, net income from operations increased by 14% over 1999. DIALYSIS SERVICES Dialysis Services net revenues for 2000 increased by 12% ($286 million) over 1999, primarily as a result of a 9% increase in the number of treatments provided, the impact of increased Medicare reimbursement rates, improved anemia management (higher EPO utilization), consolidation of joint ventures, higher revenues in other pharmaceuticals 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 2000 increased by 4% ($17 million) over 1999 primarily due to increases in treatment volume, the impact of increased Medicare reimbursement rates, higher earnings in other pharmaceuticals, and increased earnings from laboratory testing. These increases were partially offset by higher personnel costs, increased costs of EPO, higher provisions for doubtful accounts, and higher equipment lease expenses. DIALYSIS PRODUCTS Dialysis Products net revenues for 2000 increased by 1% ($10 million) over the comparable period of 1999. This is primarily due to increased sales of hemo products including machines and disposables, partially offset by decreased sales of peritoneal products. Dialysis Products operating earnings for 2000 decreased by 6% ($8 million) over the comparable period of 1999. This is a result of higher sales and marketing costs and freight and distribution expenses as well as an increased provision for doubtful accounts, partially offset by improvements in gross margin. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS 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) matters concerning violations of federal laws and (ii) NMC's claims with respect to outstanding Medicare receivables for nutrition therapy (collectively, the "Settlement"). As a result of the Settlement, the Company recorded, a special pre-tax charge of $601 million ($419 million net of income taxes ) in 1999 which included (i) a charge of approximately $486 million for settlement payment obligations to the government; (ii) a reserve of approximately $94 million for the resolution of the Company's IDPN accounts receivable; and (iii) a reserve for other related costs of $21 million. The settlement payment obligations to the Government and the amounts due to the Company for outstanding Medicare receivables have been classified in the balance sheet at their expected settlement date. (See Note 7 - "Special Charge for Settlement of Investigation and Related Costs"). OTHER EXPENSES The Company's other expenses for 2000 decreased by 1% ($1 million) over the comparable period of 1999 excluding the special charge. General corporate expenses decreased by $16 million and operating interest expense decreased by $15 million primarily due to the change in the mix of debt instruments. The decreases in general corporate and operating interest expenses for 2000 were offset by $30 million of increased interest expense related to the settlement of the OIG investigation in January 2000. 31 32 INCOME TAXES The Company has recorded an income tax provision of $98 million for 2000 as compared to an income tax benefit of $81 million for 1999. The income tax provision in 2000 is higher than the statutory tax rate primarily due to the non-deductible merger goodwill. The income tax benefit in 1999 is lower than the statutory tax rate primarily due to the tax effect of the special charge for the Settlement and related costs, partially offset by non-deductible merger goodwill. 1999 COMPARED TO 1998 Net revenues from continuing operations for 1999 increased by 10% ($244 million) over 1998. Income from continuing operations for 1999 decreased ($379 million) over 1998 as a result of increased expense relating to the special charge for settlement of investigation and related costs ($419 million, after income taxes), and increases to general corporate expenses, partially offset by increased operating earnings and reduced interest expense. Excluding the effect of the special charge for settlement of investigation and related costs recorded in 1999, net income from operations increased by 78%. DIALYSIS SERVICES Dialysis Services net revenues for 1999 increased by 11% ($223 million) over 1998, primarily as a result of a 8% increase in the number of treatments provided, the beneficial impact of the extension of the Medicare Secondary Payor (MSP) provision, higher EPO utilization relative to the comparable 1998 period, partially offset by decreased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 1998 and 1999 acquisitions. The laboratory testing revenue decrease was primarily due to lower testing volume as competitors continue to consolidate lab activity. Dialysis Services operating earnings for 1999 increased by 12% ($42 million) over the comparable period of 1998 primarily due to the increase in treatment volume, the beneficial impact of the extension of the MSP provision and higher EPO utilization, and the decrease in the provision for doubtful accounts, partially offset by decreased operating earnings in laboratory testing. The provision for doubtful accounts decreased due to revisions of estimates for bad debt cost report recoveries. These recoveries include the result of the Company's successful challenge of the Medicare regulation which capped reimbursement for the bad debts incurred by dialysis facilities in those years. Accordingly, the Company has revised its estimate of recoveries for the previously disallowed bad debt expense associated with this regulation during the year. DIALYSIS PRODUCTS Dialysis Products net revenues for 1999 increased by 7% ($45 million) over the comparable period of 1998. This is due to increased sales of hemo products including machines and disposables, partially offset by decrease sales of peritoneal products. Dialysis Products operating earnings for 1999 increased by 22% ($23 million) over 1998. This is primarily due to revenue growth and improvements in gross margin resulting from manufacturing efficiencies from increased production volume, partially offset by increased freight and distribution costs. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS 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 outstanding Medicare receivables for nutrition therapy (collectively, the "Settlement"). As a result of the Settlement, the Company recorded a special pre-tax charge of $601 million ($419 million after tax) in 1999 which included (i) a charge of $486 million for settlement payment obligations to the Government, (ii) a reserve of approximately $94 million for resolution of the Company's IDPN accounts receivable, and (iii) a reserve for other related costs of $21 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. See Note 16 - "Commitments and Contingencies - Legal Proceedings. 32 33 OTHER EXPENSES The Company's other expenses for 1999 decreased by 1% ($2 million) over the comparable period of 1998. General corporate expenses increased by $5 million due to increases in casualty and insurance expenses. Interest expense decreased by $7 million primarily due to the reduction of the Company's funded debt. INCOME TAXES The Company has recorded an income tax benefit of $81 million for 1999 as compared to an income tax provision of $74 million in 1998. The income tax benefit in 1999 is lower than the statutory tax rate primarily due to the tax effect of the special charge for the Settlement and related costs. The provision for income taxes in 1998 is higher than the statutory tax rate primarily due to the non-deductible merger goodwill. LIQUIDITY AND CAPITAL RESOURCES YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 The Company's cash requirements in 2000 and 1999, including acquisitions and capital expenditures, have been funded by cash generated from operations, additional intercompany borrowings, and an increase in the receivable financing facility. Cash from operations has improved by $14 million from $249 million in 1999 to $263 million in 2000. This improvement is primarily related to an increase in earnings and the addback of non-cash expenses of $125 million offset by net decreases in operating assets and liabilities of $111 million. These changes have been adjusted to exclude the special charge for the settlement of the OIG investigation in 1999. The movement in operating assets and liabilities includes the collection of $54 million related to IDPN receivables; increases in accounts receivable primarily due to increases in days sales outstanding resulting from slower payment patterns from third parties, specifically from non-governmental payors as well as the impact of new acquisitions; decreases in accounts payable due primarily to timing of disbursements; decreases in accrued liabilities primarily due to timing for physician compensation payments, unreconciled payments and compliance and legal costs. Cash on hand was $33 million at December 31, 2000 compared to $13 million at December 31, 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 amount is net of approximately $59.2 million of reimbursement for Medicare receivables from the Government. During 2000, the Company made payments to the Government totaling $387 million and received $54 million from the Government. 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 accrues 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 obligation is payable in six quarterly installments which began April 2000 and will end July 2001. The first three of these quarterly installments of $35.4 million including interest of 7.5% were made in April, July, and October 2000. The fourth quarterly installment was made in the amount of $35.4 million including interest at 7.5% in January 2001. The remaining two installments of $27.8 million including interest at 6.3% will be made in April and July 2001, respectively. The Government has remitted the balance of the Company's outstanding Medicare receivables in four quarterly payments of $5.2 million plus interest at 7.5%. The first three quarterly payments from the Government were received in May, August, and October 2000. The final payment was received in February 2001. Net cash flows used in investing activities of operations during 2000 totaled $220 million compared to $146 million in 1999. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations and intercompany borrowings. Acquisitions totaled $116 million and $65 million in 2000 and 1999, respectively, net of cash acquired. Capital expenditures of $104 million and $81 million were made for internal expansion, improvements, new furnishings and equipment in 2000 and 1999, respectively. Net cash flows used in financing activities of operations during 2000 totaled $23 million as compared to net cash flows used of $96 million in 1999. During 2000, the Company made payments to the government of $387 million for the 33 34 Settlement. In addition, debt and capital lease obligations were paid down by $18 million and repayments of $33 million were made on intercompany borrowings. Proceeds from financing activities in 2000 included $306 million for the issuance of mandatorily redeemable preferred stock to an affiliated company and increased borrowings under a receivable financing facility (the "A/R Facility") by $110 million. At December 31, 2000 the Company had additional borrowing capacity of approximately $69.8 million under its credit facility ("NMC Credit Facility") and $54.7 million under its A/R Facility. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Net cash flows provided by operating activities of continued operations totaled $253 million in 1999 compared to $212 million in 1998. Cash on hand was $13 million at December 31, 1999 compared to $7 million at December 31, 1998. On January 18, 2000 the Company reached a final settlement agreement with respect to the U.S. government investigation. The settlement requires net settlement payments totaling approximately $427 million, of which $14 million had previously been paid. The Company paid another $286 million after court approval of the settlement and will pay an additional $186 million over the next 18 months. As part of the Settlement, the Company will receive $59 million over the next 18 months from the U.S. government against receivable claims of $153 million for intradialytic parenteral nutrition therapy rendered on or before December 31, 1999. The Company has amended the letter of credit that was given to the government in 1996 from $150 million to $190 million which will be reduced over a period of time as we make installment payments to the government. The net cash obligations of the Company, related to the special charge are anticipated to approximate $266 million. This amount reflects the special charge of $601 million reduced for the resolution of the Company's intradialytic parenteral nutrition receivable claims of approximately $153 million, and the estimated cash savings for the tax effect of the special charge of $182 million. The cash savings of the tax benefit are expected to be realized over time in relation to the cash outflows of the settlement payment obligations to the government and expenditures for other related costs. The Company believes that it will have sufficient cash flows from continued operations and borrowing capacity under its revolving credit facility to make the payments required by the settlement agreement. The Company also believes that following such payments, it will have sufficient funds available for both its day to day operations and its anticipated growth. In December 1999, the Company and the lenders under the senior credit facility, amended certain covenants in the senior credit facility to accommodate our obligations under the settlement agreements and to enable the Company to continue in compliance with the financial covenants upon consummation of the Settlement. If cash flows from operations or availability under existing banking arrangements fall below expectations, or if the company is unsuccessful in amending its existing banking agreements, the Company may be required to consider other alternatives to maintain sufficient liquidity. Net cash flows used in investing activities of continued operations totaled $147 million in 1999 compared to $162 million in 1998. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations. Acquisitions totaled $65 million and $170 million in 1999 and 1998, respectively net of cash acquired. Capital expenditures of $81 million and $75 million were made for internal expansion, improvements, new furnishings and equipment in 1999 and 1998, respectively. The Company intends to continue to enhance its presence in the U.S. by focusing its expansion on the acquisition of individual or small groups of clinics, expansion of existing clinics, and opening of new clinics. Net cash flows used in financing activities of continued operations totaled $96 million in 1999 compared to $35 million in 1998. Due to the improvement in cash flow from operations, the Company was able to reduce its total borrowings in 1999 by approximately $97 million. In 1998, the Company funded its acquisitions and capital expenditures primarily through proceeds from external short and long-term debt, proceeds from a receivable financing facility, and proceeds from the sale of the Non-Renal Diagnostics and Homecare divisions. Additionally in 1998, acquisitions were also funded through the issuance of investment securities by Fresenius Medical Care Finance, S.A., a Luxembourg subsidiary of FMC ("FMC Finance"). In exchange for such financing, an intercompany account was established between FMC Finance and the Company with payables due to FMC Finance of $42 million at December 31, 1998. 34 35 CONTINGENCIES The Company is a plaintiff in litigation against the federal government with respect to the implementation of OBRA 93 and is a defendant in significant litigations described in Item 3. "Legal Proceedings." An adverse outcome in any of these matters, could have a material adverse effect on the Company's business, financial condition and results of operations. Because of the significant complexities and uncertainties associated with 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 16, "Commitments and Contingencies". The Company believes that its existing credit facilities, cash generated from operations and other current sources of financing are sufficient to meet its foreseeable needs. If 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." DIVESTITURES The Company sold its Non Renal Diagnostic Services and Homecare divisions on June 26, 1998 and July 29, 1998, respectively. The combined proceeds of the sales were approximately $100 million in cash and notes. 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. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires the recognition of the fair value of all derivative instruments on the balance sheet. Subsequent to the issuance of SFAS 133, the FASB received many requests to clarify certain issues causing difficulties in implementation. In June 2000, the FASB issued SFAS 138, which responds to those requests by amending certain provisions of SFAS 133. These amendments include allowing foreign-currency denominated assets and liabilities to qualify for hedge accounting, permitting the offsetting of certain inter-entity foreign currency exposures that reduce the need for third party derivatives and redefining the nature of interest rate risk to avoid sources of ineffectiveness. The Company is adopting SFAS 133, and the corresponding amendments under SFAS 138 effective as January 1, 2001. The adoption of SFAS 133, as amended by SFAS 138, results in the recording of assets related to forward currency contracts of approximately $12.9 million and a liability for interest rate swaps of approximately $24.6 million. The offset to each of these transition adjustments will be recorded to other comprehensive income. The Company expects that approximately $2.0 million deferred gains on foreign currency contracts will be recognized to earnings during fiscal year 2001. 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. 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 impact of the adoption of SAB 101 is not significant. 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 impact of the adoption of EITF 00-014 is not significant. 35 36 In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces SFAS No. 125. SFAS No. 140 provides the accounting and reporting standards for securitizations and other transfers of financial assets and collateral. These standards are based on consistent application of a financial-components approach that focuses on control. This Statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for transfers after March 31, 2001 and is effective for disclosures about securitizations and collateral for fiscal years ending after December 15, 2000. There is no impact to the Company for the adoption of SFAS No. 140. 36 37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its market risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations and purchase commitments. The Company does not hold or issue derivative instruments for trading or speculative purposes. Hedge accounting is applied if the derivative reduces the risk of the underlying hedged item and is designated at inception as a hedge. Additionally, changes in the value of the derivative must result in payoffs that are highly correlated to the changes in value of the hedged item. Derivatives are measured for effectiveness both at inception and on an ongoing basis. The Company enters into foreign exchange contracts that are designated as, and effective as, hedges for firmly committed purchases. Also, since the Company carries a substantial amount of floating rate debt, the Company uses interest rate swaps to synthetically change certain variable-rate debt obligations to fixed-rate obligations, as well as options to mitigate the impact of interest rate fluctuations. Gains and losses on foreign exchange contracts accounted for as hedges are deferred in other current assets or liabilities. The deferred gains and losses are recognized as adjustments to the underlying hedged transaction when the future sales or purchases are recognized. Interest rate swap payments and receipts are recorded as part of interest expense. The fair value of the swap contracts is not recognized in the financial statements. Cash flows from derivatives are recognized in the consolidated statement of cash flows in the same category as the item being hedged. If a derivative instrument ceases to meet the criteria for deferral, any subsequent gains or losses are recognized in operations. If a firm commitment does not occur, the foreign exchange contract is terminated and any gain or loss is recognized in operations. If a hedging instrument is sold or terminated prior to maturity, gains or losses continue to be deferred until the hedged item is recognized. Should a swap be terminated while the underlying obligation remains outstanding, the gain or loss is capitalized as part of the underlying obligation and amortized into interest expense over the remaining term of the obligation. At December 31, 2000, the fair value of the Company's interest rate agreements, which consisted entirely of interest rate swaps, is approximately ($24.6 million). The table below presents information on the Company's significant debt obligations, some of which are subject to interest rate changes, and the interest rate protection agreements used to hedge both long-term and short-term obligations. INTEREST RATE EXPOSURE DECEMBER 31, 2000 ($ MILLIONS)
2001 2002 2003 2004 Thereafter Totals ---- ---- ---- ---- ---------- ------ Principal Payments Due on NMC Credit Facility $150 $150 $433 $ 733 Variable Interest Rate = 7.43% - 7.69% Principal Payments Due on A/R Facility $445 $ 445 Variable Interest Rate = approx. 6.59% Borrowings from Affiliates Variable Interest Rate = 6.87% - 7.75% $340 $ 340 Fixed Interest Rate = 9.25% $351 $ 351 Fixed Interest Rate = 8.43% $436 $ 436 Interest Rate Agreements (notional amounts) $600 $250 $200 $1,050 Average Fixed Pay Rate = 6.52% 6.58% 6.32% 6.61% Receive Rate = 3-Month LIBOR
37 38 At December 31, 2000, the fair value of the Company's foreign exchange contracts, which consisted entirely of forward agreements, is approximately $20.4 million. The Company had outstanding contracts covering the purchase of 494.9 million Euros ("EUR") at an average contract price of $0.9109 per EUR, for delivery between January 2001 and November 2003. The Company's hedging strategy vis-a-vis the above-mentioned market risks has not changed significantly from 1999 to 2000. The Company does not believe the adoption of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and the corresponding amendments under SFAS 138 effective January 1, 2001, will have a material impact on its hedging strategy or the consolidated financial statements, except that hedge accounting for option agreements may result in increased earnings volatility and the Company has therefore minimized its use of such hedging instruments. For additional information, see also "Notes to Consolidated Financial Statements - Note 2. Summary of Significant Accounting Policies - Derivative Financial Instruments" and "Notes to Consolidated Financial Statements - Note 14. Financial Instruments". 38 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is indexed in Item 14 of this Report and contained on the pages following the signature page hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with General Instruction G. (3) to Form 10-K, the information required by Part III is incorporated by reference to the Company's definitive information statement to be filed by April 30, 2001. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Consolidated Financial Statements The following consolidated financial statements are filed with this report: Report of Independent Auditors. Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2000, 1999 and 1998. Consolidated Balance Sheets as of December 31, 2000 and 1999. Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998. Consolidated Statements of Changes in Equity for the Years Ended December 31, 2000, 1999 and 1998. Schedule of Valuation and Qualifying Accounts as of December 31, 2000, 1999, and 1998. Notes to Consolidated Financial Statements. The Company is a majority-owned subsidiary of Fresenius Medical Care AG. The operating results and other financial information of the Company included in this report are not necessarily indicative of the operating results and financial condition of Fresenius Medical Care AG at the dates or for the periods presented herein. Users of the Company's financial statements wishing to obtain financial and other information regarding Fresenius Medical Care AG should consult the Annual Report on Form 20-F of Fresenius Medical Care AG, which will be filed with the Securities and Exchange Commission and the New York Stock Exchange. (b) Reports on Form 8-K. 39 40 No current reports were filed during the fourth quarter of 2000. (c) Exhibits. Exhibits. The following exhibits are filed or incorporated by reference as required by Item 601 of Regulation S-K. EXHIBIT NO. DESCRIPTION Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and Fresenius AG (incorporated herein by reference to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents 40 41 (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996). Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). 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 41 42 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 4.11 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 Amendment No. 10 dated as of September 21, 2000 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 November 11, 2000). Exhibit 4.13 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 4.14 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 4.15 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 4.16 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), (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on August 9, 2000). 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). 42 43 Exhibit 10.7 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.8 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.9 Amended and Restated Transfer and Administration Agreement dated as October 26, 2000 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. 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 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 10.14 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 10.15 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 10.16 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and Fresenius Medical Care North America (filed herewith). Exhibit 10.17 Employment Agreement dated June 1, 2000 by and between John F. Markus and Fresenius Medical Care North America (filed herewith). Exhibit 10.18 Employment Agreement dated January 1, 2001 by and between E. Craig Dawson and Fresenius Medical Care North America (filed herewith). Exhibit 10.19 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. Schedule II- Valuation and Qualifying Accounts 43 44 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 2, 2001 FRESENIUS MEDICAL CARE HOLDINGS, INC. By: /s/ Ben J. Lipps Ben J. Lipps, President (Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ Ben J. Lipps President and Director April 2, 2001 Ben J. Lipps (Chief Executive Officer) /s/ Jerry A. Schneider Chief Financial Officer, Treasurer and Director April 2, 2001 Jerry A. Schneider (Chief Financial and Accounting Officer)
44 45 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Fresenius Medical Care Holdings, Inc. We have audited the accompanying consolidated balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of December 31, 2000 and 1999 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the years in the three year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the three years then ended in conformity with accounting principles generally accepted in the United States of America. KPMG LLP February 9, 2001, except as to paragraph 14 of Note 16, as to which the date is April 2, 2001 Boston, MA 45 46 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------------------- 2000 1999 1998 ---------- ----------- ----------- NET REVENUES Health care services ........................................... $2,609,108 $ 2,324,322 $ 2,100,422 Medical supplies ............................................... 480,067 490,911 470,984 ---------- ----------- ----------- 3,089,175 2,815,233 2,571,406 ---------- ----------- ----------- EXPENSES Cost of health care services ................................... 1,768,914 1,542,965 1,390,321 Cost of medical supplies ....................................... 339,908 336,749 317,122 General and administrative expenses ............................ 269,574 276,408 253,920 Provision for doubtful accounts ................................ 62,949 42,243 54,709 Depreciation and amortization .................................. 222,870 217,952 216,214 Research and development ....................................... 4,127 4,065 4,060 Interest expense, net, and related financing costs including $110,746, $88,679 and $77,705 interest with affiliates ..... 187,315 201,915 208,776 Interest expense on settlement of investigation, net ........... 29,947 -- -- Special charge for settlement of investigation and related costs -- 601,000 -- ---------- ----------- ----------- 2,885,604 3,223,297 2,445,122 ---------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS ..................................... 203,571 (408,064) 126,284 PROVISION (BENEFIT) FOR INCOME TAXES ................................ 98,321 (81,037) 74,447 ---------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS .................................................... $ 105,250 $ (327,027) $ 51,837 ---------- ----------- ----------- DISCONTINUED OPERATIONS Loss from discontinued operations, net of income taxes ......... -- -- (8,669) Loss on disposal of discontinued operations, net of income tax benefit ................................................... -- -- (97,228) ---------- ----------- ----------- Loss from discontinued operations .............................. $ -- $ -- $ (105,897) ---------- ----------- ----------- CUMLUATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS, NET OF TAX BENEFIT .............................. -- -- (4,890) ---------- ----------- ----------- NET INCOME (LOSS) ................................................... $ 105,250 $ (327,027) $ (58,950) ========== =========== =========== Basic and fully dilutive (loss) earnings per share Continuing operations ............................................ $ 1.16 $ (3.64) $ 0.57 Loss from discontinued operations ............................... $ -- $ -- $ (0.10) Loss on disposal of discontinued operations ........................ $ $ $ (1.08) Cumulative effect of accounting change ........................... $ -- $ -- $ (0.05) Net Income (loss) ................................................ $ 1.16 $ (3.64) $ (0.66)
See accompanying Notes to Consolidated Financial Statements 46 47 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------------- 2000 1999 1998 --------- --------- -------- NET INCOME (LOSS) $ 105,250 $(327,027) $(58,950) Other comprehensive income Foreign currency translation adjustments (174) (625) 1,872 --------- --------- -------- Total other comprehensive income (174) (625) 1,872 --------- --------- -------- COMPREHENSIVE INCOME (LOSS) $ 105,076 $(327,652) $(57,078) ========= ========= ========
See accompanying Notes to Consolidated Financial Statements 48 48 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------------------- 2000 1999 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents ....................... $ 33,327 $ 12,563 Accounts receivable, less allowances of $80,466 and $63,012 ............................ 318,391 295,235 Inventories ..................................... 191,699 183,112 Deferred income taxes ........................... 123,190 219,454 Other current assets ............................ 139,082 130,771 IDPN accounts receivable ........................ 5,189 53,962 ----------- ----------- Total Current Assets ....................... 810,878 895,097 ----------- ----------- Properties and equipment, net ........................ 456,936 428,793 ----------- ----------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $564,880 and $424,704 ...................................... 3,222,044 3,265,491 Other assets and deferred charges ............... 63,500 49,998 Non-current IDPN accounts receivable ............ -- 5,189 ----------- ----------- Total Other Assets ......................... 3,285,544 3,320,678 ----------- ----------- Total Assets ......................................... $ 4,553,358 $ 4,644,568 =========== =========== LIABILITIES AND EQUITY Current Liabilities: Note payable for settlement of investigation .... $ 85,920 $ -- Current portion of long-term debt and capitalized lease obligations .................. 151,268 142,110 Current portion of borrowing from affiliates .... 341,643 372,949 Accounts payable ................................ 139,754 133,337 Accrued settlement .............................. -- 386,815 Accrued liabilities ............................. 228,025 291,358 Net accounts payable to affiliates .............. 6,317 12,361 Accrued income taxes ............................ 11,525 12,433 ----------- ----------- Total Current Liabilities .................. 964,452 1,351,363 Long-term debt ....................................... 588,526 615,065 Non-current borrowings from affiliates ............... 786,865 788,506 Capitalized lease obligations ........................ 911 1,190 Deferred income taxes ................................ 122,946 134,310 Accrued settlement ................................... -- 85,920 Other liabilities .................................... 58,188 46,153 ----------- ----------- Total Liabilities .......................... 2,521,888 3,022,507 ----------- ----------- Mandatorily Redeemable Preferred Securities .......... 305,500 -- ----------- ----------- Equity: Preferred stock, $100 par value ................... 7,412 7,412 Preferred stock, $.10 par value ................... 8,906 8,906 Common stock, $1 par value; 300,000,000 shares authorized; outstanding 90,000,000 ............. 90,000 90,000 Paid in capital ................................... 1,942,387 1,943,034 Retained deficit .................................. (322,973) (427,703) Accumulated comprehensive income .................. 238 412 ----------- ----------- Total Equity ................................. 1,725,970 1,622,061 ----------- ----------- Total Liabilities and Equity ......................... $ 4,553,358 $ 4,644,568 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 49 49 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 --------- --------- --------- Cash Flows from Operating Activities: Net income (loss) ..................................... $ 105,250 $(327,027) $ (58,950) Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization .................... 222,870 217,952 216,214 Write-off of receivables relating to settlement of investigation .................................. -- 94,349 -- Loss on disposition of businesses ................ -- -- 97,228 Loss from discontinued operations ................ -- -- 8,669 Cumulative effect of change in accounting ........ -- -- 4,890 Provision for doubtful accounts .................. 62,949 42,243 54,709 Deferred income taxes ............................ 84,900 (93,124) 16,734 Loss on disposal of properties and equipment ..... 970 713 402 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable ................. (194,772) (112,095) (159,228) Increase in inventories .......................... (7,472) (12,606) (30,979) (Increase) decrease in other current assets ..... (6,025) (21,300) 3,890 Decrease in IDPN receivables ..................... 53,962 -- -- (Increase) decrease in other assets and deferred charges ........................................ (3,025) 1,646 (19,554) Increase (decrease) in accounts payable .......... 5,976 25,855 (11,705) (Decrease) increase in accrued income taxes ...... (908) 22 74,395 (Decrease) increase in accrued liabilities ....... (65,227) 356,539 (31,040) Increase in other long-term liabilities .......... 12,035 102,795 3,560 Net changes due to/from affiliates ............... (6,044) (5,605) 22,777 Other, net ....................................... (2,126) (17,088) 19,614 --------- --------- --------- Net cash provided by operating activities of continued operations ......................................... 263,313 253,269 211,626 --------- --------- --------- Net cash used in operating activities of discontinued operations ......................................... -- (3,782) (11,947) --------- --------- --------- Net cash provided by operating activities ............. 263,313 249,487 199,679 --------- --------- --------- Cash Flows from Investing Activities: Capital expenditures ............................. (104,199) (81,330) (74,653) Payments for acquisitions, net of cash acquired .. (115,601) (65,235) (170,137) Proceeds from disposition of businesses .......... -- -- 82,500 --------- --------- --------- Net cash used in investing activities of continued operations .......................................... (219,800) (146,565) (162,290) --------- --------- --------- Net cash used in investing activities of discontinued operations ........................................... -- -- (8,925) --------- --------- --------- Net cash used in investing activities ................. (219,800) (146,565) (171,215) --------- --------- --------- Cash Flows from Financing Activities: Payments on settlement of investigation .......... (386,815) -- -- (Decrease) increase in borrowings from affiliates (32,947) 172,455 445,447 Cash dividends paid .............................. (520) (520) (520) Proceeds from mandatorily redeemable preferred securities ..................................... 305,500 -- -- Proceeds from issuance of debt ................... -- 37 16,385 Proceeds from receivable financing facility ...... 110,300 29,400 105,600 Payments on debt and capitalized leases .......... (17,660) (298,587) (599,714) Other, net ....................................... (647) 799 (2,027) --------- --------- --------- Net cash used in financing activities of continued operations .......................................... (22,789) (96,416) (34,829) --------- --------- --------- Net cash used in financing activities of discontinued operations .......................................... -- -- (2,107) --------- --------- --------- Net cash used in financing activities .................. (22,789) (96,416) (36,936) --------- --------- --------- Effects of changes in foreign exchange rates ............... 40 (522) 1,997 --------- --------- --------- Change in cash and cash equivalents ........................ 20,764 5,984 (6,475) Cash and cash equivalents at beginning of period ........... 12,563 6,579 13,054 --------- --------- --------- Cash and cash equivalents at end of period ................. $ 33,327 $ 12,563 $ 6,579 ========= ========= =========
50 50 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED ------------------------------------------- 2000 1999 1998 --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ............................... $ 223,847 $ 216,647 $ 194,141 Income taxes (received)/paid, net ...... 14,882 8,344 (19,149) Details for Acquisitions: Assets acquired ............................. 117,935 65,256 172,511 Liabilities assumed ......................... (2,334) (21) (2,374) --------- --------- --------- Cash paid ................................... 115,601 65,235 170,137 Less cash acquired .......................... -- -- -- --------- --------- --------- Net cash paid for acquisitions .............. $ 115,601 $ 65,235 $ 170,137 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements 51 51 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stocks Common Stock ------------------------ ------------------------- Shares Amount Shares Amount ---------- ------- ---------- -------- BALANCE, DECEMBER 31, 1997 89,136,435 $16,318 90,000,000 $ 90,000 Net Loss -- -- -- -- Cash dividends on preferred stock -- -- -- -- Tax benefit on International transfer -- -- -- -- Other comprehensive income -- -- -- -- BALANCE, DECEMBER 31, 1998 89,136,435 $16,318 90,000,000 $ 90,000 ========== ======= ========== ======== Net Loss -- -- -- -- Cash dividends on preferred stock -- -- -- -- Tax benefit of dispositions of stock options -- -- -- -- Other comprehensive income -- -- -- -- Other adjustments -- -- -- -- ---------- ------- ---------- -------- BALANCE, DECEMBER 31, 1999 89,136,435 $16,318 90,000,000 $ 90,000 ========== ======= ========== ======== Net Income -- -- -- -- Cash dividends on preferred stock -- -- -- -- Other comprehensive income -- -- -- -- Other adjustments -- -- -- -- ---------- ------- ---------- -------- BALANCE, DECEMBER 31, 2000 89,136,435 $16,318 90,000,000 $ 90,000 ========== ======= ========== ========
Capital in Retained Other Excess Earnings Comprehensive Total of Par Value (Deficit) Income Equity ----------- --------- ------------- ----------- BALANCE, DECEMBER 31, 1997 $ 1,921,853 $ (40,686) $ (835) $ 1,986,650 Net Loss -- (58,950) -- (58,950) Cash dividends on preferred stock -- (520) -- (520) Tax benefit on International transfer 20,382 -- -- 20,382 Other comprehensive income -- -- 1,872 1,872 ----------- --------- ------- ----------- BALANCE, DECEMBER 31, 1998 $ 1,942,235 $(100,156) $ 1,037 $ 1,949,434 =========== ========= ======= =========== Net Loss -- (327,027) -- (327,027) Cash dividends on preferred stock -- (520) -- (520) Tax benefit of dispositions of stock options 822 -- -- 822 Other comprehensive income -- -- (625) (625) Other adjustments (23) -- -- (23) ----------- --------- ------- ----------- BALANCE, DECEMBER 31, 1999 $ 1,943,034 $(427,703) $ 412 $ 1,622,061 =========== ========= ======= =========== Net Income -- 105,250 -- 105,250 Cash dividends on preferred stock -- (520) -- (520) Other comprehensive income -- -- (174) (174) Other adjustments (647) -- -- (647) ----------- --------- ------- ----------- BALANCE, DECEMBER 31, 2000 $ 1,942,387 $(322,973) $ 238 $ 1,725,970 =========== ========= ======= ===========
See accompanying Notes to Consolidated Financial Statements 52 52 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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., ("NMC"); Fresenius USA Marketing Inc., Fresenius USA Manufacturing Inc., and SRC Holding Company, Inc., ("SRC"), all Delaware corporations and Fresenius USA Inc., a Massachusetts corporation. 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. Effective January 1, 1998, the Company transferred legal ownership of substantially all of its international operations to FMC. The transfer of contributed capital of $199 million was accounted for on the cost basis. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at December 31, 2000, 1999 and 1998, respectively, reflect all adjustments that, in the opinion of management, are necessary for the fair presentation of the consolidated results for all periods presented. All intercompany transactions and balances have been eliminated in consolidation. 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.
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 ------ ------ ------ The weighted average number of shares of Common Stock were as follows................. 90,000 90,000 90,000 ====== ====== ======
53 53 Net income (loss) used in the computation of earnings per share is as follows:
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 --------- --------- -------- CONSOLIDATED Net income (loss) $ 105,250 $(327,027) $(58,950) Dividends paid on preferred stocks (520) (520) (520) --------- --------- -------- Income (loss) used in per share computation of earnings $ 104,730 $(327,547) $(59,470) ========= ========= ======== Basic and fully dilutive earnings (loss) per share $ 1.16 $ (3.64) $ (0.66) ========= ========= ========
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities (including disclosed amounts of contingent assets and liabilities) at the dates of the consolidated financial statements and the reported revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. CASH EQUIVALENTS Cash equivalents consist of highly liquid instruments with maturities of three months or less when purchased. DERIVATIVE FINANCIAL INSTRUMENTS Foreign currency contracts -- Gains and losses on foreign currency contracts that are designated and effective as hedges of existing assets, liabilities (including borrowings) and firm commitments are deferred and recorded as an adjustment to general and administrative expenses or cost of goods sold in the period in which the related transaction is consummated. Gains and losses on other foreign currency contracts are recognized at each reporting period. Interest rate swaps -- Interest rate agreements that are designated and effective as a hedge of a debt or other long-term obligations are accounted for on an accrual basis. That is, the interest payable and interest receivable under the swaps terms are accrued and recorded as an adjustment to interest expense of the designated liabilities or obligations. Amounts due from and payable to the counterparties of interest rate swaps are recorded on an accrual basis at each reporting date on amounts computed by reference of the respective interest rate swap contract. Realized gains and losses that occur from the early termination or of foreign currency contracts and interest rate swaps are recorded in the consolidated statement of operations over the remaining period of the original agreement. Gains and losses arising from the interest differential on contracts that hedge specific borrowings are recorded as a component of interest expense over the life of the contract. The effectiveness of the hedge is measured by a historical and probable future high correlation of changes in the fair value of the hedging instruments with changes in the value of the hedged item. If correlation ceases to exist, hedge accounting will be terminated and gains on losses recorded in other income. To date, high correlation has always been achieved. REVENUE RECOGNITION Revenues are recognized on the date services and related products are provided/shipped and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare and Medicaid. The Company establishes appropriate allowances based upon factors surrounding credit risks of specific third party payors, historical 54 54 trends and other information. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net Revenues from machines sales for 2000 and 1999 include $54.5 million and $36.0 million, respectively, of net revenues for machines sold to a third party leasing company which are utilized by the dialysis services division to provide services to our customers. The profits on these sales are deferred and amortized to earnings over the lease terms. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTIES AND EQUIPMENT Properties and equipment are stated at cost. Significant improvements are capitalized; repairs and maintenance costs that do not extend the lives of the assets are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any resulting gain or loss is included in income when the assets are disposed. The cost of properties and equipment is depreciated over estimated useful lives on a straight - line basis as follows: buildings - 20 to 40 years, equipment and furniture - 3 to 10 years, and leasehold improvements - the shorter of the lease term or useful life. For income tax purposes, depreciation is calculated using accelerated methods to the extent permitted. EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS The Company has adopted the following useful lives and methods to amortize intangible assets: trade name, 40 years; goodwill -- 25 to 40 years on a straight-line basis; acute care agreements - over the term of the agreement, generally from 1 to 2 years; patient relationships and other intangible assets - over the estimated period to be benefited, generally from 5 to 6 years on a straight line basis. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired on business combinations accounted for as a purchase. DEBT ISSUANCE COSTS Costs related to the issuance of debt are amortized over the term of the related obligation using a straight line method. SELF INSURANCE PROGRAMS The Company is self insured for professional, product and general liability, auto and worker's compensation claims up to predetermined amounts above which third party insurance applies. Estimates include ultimate costs for both reported and incurred but not reported claims. IMPAIRMENT In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers various valuation factors including discounted cash flows, fair values and replacement costs to assess any impairment of goodwill and other long lived assets. FOREIGN CURRENCY TRANSLATION The Company follows the provisions of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". Substantially all assets and liabilities of the Company's foreign subsidiaries are translated at year end exchange rates, while revenue and expenses are translated at exchange rates prevailing during the year. Adjustments for foreign currency translation fluctuations are excluded from net earnings and are deferred in the cumulative translation adjustment component of 55 55 equity. In addition, the translation of certain intercompany borrowings denominated in foreign currencies, which are considered foreign equity investments, is included in the cumulative translation adjustment. Gains and losses resulting from the translation of revenues and expenses and intercompany borrowings, which are not considered equity investments, are included in general and administrative expense. Translation gains amounted to $5,927, $58 and $766 for the twelve months ended December 31, 2000, 1999 and 1998, respectively. INCOME TAXES Deferred income taxes are provided for temporary differences between the reporting of income and expense for financial reporting and tax return purposes. Deferred tax liabilities or assets at the end of each period are determined using the tax rates then in effect for the periods when taxes are actually expected to be paid or recovered. Accordingly, income tax expense provisions will increase or decrease in the period in which a change in tax rates is enacted. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. COMPREHENSIVE INCOME The Company has adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement further requires that the Company classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. PENSION AND OTHER POSTRETIREMENT BENEFITS Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". The provisions of SFAS No. 132 revise employers' disclosures about pension and other post retirement benefit plans. It does not change the measurement or recognition of these plans. It standardized the disclosure requirements for pensions and other post retirement benefits to the extent practicable. NEW PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities "(SFAS 133"). SFAS 133 requires the recognition of the fair value of all derivative instruments on the balance sheet. Subsequent to the issuance of SFAS 133, the FASB received many requests to clarify certain issues causing difficulties in implementation. In June 2000, the FASB issued SFAS 138, which responds to those requests by amending certain provisions of SFAS 133. These amendments include allowing foreign-currency denominated assets and liabilities to qualify for hedge accounting, permitting the offsetting of certain inter-entity foreign currency exposures that reduce the need for third party derivatives and redefining the nature of interest rate risk to avoid sources of ineffectiveness. The Company is adopting SFAS 133, and the corresponding amendments under SFAS 138 effective as January 1, 2001. The adoption of SFAS 133, as amended by SFAS 138, results in the recording of assets related to forward currency contracts of approximately $12.9 million and a liability for interest rate swaps of approximately $24.6 million. The offset to each of these transition adjustments will be recorded to other comprehensive income. The Company expects that approximately $2.0 million deferred gains on foreign currency contracts will be recognized to earnings during fiscal year 2001. 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. 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 impact of the adoption of SAB 101 is not significant. 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 56 56 report these sales incentives that reduce the price paid to be netted directly against revenues. EITF 00-014 is effective no later than the second quarter of 2000. The impact of the adoption of EITF-00-14 is not significant. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces SFAS No. 125 and rescinds SFAS No. 127. SFAS No. 140 provides the accounting and reporting standards for securitizations and other transfers of financial assets and collateral. These standards are based on consistent application of a financial-components approach that focuses on control. This Statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for transfers after March 31, 2001 and is effective for disclosures about securitizations and collateral for fiscal years ending after December 15, 2000. There is no impact for the adoption of SFAS No. 140. 1996 RESTRUCTURING COSTS In 1996, the Company accrued approximately $50,000 for restructuring costs relating to the closing of certain renal products manufacturing and distribution operations as well as the closing of certain clinics of the Homecare Division. These restructuring costs primarily relate to severance payments and lease commitments. Through the period ended December 31, 2000 approximately $49,000 in payments and other charges have been applied against these restructuring costs. The restructuring plan has been completed and the remaining outstanding balance will be used primarily for the remaining lease commitments for closed production facilities. RECLASSIFICATION Certain 1999 and 1998 amounts have been reclassified to conform with the 2000 presentation. NOTE 3. ACQUISITIONS The Company acquired certain health care facilities, and clinical laboratories, for a total consideration of $115,601, $65,235 and $170,137 for the twelve months ended December 31, 2000, 1999 and 1998, respectively. These acquisitions have been accounted for as purchase transactions and, accordingly, are included in the results of operations from the dates of acquisition. The excess of the total acquisition costs over the fair value of tangible net assets acquired was $93,417, $62,376 and $157,836 for the twelve months ended December 31, 2000, 1999 and 1998, respectively. Had the acquisitions that occurred during the twelve months ended December 31, 2000 been consummated on January 1, 1999, unaudited proforma net revenues for the twelve months ended December 31, 2000 and 1999 would have been $3,139,406 and $2,929,550, respectively. Unaudited proforma income (loss) from continuing operations before cumulative effect of change in accounting for start up costs would have been $106,505 and ($325,648) for the twelve months ended December 31, 2000 and 1999, respectively. Had the acquisitions that occurred during the twelve months ended December 31, 1999 been consummated on January 1, 1998, unaudited proforma net revenues for the twelve months ended December 31, 1999 and 1998 would have been $2,829,989 and $2,606,856, respectively. Unaudited proforma income from continuing operations before cumulative effect of change in accounting for start up costs would have been ($328,167) and $49,676 for the twelve months ended December 31, 1999 and 1998, respectively. 57 57 NOTE 4. OTHER BALANCE SHEET ITEMS
DECEMBER 31, -------------------------- 2000 1999 ---------- ---------- Inventories Raw materials $ 44,787 $ 41,045 Manufactured goods in process 10,516 8,748 Manufactured and purchased inventory available for sale 80,520 90,748 ---------- ---------- 135,823 140,541 Health care supplies 55,876 42,571 ---------- ---------- Total $ 191,699 $ 183,112 ========== ========== Under the terms of certain purchase commitments, the Company is obligated to purchase raw materials and health care supplies during 2001 amounting to $55,483 Other Current Assets Miscellaneous accounts receivable $ 98,668 $ 91,042 Deposits and prepaid expenses 40,414 39,729 ---------- ---------- Total $ 139,082 $ 130,771 ========== ========== Excess of Cost Over the Fair Value of Net Assets Acquired and Other Intangible Assets: Goodwill, less accumulated amortization of $302,757 and $228,426 $2,701,281 $2,713,385 Patient relationships, less accumulated amortization of $116,856 and $87,169 72,662 92,898 Other intangible assets, less accumulated amortization of $145,267 and $109,109 448,101 459,208 ---------- ---------- Total $3,222,044 $3,265,491 ========== ========== Accrued Liabilities Accrued operating expenses $ 36,062 $ 46,019 Accrued insurance 47,021 54,702 Accrued legal and compliance costs 1,601 9,441 Accrued salaries and wages 50,988 53,371 Accounts receivable credit balances 38,215 48,932 Accrued interest 14,974 19,125 Accrued other 16,529 21,669 Accrued physician compensation 17,649 17,721 Accrued other related costs for OIG investigation 4,986 20,378 ---------- ---------- Total $ 228,025 $ 291,358 ========== ==========
Accounts receivable credit balances principally reflect overpayments from third party payors and are in the process of repayment. 58 58 NOTE 5. SALE OF ACCOUNTS RECEIVABLE On September 27, 1997, NMC established a new $204,000 receivable financing facility (the "A/R Facility") with NationsBank, N.A. (now known as Bank of America, N.A.) to replace its former facility with CitiCorp. The A/R Facility was amended on February 27, 1998 to increase the commitment amount to $331,500. It was further amended on September 27, 1999 to increase the commitment amount to $360,000 and to add WestDeutsche Landesbank Girozentrale, New York Branch, as an additional Administrative Agent. On October 26, 2000, the amount was increased to $500,000 and Bayerische Landesbank, New York Branch, became an additional Administrative Agent. The current agreement carries an effective interest rate based on commercial paper, which was approximately 6.59% at December 31, 2000, and matures on October 25, 2001. At December 31, 2000 and 1999, $445,300 and $335,000 had been received pursuant to such sales, respectively; these amounts are reflected as reductions to accounts receivable. Under the terms of the agreement, new interests in accounts receivable are sold as collections reduce previously sold accounts receivable. The costs related to such sales are expensed as incurred and recorded as interest expense and related financing costs. There were no gains or losses on these transactions. NOTE 6. DEBT Long-term debt to outside parties consists of:
DECEMBER 31, ---------------------- 2000 1999 -------- -------- NMC Credit Facility $732,500 $738,150 Note payable for settlement of investigation 85,920 -- Other 7,120 17,454 -------- -------- 825,540 755,604 Less amounts classified as current 237,014 140,539 -------- -------- $588,526 $615,065 ======== ========
In September 1996, NMC entered into a credit agreement with a group of banks (collectively, the "Lenders"), pursuant to which the Lenders made available to NMC and certain specified subsidiaries and affiliates an aggregate of $2,000,000 through two credit facilities (collectively, the "NMC Credit Facility"). The NMC Credit Facility, as amended, includes: (i) a revolving credit facility of up to $1,000,000 for up to seven years (of which up to $250,000 is available for letters of credit, up to $450,000 is available for borrowings in certain non-U.S. currencies, up to $50,000 is available as swing lines in U.S. dollars and up to $20,000 is available as swing lines in certain non-U.S. currencies) ("Facility 1") and (ii) a term loan facility of $1,000,000 for up to seven years ("Facility 2"). Loans under the NMC Credit Facility bear interest at one of the following rates, at either (i) LIBOR plus an applicable margin or (ii) a base rate equal to the sum of (1) the higher from time to time of (A) the prime rate of Bank of America, N.A. or (B) the federal funds rate plus 0.50% and (2) an applicable margin. A commitment fee is payable to the Lenders equal to a percentage per annum applied against the unused portion of the NMC Credit Facility. In addition to scheduled quarterly principal payments under Facility 2, the NMC Credit Facility will be reduced by certain portions of the net cash proceeds from certain sales of assets, sales of accounts receivable and the issuance of subordinated debt and equity securities. All borrowings outstanding under Facility 1 are due and payable at the end of the seventh year. Prepayments are permitted at any time without penalty, except in certain defined periods. The NMC Credit Agreement contains certain affirmative and negative covenants with respect to the Company, NMC and its subsidiaries, customary for this type of agreement. In December 1999, the Company successfully amended certain covenants including, among other things, financial ratios contained in its NMC Credit Facility that would have been affected by the impact of the settlement related to the U.S. Government investigation. At December 31, 2000, the Company was in compliance with all such covenants. 59 59 In February 1998, $250,000 of Facility 2 was repaid, primarily using borrowings from affiliates. The voluntary prepayment reduced the available financing under the agreement to $1,750,000. The Company has made all of its scheduled principal payments, reducing the amount available under the NMC Credit Facility at the end of 2000and 1999 to $1,577,500 and $1,716,250, respectively. At December 31, 2000 and 1999 the Company had available $698,000 and $777,000, respectively, of additional borrowing capacity under the NMC Credit Facility including $103,000 and $49,000 respectively, available for additional letters of credit. Borrowings from affiliates consists of:
DECEMBER 31, -------------------------- 2000 1999 ---------- ---------- Fresenius Medical Care AG, borrowings at interest rates approximating 7.75% $ 18,850 $ 42,949 Fresenius AG, borrowings at interest rates approximating 7.34 - 7.38% 209,000 330,000 Fresenius Medical Care Trust Finance S.a.r.l., borrowings at interest rates of 8.43% and 9.25% 786,524 786,524 Fresenius Acquisition, LLC at interest rates approximating 6.87% 113,121 -- Other 1,013 1,982 ---------- ---------- 1,128,508 1,161,455 Less amounts classified as current 341,643 372,949 ---------- ---------- Total $ 786,865 $ 788,506 ========== ==========
Scheduled maturities of long-term debt and borrowings from affiliates are as follows: 2001 $ 578,657 2002 151,985 2003 150,000 2004 282,500 2005 0 2006 and thereafter 790,865 -------------- Total $ 1,954,007 ==============
60 60 NOTE 7. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS 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) matters concerning violations of federal laws and (ii) NMC's claims with respect to outstanding Medicare receivables for nutrition therapy (collectively, the "Settlement"). Under the Settlement 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 is payable in six quarterly installments which began in April 2000 and will end in July 2001. The first four quarterly installments were made in the amount of $35.4 million including interest at 7.5%. The first three of these four payments were made in April, July, and October 2000 to the Government totaling $106.2 million including interest. The fourth installment was made in January 2001. 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 received approximately $59.2 million from the Government related to the Company's claims for outstanding Medicare receivables. The Company received $54.0 million in 2000 and a final payment of $5.2 million in February 2001. NOTE 8. DISCONTINUED OPERATIONS Effective June 1, 1998, the Company classified its non-renal diagnostic services business ("Non-Renal Diagnostic Services") and homecare business ("Homecare") as discontinued operations. The Company disposed of its Non-Renal Diagnostic Services division and its Homecare division on June 26, 1998 and July 29, 1998, respectively. In connection with the sale of Homecare, the Company retained the assets and the operations associated with the delivery of IDPN. The Company recorded a net after tax loss of $97 million in 1998 on the sale of these businesses. The net loss on the disposal of these businesses and their results of operations have been accounted for as discontinued operations. IDPN receivables of $153.5 million, that had been included in net assets of discontinued operations were resolved as part of the Settlement Agreements with the Government as part of the OIG Investigation. As a result, a $94.3 million write-off was taken against these receivables. The remaining receivables were reclassified to other current and non-current IDPN receivables on the balance sheet. The Company has collected approximately $54.0 million from the Government, and the remaining portion will be collected on February 2001. Operating results of discontinued operations are presented below: Discontinued Operations - Results of Operations The revenues and results of operations of the discontinued operations of Non Renal Diagnostic Services and Homecare divisions were as follows:
TWELVE MONTHS ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 --------- --------- --------- NET REVENUES ................................. $ -- $ -- $ 120,940 --------- --------- --------- Loss from operations before income tax benefit -- -- (14,212) Income tax benefit ........................... -- -- (5,543) --------- --------- --------- Loss from operations ......................... -- -- (8,669) --------- --------- --------- Loss on disposal before income tax benefit ... -- -- (140,000) Income tax benefit ........................... -- -- (42,772) --------- --------- --------- Loss on disposal ............................. -- -- (97,228) --------- --------- --------- Loss from discontinued operations ............ -- -- (105,897) ========= ========= =========
61 61 NOTE 9. INCOME TAXES Income (loss) from continuing operations before income taxes are as follows:
TWELVE MONTHS ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 -------- --------- --------- Domestic $201,305 $(410,034) $ 126,347 Foreign 2,266 1,970 (63) -------- --------- --------- Total income (loss) $203,571 $(408,064) $ 126,284 ======== ========= =========
The provision (benefit) for income taxes was as follows:
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 ------- -------- ------- Current tax expense Federal $ 2,616 $ 1,545 $44,777 State 10,195 9,916 12,406 Foreign 610 626 530 ------- -------- ------- Total current 13,421 12,087 57,713 Deferred tax (benefit) expense Federal 79,858 (87,926) 14,642 State 4,712 (4,981) 2,092 Foreign 330 (217) -- ------- -------- ------- Total deferred tax (benefit) 84,900 (93,124) 16,734 ------- -------- ------- Total provision (benefit) $98,321 $(81,037) $74,447 ======= ======== =======
Deferred tax liabilities (assets) are comprised of the following:
DECEMBER 31, -------------------------- 2000 1999 --------- --------- Allowance for doubtful accounts $ (22,928) $ (26,345) Insurance liability (388) (21,125) Legal liability (11,461) (13,109) Deferred and incentive compensation (8,547) (9,055) Pension and benefit accruals (19,623) (19,424) Accrued interest (47,259) (36,181) Inventory reserves (6,099) (5,236) Accrued expenses (7,033) (13,643) Other temporary differences (4,392) (4,653) Government settlement (5,302) (92,469) Loss carry forwards (11,222) (5,301) --------- --------- Gross deferred tax assets (144,254) (246,541) Deferred tax assets valuation 2,622 5,029 --------- --------- Deferred tax assets (141,632) (241,512) --------- --------- Depreciation and amortization 140,864 156,113 Other temporary differences 524 255 --------- --------- Gross deferred tax liabilities 141,388 156,368 --------- --------- Net deferred tax (asset) liabilities $ (244) $ (85,144) ========= =========
62 62 The provision (benefit) for income taxes for the twelve months ended December 31, 2000, 1999, and 1998 differed from the amount of income taxes determined by applying the applicable statutory federal income tax rate to pretax earnings as a result of the following differences:
TWELVE MONTHS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 ------ ------ ------ Statutory federal tax rate (benefit) 35.0% (35.0%) 35.0% State income taxes, net of federal 4.7 0.8 7.5 tax benefit Amortization of goodwill 10.2 5.1 16.6 Government Settlement (2.3) 8.7 -- Foreign losses and taxes 0.6 (0.1) 0.4 Other 0.1 0.6 (0.6) ---- ----- ---- Effective tax rate (benefit) 48.3% (19.9%) 58.9% ==== ===== ====
The net (decrease) increase in the valuation allowance for deferred tax assets was $(2,407), $(311) and $1,972 for the twelve months ended December 31, 2000, 1999, and 1998, respectively. It is the Company's expectation that it is more likely than not to generate future taxable income to utilize its net deferred tax asset. The changes for all three years relate to activities incurred by foreign subsidiaries. At December 31, 2000, there were approximately $6,750 of foreign net operating losses, the majority of which expire within seven years. The Company also has $21,500 of Federal net operating losses which will begin to expire in the year 2018. Provision has not been made for additional federal, state, or foreign taxes on $5,509 of undistributed earnings of foreign subsidiaries. Those earnings have been, and will continue to be reinvested. The earnings could be subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to the Company or a U.S. affiliate or if the Company should sell its stock in the subsidiaries. The Company estimates that the distribution of these earnings would result in $ 2,166 of additional foreign withholding and federal income taxes. NOTE 10. PROPERTIES AND EQUIPMENT
DECEMBER 31, ------------------------- 2000 1999 --------- --------- Land and improvements $ 5,135 $ 5,205 Buildings 63,937 68,812 Capitalized lease property 3,312 6,668 Leasehold improvements 235,096 201,405 Equipment and furniture 403,701 363,244 Construction in progress 38,176 25,028 --------- --------- 749,357 670,362 Accumulated depreciation and amortization (292,421) (241,569) --------- --------- Properties and equipment, net $ 456,936 $ 428,793 ========= =========
Depreciation expense relating to properties and equipment amounted to $80,034, $80,803 and $81,683 for the years ended December 31, 2000, 1999 and 1998, respectively. Included in properties and equipment as of December 31, 2000, and 1999 were $26,816 and $25,355, respectively, of peritoneal dialysis cycler machines which the Company leases to customers with end-stage renal disease on a month-to-month basis. Rental income for the peritoneal dialysis cycler machines was $12,472, $8,762, and $7,679 for the twelve months ended December 31, 2000, 1999 and 1998, respectively. 63 63 LEASES In September 2000, the Company entered into an amended operating lease arrangement with a bank that covers approximately $65,165 of equipment in its dialyzer manufacturing facility in Ogden, Utah. The agreement has a basic term expiration date of January 1, 2010, renewal options and a purchase option at the greater of 20% of the original cost or the fair market value. Future minimum payments under noncancelable leases (principally for clinics and offices) as of December 31, 2000 are as follows:
OPERATING CAPITAL LEASES LEASES TOTAL -------- -------- -------- 2001 $136,936 $ 342 $137,278 2002 117,394 300 117,694 2003 104,414 284 104,698 2004 130,577 230 130,807 2005 55,153 292 55,445 2006 and beyond 131,552 -- 131,552 -------- ------ -------- Total minimum payments $676,026 $1,448 $677,474 ======== ======== Less interest and operating costs 323 ------ Present value of minimum lease Payments ($215 payable in 2001) $1,125 ======
Rental expense for operating leases was $157,335, $132,248 and $103,838 for the years ended December 31, 2000, 1999 and 1998, respectively. Amortization of properties under capital leases amounted to $369, $852, and $968 for the years ended December 31, 2000, 1999 and 1998, respectively. Lease agreements frequently include renewal options and require that the Company pay for utilities, taxes, insurance and maintenance expenses. Options to purchase are also included in some lease agreements, particularly capital leases. NOTE 11. MANDATORILY REDEEMABLE PREFERRED SECURITIES During the fourth quarter of 2000, a wholly-owned subsidiary of the Company issued to NMC 1,000 shares of Series A Preferred Stock and 1,700 shares of Series C Preferred Stock that were then transferred to FMC for proceeds of $113,500 and $192,000, respectively ("Redeemable Preferred Securities"). The Redeemable Preferred Securities are identical in substance except that the Series A shares rank prior to the Series C shares both as to dividends and liquidation, dissolution or winding-up of the subsidiary. The Redeemable Preferred Securities have a par value of $.01 per share. The holders of the securities are entitled to receive dividends in amount of dollars per share equal to approximately 8% of the share issuance price. The dividends will be declared and paid in cash at least annually. Upon liquidation or dissolution or winding up of the subsidiary, the holders of the Redeemable Preferred Securities are entitled to an amount equal to the liquidation preference for each share of stock plus an amount equal to all accrued and unpaid dividends thereon through the date of distribution. The liquidation preference is the sum of the issuance price plus, for each year or portion thereof an amount equal to one-half of one percent of the issue price, not to exceed 5%. The Redeemable Preferred Securities will be sold to the Company in two years for an amount equal to Euros 341,385 plus any accrued and unpaid dividends. Accordingly, the mandatorily redeemable preferred securities are deemed to Euro liability and the risk of foreign currency fluctuations are hedged through forward currency contracts. The holders of the Redeemable Preferred Securities have the participation rights of the holders of all other classes of capital stock of the subsidiary. 64 64 NOTE 12. PENSION AND OTHER POST RETIREMENT BENEFITS DEFINED BENEFIT PENSION PLANS Substantially all domestic employees are covered by NMC's non-contributory, defined benefit pension plan. Each year NMC contributes at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended. Plan assets consist primarily of publicly traded common stock, fixed income securities and cash equivalents. The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans.
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 --------- -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 87,737 $ 87,464 $ 72,025 Service Cost 9,987 8,212 7,416 Interest Cost 6,713 5,966 5,217 Amendments -- (5) -- Actuarial (Gain)/Loss 3,752 (12,496) 5,810 Divestitures -- -- (1,717) Benefits Paid (2,748) (1,404) (1,287) --------- -------- -------- Benefit obligation at end of year $ 105,441 $ 87,737 $ 87,464 --------- -------- -------- CHANGE ON PLAN ASSETS Fair value of plan assets at beginning of year 86,794 77,019 65,088 Actual return on plan assets (2,098) 11,179 13,218 Employee contribution -- -- -- Benefits paid (2,748) (1,404) (1,287) --------- -------- -------- Fair value of plan assets at end of year $ 81,948 $ 86,794 $ 77,019 --------- -------- -------- Funded Status (23,493) (942) (10,444) Unrecognized net (gain)/loss (14,367) (30,993) (15,239) Unrecognized prior service cost (4) (4) -- --------- -------- -------- Accrued benefit costs $ (37,864) $(31,939) $(25,683) --------- -------- -------- WEIGHTED - AVERAGE ASSUMPTIONS AS OF DECEMBER 31, Discount rate 7.50% 7.50% 6.75% Expected return of plan assets 9.70 9.70 9.70 Rate of compensation increase 4.50 4.50 4.50 COMPONENTS OF NET PERIOD BENEFIT COST Service Cost $ 9,987 $ 8,212 $ 7,416 Interest Cost 6,713 5,966 5,217 Expected return on plan assets (8,345) (7,401) (6,430) Amortization of prior service cost (1) (1) -- Recognized net (gain)/loss (2,429) (520) (891) Curtailment net (gain) -- -- (1,717) --------- -------- -------- Net periodic benefit costs $ 5,925 $ 6,256 $ 3,595 --------- -------- --------
NMC also sponsors a supplemental executive retirement plan to provide certain key executives with benefits in excess of normal pension benefits. The projected benefit obligation was $5,453 and $3,057 at December 31, 2000 and 1999, respectively. Pension expense for this plan, for the twelve months ended December 31, 2000, 1999 and 1998 was $983, $402 and $374, respectively. NMC does not provide any postretirement benefits to its employees other than those provided under its pension plan and supplemental executive retirement plan. 65 65 DEFINED CONTRIBUTION PLANS The Company's employees are eligible to join 401 (k) Savings Plan once they have achieved a minimum of 90 days of service and if they have more than 900 hours of service before their one year anniversary date. Under the provisions of the 401(k) plan, employees are allowed to contribute up to 16% of their salaries. The Company contributes 50% of their savings up to 6% of saved pay after one year. The Company's total contributions for the year ended December 31, 2000, 1999 and 1998 was $8,786, $7,298 and $7,617, respectively. NOTE 13. EQUITY PREFERRED STOCK At December 31, 2000 and 1999, the components of the Company's preferred stocks as presented in the Consolidated Balance Sheet and the Consolidated Statement of Changes in Equity are as follows: PREFERRED STOCKS, $100 PAR VALUE - - 6% Cumulative (1); 40,000 shares authorized; 36,460 outstanding $ 3,646 - - 8% Cumulative Class A (2); 50,000 shares authorized; 16,176 outstanding 1,618 - - 8% Noncumulative Class B (2); 40,000 shares authorized; 21,483 outstanding 2,148 ------- $ 7,412 ------- PREFERRED STOCKS, $.10 PAR VALUE - - Noncumulative Class D (3); 100,000,000 shares authorized; 89,062,316 outstanding 8,906 ------- Total Preferred $16,318 =======
(1) 160 votes per share (2) 16 votes per share (3) 1/10 vote per share STOCK OPTIONS In 1996, FMC adopted a stock incentive plan (the "FMC Plan") under which the Company's key management and executive employees are eligible. Under the FMC Plan, eligible employees will have the right to acquire Preference Shares of FMC. Options granted under the FMC Plan will be evidenced by a non-transferable convertible bond and corresponding non-recourse loan to the employee, secured solely by the bond with which it was made. The bonds mature in ten years and are generally fully convertible after three to five years. Each convertible bond, which is DM denominated, entitles the holder thereof to convert the bond in Preference Shares equal to the face amount of the bond divided by the Preference Share's nominal value. During 1997, FMC granted 2,697,438 options (of which 216,663 were forfeited) to the Company, under the FMC Plan. At December 31, 1997 no options were exercisable. During 2000, 1999 and 1998 a total of 75,833, 30,065, and, 2,169,711 awards were cancelled or forfeited resulting in awards outstanding of 205,166 for 2000, 280,999 for 1999 and 311,064 in 1998. If the 205,166 awards outstanding at December 31, 2000 were exercised, a total of approximately 68.389 non-voting preferred shares would be issued. At December 31, 2000, 205,166 options were exercisable under the FMC plan. During 1998, the FMC adopted a new stock incentive plan ("FMC 98 Plan") under which the Company's key management and executive employees are eligible. Under the FMC 98 Plan, eligible employees will have the right to acquire Preference Shares of FMC. Options granted under the FMC 98 Plan will be evidenced by a non-transferable convertible bond and a corresponding non-recourse loan to the employee, secured solely by the bond with which it was made. Each convertible bond, which will be DM denominated, will entitle the holder thereof to convert the bond in Preference Shares equal to the face amount of the bond divided by the Preference Share's nominal value. During 1998, FMC awarded 1,024,083 options and exercisable upon vesting for 1,024,083 Preference Shares. During 1999, FMC granted 571,940 Preference Shares. During 1999, options for 140,168 Preference Shares were forfeited or cancelled under the FMC 98 Plan. During 2000, FMC granted 653,325 Preference Shares and 303,123 Preference Shares were forfeited or cancelled. In addition, 10,060 stock options from the FMC 98 Plan were 66 66 exercised with 10,060 Preference Shares being issued. At December 31, 2000, there were 568,887 Preference Shares for which grants could be issued. Grants for 660,270 Preference Shares were exercisable under the FMC 98 Plan at December 31, 2000. NOTE 14. FINANCIAL INSTRUMENTS MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with firm commitments and debt obligations. The Company does not hold or issue derivative instruments for trading or speculative purposes. The mark-to-market valuations of the financial instruments and of associated underlying exposures are closely monitored at all times. The Company uses portfolio sensitivities and stress tests to monitor risk. Overall financial strategies and the effects of using derivatives are reviewed periodically. FOREIGN CURRENCY CONTRACTS The Company uses foreign exchange contracts as a hedge against foreign exchange risks associated with the settlement of foreign currency denominated payables and firm commitments. At December 31, 2000 and 1999, the Company had outstanding foreign currency contracts for the purchase of Euros ("EUR") totaling $450,856 and $41,925, respectively. The contracts outstanding at December 31, 2000 include forward contracts for delivery of EUR between January 2001 and November 2003, at rates ranging from $0.8489 to $0.9374 per EUR. The fair value of forward currency contracts are the estimated amounts that the Company would receive or pay to terminate the agreement at the reporting date, taking into account the current exchange rates and the current creditworthiness of the counterparties. At December 31, 2000 and 1999, the Company would have received approximately $20,400 and $2,800, respectively, to terminate the contracts. INTEREST RATE AGREEMENTS At December 31, 2000 and 1999, the Company had interest rate swaps and option agreements outstanding with various commercial banks for notional amounts totaling $1,050,000 and $1,600,000, respectively. All of these agreements were entered into for other than trading purposes. In the year 2000, the Company purchased new interest rate swaps with $450,000 notional amount and closed out its option agreements (cap and floor with notional amount of $150,000). Hedges totalling $850,000 expired on January 4, 2000.The rest of the contracts mature at various dates between November 2003 and November 2007. For a notional amount of $1,050,000, the interest rate swaps effectively change the Company's interest rate exposure on its variable-rate loans under the NMC Credit Facility (drawn as of December 31, 2000: $732,500), and drawdowns under the receivables financing facility (drawn as of December 31, 2000: $445,300) to fixed rates of interest ranging between 6.05% and 6.611%. Under the NMC Credit Facility, the Company agreed to maintain at least $500,000 of interest rate protection. The Company closed out its option agreements (cap and floor with notional amount of $150,000) in November 2000 and is amortizing the loss over the original term of the agreements. The fair value of the interest rate swaps and options is the estimated amount that the Company would receive or pay to terminate the agreements. The fair value of these agreements at December 31, 2000 and 1999 would require the Company to pay approximately $24,600 and receive approximately $9,200, respectively. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions significantly affect the estimates. CREDIT RISK The Company is exposed to credit risk to the extent of potential nonperformance by counterparties on financial instruments. As of December 31, 2000, the Company's credit exposure was insignificant and limited to the fair value stated above; the Company believes the risk of incurring losses due to credit risk is remote. 67 67 FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS At December 31, 2000 and 1999, the carrying value of cash, cash equivalents, accounts receivable, prepaid expenses, accounts payable, accrued expenses, short-term borrowings, short-term borrowings and mandatorily redeemable preferred securities with related parties and current liabilities approximated their fair values, based on the short-term maturities of these instruments. In addition, the Company is a "Subsidiary Guarantor" along with its parent company, FMC, for the issuance of Trust Preferred Securities on the books of FMC at a carrying value of $952,727 and $964,103, at December 31, 2000 and 1999 respectively. The Trust Preferred Securities are guaranteed through a series of undertakings by FMC and Subsidiary Guarantors. At December 31, 2000 and 1999, the carrying value of these Trust Preferred Securities exceeded their fair value by $54,900 and $20,059, respectively. The fair value of these Trust Preferred Securities is based upon market quotes. NOTE 15. RELATED PARTY TRANSACTIONS AND ALLOCATIONS SERVICES Related party transactions pertaining to services performed and products purchased/sold between affiliates are recorded as net accounts payable to affiliates on the balance sheet. At December 31, 2000 and 1999, the Company had net accounts payable of $6,317 and $12,361, respectively. BORROWINGS WITH AFFILIATES The Company has various outstanding borrowings with FMC and affiliates. The funds were used for general corporate purposes. The loans are due at various maturities. See Note 6 - "Debt, - Borrowings from Affiliates" for details and See Note 11 - "Mandatorily Redeemable Preferred Securities" NOTE 16. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS COMMERCIAL INSURER LITIGATION In 1997, the Company, NMC, and certain named NMC subsidiaries, were served with a civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York. 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. 68 68 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 the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding 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. In July, 2000, NMC filed a complaint in the U.S. District Court for the Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S. Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S. Healthcare and health plans administered by Aetna U.S. Healthcare for claims related to primary payor liability for dual eligible ESRD patients under the Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed the action pending resolution of the District of Columbia Court action. 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 69 69 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. 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. ("Grace") and Fresenius AG. In connection with the Merger, W.R. Grace & Co.-Conn. ("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 may be contingently liable for certain liabilities with respect to pre-Merger matters that are not related to NMC operations. Grace Chemicals has filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. If Grace Chemicals' indemnity obligation is terminated or limited as a result of this bankruptcy proceeding, and the Company is held liable for pre-Merger obligations of Grace Chemicals, the Company's business, financial condition, and results of operations may be adversely affected. 70 70 On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al. (Sup. Court of Calif., S.F. County, #315465) was filed as a class action by plaintiffs claiming to be creditors of Grace Chemicals against Grace Chemicals, the Company, and other defendants, principally alleging that the Merger was a fraudulent transfer, violated the uniform fraudulent transfer act, and constituted a conspiracy. An amended complaint was filed subsequently with substantially similar allegations (Abner et al. v. W. R. Grace & Company, et al.). The Company has requested indemnification from Grace Chemicals pursuant to the Merger agreement. If the Merger is determined to have been a fraudulent transfer, if material damages are proved by the plaintiff, and if the Company is not able to collect, in whole or in part, on the indemnity, a judgment could have a material adverse effect on the Company's business, the financial condition of the Company and results of operations. The Company believes that no fraudulent transfer or conspiracy occurred and intends to defend the case vigorously. 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, financial condition and results of operations. NOTE 17. SIGNIFICANT RELATIONS For the periods presented, approximately 63% of the Company's health care services net revenues are paid by and subject to regulations under governmental programs, primarily Medicare and Medicaid. The Company maintains reserves for losses related to these programs, including uncollectible accounts receivable, and such losses have been within management's expectations. Revenues from EPO accounted for approximately 28% of the Dialysis Services net revenues for the twelve months ended December 31, 2000 and materially contribute to Dialysis Services operating earnings. EPO is produced by a single source manufacturer, Amgen, Inc., and any interruption of supply could materially adversely affect the Company's business and results of operations. NOTE 18. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS The Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information during the fourth quarter of 1998. SFAS No. 131 established the standards for reporting information about operating statements in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. The Company's reportable segments are Dialysis Services and Dialysis Products. For purposes of segment reporting, the Dialysis Services Division and Spectra Renal Management are combined and reported as Dialysis Services. These divisions are aggregated because of their similar economic classifications. These include the fact that they are both health care service providers whose services are provided to a common patient population, and both receive a significant portion of their net revenue from Medicare and other government and non-government third party payors. The Dialysis Products segment reflects the activity of the Dialysis Products Division only. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company generally evaluates division operating performance based on Earnings Before Interest and Taxes (EBIT) but does use Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA) in some cases. The table below provides information for the years ended December 31, 2000, 1999 and 1998 pertaining to the Company's operations by geographic area.
UNITED STATES ASIA/PACIFIC TOTAL ------------- ------------ ----------- NET REVENUES FOR TWELVE MONTHS ENDED 2000 $3,085,320 $ 3,855 $3,089,175 1999 2,811,380 3,853 2,815,233 1998 2,564,785 6,621 2,571,406 OPERATING EARNINGS FOR TWELVE MONTHS ENDED 2000 $ 520,790 $ 30 $ 520,820 1999 511,847 444 512,291 1998 446,725 1,013 447,738
71 71 ASSETS AT DECEMBER 31, 2000 2,810,514 10,394 2,820,908 1999 2,553,763 10,112 2,563,875 1998 2,461,863 9,584 2,471,447
The table below provides information for the years ended December 31, 2000, 1999 and 1998 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT TOTAL SERVICES PRODUCTS SALES ---------- ---------- ----------- ---------- NET REVENUES FOR TWELVE MONTHS ENDED 2000 $2,624,520 $716,757 $252,102 $3,089,175 1999 2,339,185 706,709 230,661 2,815,233 1998 2,116,185 662,324 207,103 2,571,406 OPERATING EARNINGS FOR TWELVE MONTHS ENDED 2000 402,887 117,933 -- 520,820 1999 386,479 125,812 -- 512,291 1998 344,208 103,530 -- 447,738 ASSETS AT DECEMBER 31 2,176,055 644,853 -- 2,820,908 2000 1,918,612 645,263 -- 2,563,875 1999 1,815,368 656,079 -- 2,471,447 1998 CAPITAL EXPENDITURES FOR TWELVE MONTHS ENDED 2000 72,421 28,775 -- 101,196 1999 59,061 15,519 -- 74,580 1998 54,821 13,147 -- 67,968 DEPRECIATION AND AMORTIZATION OF PROPERTIES AND EQUIPMENT FOR TWELVE MONTHS ENDED 2000 120,985 23,749 -- 144,734 1999 117,059 21,936 -- 138,995 1998 114,240 22,175 -- 136,415
The table below provides the reconciliations of reportable segment operating earnings, assets, capital expenditures, and depreciation and amortization to the Company's consolidated totals.
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------------------- SEGMENT RECONCILIATION 2000 1999 1998 --------------------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECTIVE OF CHANGE IN ACCOUNTING FOR START UP COSTS: Total operating earnings for reportable segments $ 520,820 $ 512,291 $ 447,738 Corporate G&A (including foreign exchange) (95,860) (113,375) (108,618) Research and development expense (4,127) (4,065) (4,060) Net interest expense (187,315) (201,915) (208,776) Interest expense on settlement of investigation, net (29,947) -- -- Special charge for settlement of investigation and related costs -- (601,000) -- ----------- ----------- ----------- Income (Loss) before income taxes and cumulative effective of change in accounting for start up costs $ 203,571 $ (408,064) $ 126,284 =========== =========== =========== ASSETS: Total assets for reportable segments $ 2,820,908 $ 2,563,875 $ 2,471,447 Intangible assets not allocated to segments 1,934,643 2,006,985 2,067,648 Accounts receivable financing agreement (445,300) (335,000) (305,600) Net assets of discontinued operations and IDPN accounts receivable 5,189 59,151 151,067 Corporate assets and other 237,918 349,557 228,841 ----------- ----------- ----------- Total Assets $ 4,553,358 $ 4,644,568 $ 4,613,403 =========== =========== =========== CAPITAL EXPENDITURES Total capital expenditures for reportable segments $ 101,196 $ 74,580 $ 67,968 Corporate capital expenditures 3,003 6,750 6,685 ----------- ----------- ----------- Total Capital Expenditures $ 104,199 $ 81,330 $ 74,653 =========== =========== ===========
72 72 DEPRECIATION AND AMORTIZATION: Total depreciation and amortization for reportable segments $ 144,734 $ 138,995 $ 136,415 Corporate depreciation and amortization 78,136 78,957 79,799 ----------- ----------- ----------- Total Depreciation and Amortization $ 222,870 $ 217,952 $ 216,214 =========== =========== ===========
NOTE 19. QUARTERLY SUMMARY (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- 2000 Net revenues $745,115 $760,724 $794,694 $788,642 Cost of health care services and medical supplies 506,858 512,494 544,011 545,459 Operating expenses 139,899 141,199 140,944 137,478 Interest expense, net 47,118 49,269 46,892 44,036 Interest expense, on settlement of investigation 6,185 7,666 7,951 8,145 -------- -------- -------- -------- Total expenses 700,060 710,628 739,798 735,118 -------- -------- -------- -------- Earnings before income taxes 45,055 50,096 54,896 53,524 Provision for income taxes 21,961 24,927 27,227 24,206 -------- -------- -------- -------- Net income $ 23,094 $ 25,169 $ 27,669 $ 29,318 ======== ======== ======== ======== Basic and fully dilutive earnings per share $ 0.26 $ 0.28 $ 0.31 $ 0.31 -------- -------- -------- --------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- 1999 Net revenues $672,140 $698,466 $ 711,850 $732,777 Cost of health care services and medical supplies 450,432 471,548 477,726 480,008 Operating expenses 134,003 129,403 131,995 145,267 Interest expense, net 50,126 52,504 49,524 49,761 Special charge for settlement of investigations and related costs -- -- 590,000 11,000 -------- -------- -------- -------- Total expenses 634,561 653,455 1,249,245 686,036 -------- -------- -------- -------- Earnings before income taxes 37,579 45,011 (537,395) 46,741 Provision (Benefit) for income taxes 19,952 23,607 (150,190) 25,594 -------- -------- -------- -------- Net income (loss) $ 17,627 $ 21,404 $ (387,205) $ 21,147 ======== ======== =========== ======== Basic and fully dilutive earnings per share $ 0.19 $ 0.24 $ (4.30) $ 0.23 -------- -------- ----------- --------
73 73 To the Board of Directors and Stockholders of Fresenius Medical Care Holdings, Inc. Under the date of February 9, 2001, we reported on the consolidated balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of December 31, 2000 and 1999 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the years in the three year period ended December 31, 2000 as included in the annual report on Form 10-K for the year 2000. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP February 9, 2001, except as to paragraph 14 of Note 16, as to which the date is April 2, 2001 Boston, MA 74 74 SCHEDULE II FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS) FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
ADDITIONS (DEDUCTIONS) -------------------------------- CHARGED BALANCE AT (CREDITED) TO OTHER NET BALANCE AT BEGINNING OF COSTS AND END OF PERIOD YEAR EXPENSES ------------- --------------- ---------- ------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $63,012 62,949 (45,495) $80,466
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
ADDITIONS (DEDUCTIONS) -------------------------------- CHARGED BALANCE AT (CREDITED) TO OTHER NET BALANCE AT BEGINNING OF COSTS AND END OF PERIOD YEAR EXPENSES ------------- --------------- ---------- ------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $49,209 42,243 (28,440) $63,012
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
ADDITIONS (DEDUCTIONS) -------------------------------- CHARGED BALANCE AT (CREDITED) TO OTHER NET BALANCE AT BEGINNING OF COSTS AND END OF PERIOD YEAR EXPENSES ------------- --------------- ---------- ------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $53,109 54,709 (58,609) $49,209
75 75 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and Fresenius AG (incorporated herein by reference to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and 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). 76 76 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 77 77 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 4.11 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 Amendment No. 10 dated as of September 21, 2000 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 November 11, 2000). Exhibit 4.13 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 4.14 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 4.15 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 4.16 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), (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on August 9, 2000). 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). 78 78 Exhibit 10.7 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.8 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.9 Amended and Restated Transfer and Administration Agreement dated as October 26, 2000 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. 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 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 10.14 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 10.15 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 10.16 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and Fresenius Medical Care North America (filed herewith). Exhibit 10.17 Employment Agreement dated June 1, 2000 by and between John F. Markus and Fresenius Medical Care North America (filed herewith). Exhibit 10.18 Employment Agreement dated January 1, 2001 by and between E. Craig Dawson and Fresenius Medical Care North America (filed herewith). Exhibit 10.19 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. 79 EX-10.9 2 b38153fmex10-9.txt AMENDED & RESTATED TRANSFER & ADMINISTRATION AGMNT 1 EXHIBIT 10.9 AMENDMENT NO. 2 Dated as of October 26, 2000 to AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT Dated as of September 27, 1999 THIS AMENDMENT NO. 2 (this "Amendment") dated as of October 26, 2000 is entered into by and among NMC FUNDING CORPORATION, a Delaware corporation, as Transferor, NATIONAL MEDICAL CARE, INC., a Delaware corporation, as Collection Agent, ENTERPRISE FUNDING CORPORATION, a Delaware corporation ("Enterprise"), as a Conduit Investor, COMPASS US ACQUISITION, LLC, a Delaware limited liability company ("Compass"), as a Conduit Investor, GIRO MULTI-FUNDING CORPORATION, a bankruptcy-remote special purpose company incorporated in Delaware ("GMFC"), as a Conduit Investor, the FINANCIAL INSTITUTIONS PARTIES HERETO as Bank Investors, WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH ("WestLB"), as an Administrative Agent, BAYERISCHE LANDESBANK, NEW YORK BRANCH ("BLB"), as an Administrative Agent and BANK OF AMERICA, N.A. ("Bank of America"), as an Administrative Agent and as Agent. PRELIMINARY STATEMENTS A. The Transferor, the Collection Agent, Compass, Enterprise, the Bank Investors, WestLB, as an Administrative Agent, and Bank of America, as an Administrative Agent and as Agent, are parties to that certain Amended and Restated Transfer and Administration Agreement dated as of September 27, 1999 (as amended or otherwise modified prior to the date hereof, the "TAA"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the TAA. B. The parties hereto desire to add GMFC as a Conduit Investor and BLB as an Administrative Agent under the TAA. C. In addition, the parties hereto have agreed to amend the TAA on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises set forth above, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. Amendments to the TAA. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the TAA is amended as follows: 1.1. The definition of "Administrative Agent" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: 2 "Administrative Agent" means (i) Bank of America as administrative agent for the Related Group that includes Enterprise, (ii) WestLB, as administrative agent for the Related Group that includes Compass or (iii) BLB, as administrative agent for the Related Group that includes GMFC. 1.2. The definition of "Bank Investors" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "Bank Investors" means Bank of America, WestLB, BLB, each other financial institution identified on Schedule II and their respective successors and assigns. 1.3. The following definition is added to Section 1.1 of the TAA in appropriate alphabetical order: "BLB" means Bayerische Landesbank, New York Branch, together with its successors and permitted assigns. 1.4. Clause (i) of the definition of "Commitment" in Section 1.1 of the TAA is amended to delete the words "the dollar amount set forth opposite such Bank Investor's signature on the signature page hereto" and to substitute therefor the following: "the dollar amount set forth opposite such Bank Investor's name on Schedule II hereto". 1.5. The definition of "Commitment Termination Date" in Section 1.1 of the TAA is amended to change the date set forth therein from "October 26, 2000" to "October 25, 2001". 1.6. The definition of "Contractual Adjustment" is amended to replace the words "Outstanding Balance" with the words "outstanding principal amount". 1.7. The following definition is added to Section 1.1 of the TAA in appropriate alphabetical order: "Contractual Adjustment Amount" means, with respect to any Receivable originated by a member of the Spectra Renal Management Group, at any time, an amount equal to (i) 75% of the original outstanding principal amount of such Receivable (excluding any accrued and outstanding Finance Charges related thereto) minus (ii) the amount of any Contractual Adjustments already granted with respect to such Receivable. 1.8. The definition of "Conduit Investor" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "Conduit Investor" means Compass, GMFC or Enterprise. 1.9 The definition of "Dealer Fee" in Section 1.1 of the TAA is amended and restated to read in its entirety as follows: 2 3 "Dealer Fee" means, with respect to any Conduit Investor, the fee payable by the Transferor to the related Administrative Agent or, in the case of GMFC, to such Conduit Investor, pursuant to Section 2.4 hereof, the terms of which are set forth in the Fee Letter to which such Conduit Investor is a party." 1.10 The definition of "Dilution Ratio" in Section 1.1 of the TAA is amended to delete the words "the aggregate amount of any Receivables that are reduced or canceled" and to substitute therefor the following: "the aggregate amount of any reductions to or cancellations of the respective Outstanding Balances of the Receivables". 1.11 The following definition is added to Section 1.1 of the TAA in appropriate alphabetical order: "Face Amount" means, with respect to any Commercial Paper, (i) the face amount of any such Commercial Paper issued on a discount basis and (ii) the principal amount of, plus the amount of all interest accrued and to accrue thereon to the stated maturity date of, any such Commercial Paper issued on an interest-bearing basis. 1.12 definition of "Facility Limit" in Section 1.1 of the TAA is amended to change the dollar amount set forth therein from "$360,000,000" to "$500,000,000". 1.13 The definition of "Fee Letter" in Section 1.1 of the TAA is amended to add the following immediately before the period: "or (iii) the letter agreement dated October 26, 2000 between the Transferor, GMFC and BLB with respect to the fees to be paid by the Transferor hereunder with respect to the Related Group that includes GMFC, as amended, modified or supplemented from time to time." 1.14 The following definition is added to Section 1.1 of the TAA in appropriate alphabetical order: "GMFC" means Giro Multi-Funding Corporation, a bankruptcy-remote special purpose company incorporated in Delaware, together with its successors and permitted assigns. 1.15 The definition of "Loss Reserve" in Section 1.1 of the TAA is amended to delete the dollar amount "$16,250,000" set forth therein and to substitute therefor the following: "5% of the maximum Net Investment permitted under clause (i)(z) of the second sentence of Section 2.2(a)." 1.16 The definition of "Net Receivables Balance" in Section 1.1 of the TAA is amended to add the following at the end of such definition immediately before the period: "plus (iv) the aggregate amount by which the Outstanding Balance of all Eligible Receivables originated by any member of the Spectra Renal Management Group exceeds 7.5% of the Net Investment". 3 4 1.17 The definition of "Outstanding Balance" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "Outstanding Balance" means (i) with respect to any Receivable originated by a member of the Spectra Renal Management Group, the outstanding principal amount thereof (excluding any accrued and outstanding Finance Charges related thereto) minus the Contractual Adjustment Amount with respect to such Receivable and (ii) with respect to any other Receivable, the outstanding principal amount thereof (excluding any accrued and outstanding Finance Charges related thereto). 1.18 The definition of "Related Group" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "Related Group" means any of the following groups: (i) Enterprise, as a Conduit Investor, and Bank of America, N.A., as a Bank Investor and as an Administrative Agent, together with their respective successors and permitted assigns, (ii) Compass, as a Conduit Investor, Landesbank Hessen-Thueringen Girozentrale, as a Bank Investor and WestLB, as a Bank Investor and as an Administrative Agent, together with their respective successors and permitted assigns and (iii) GMFC, as a Conduit Investor, and BLB, as a Bank Investor and as an Administrative Agent, together with their respective successors and permitted assigns. 1.19 The definition of "Related Group Limit" in Section 1.1 of the TAA is amended and restated in its entirety as follows: "Related Group Limit" means (i) with respect to the Related Group that includes Enterprise, $200,000,000, (ii) with respect to the Related Group that includes Compass, $200,000,000 and (iii) with respect to the Related Group that includes GMFC, $100,000,000. 1.20 The following definition is added to Section 1.1 of the TAA in appropriate alphabetical order: "Spectra Renal Management Group" means, collectively, Spectra East, Inc., a Delaware corporation, Spectra Laboratories, Inc., a Nevada corporation, as Transferring Affiliates, and their respective successors. 1.21 The definition of "Termination Date" in Section 1.1 of the TAA is amended to change the date set forth in clause (viii) thereof from "October 26, 2000" to "October 25, 2001". 1.22 Clause (i)(z) of the second sentence of Section 2.2(a) of the TAA is amended to replace the dollar amount "$352,800,000" with the dollar amount "$490,000,000." 1.23 Section 9.7(b) of the TAA is amended by adding the following as the second sentence thereof: "Without limiting the generality of the foregoing, it is understood for the avoidance of doubt that an Administrative Agent may condition any approval on its receipt of written confirmation from S&P and Moody's that such assignment will not 4 5 result in the reduction or withdrawal of the then current rating of the Commercial Paper issued by the related Conduit Investor." 1.24 The first sentence of Section 9.7(d) of the TAA is amended and restated to read in its entirety as follows: "The Transferor shall pay to the Administrative Agent for a Conduit Investor or, in the case of GMFC, to such Conduit Investor, for the account of such Conduit Investor, in connection with any assignment by such Conduit Investor to the Bank Investors in its Related Group pursuant to Section 9.7, an aggregate amount equal to all Discount to accrue through the end of each outstanding Tranche Period plus all other Aggregate Unpaids (other than Net Investment) owing to such Conduit Investor." 1.25 Section 10.2 of the TAA is amended by adding the following as the last sentence thereof: "Without limiting the generality of the foregoing, it is understood for the avoidance of doubt that an Administrative Agent may condition its consent to any amendment or waiver on its receipt of written confirmation from S&P and Moody's that such amendment or waiver will not result in the reduction or withdrawal of the then current rating of the Commercial Paper issued by its related Conduit Investor." 1.26 Section 10.3 of the TAA is amended to add the following notice addresses for GMFC and BLB, respectively: If to GMFC: Giro Multi-Funding Corporation c/o Global Securitization Services 114 West 47th Street, Suite 1715 New York, NY 10036 Attention: David Taylor Tel: 212/302-5151 Telecopy: 212/302-8767 If to BLB Bayerische Landesbank, New York Branch 560 Lexington Avenue New York, New York 10022 Attention: Lori-Ann Wynter Tel: 212/230-9005 Telecopy: 212/230-9020 1.27 Section 10.9 of the TAA is amended (i) to add the words "or any other proceedings related to an Event of Bankruptcy" at the end of the first sentence thereof and (ii) by adding the following after the first sentence thereof: 5 6 "Notwithstanding any provision contained in this Agreement to the contrary, no Conduit Investor shall, nor shall any Conduit Investor be obligated to, pay any amount pursuant to this Agreement unless (i) the Conduit Investor has received funds which may be used to make such payment in accordance with such Conduit Investor's commercial paper program documents, which funds are not required to repay its Commercial Paper when due; and (ii) after giving effect to such payment, either (x) there is sufficient liquidity available (determined in accordance with such program documents) to pay the Face Amount of all its Commercial Paper, (y) the Conduit Investor is not rendered insolvent or (z) its Commercial Paper has been repaid in full. Any amount which the Conduit Investor does not pay pursuant to the operation of the preceding sentence shall not constitute a claim (as defined in Section 101 of the United States Bankruptcy Code) against or a corporate obligation of the Conduit Investor for any insufficiency. The provisions of this Section shall survive the termination of this Agreement." 1.28 The signature pages to the TAA are hereby amended to delete all dollar amounts set forth therein. 1.29 Schedule I to the TAA is hereby amended and restated in its entirety to read as set forth in New Schedule I attached hereto. 1.30 The New Schedule II attached hereto is hereby added as Schedule II to the TAA. 1.31 Exhibit Q to the TAA is hereby amended to add "Spectra East, Inc., a Delaware corporation" and "Spectra Laboratories, Inc., a Nevada corporation" to the list of Transferring Affiliates set forth therein. SECTION 2. Conditions Precedent. This Amendment shall become effective and be deemed effective as of the date hereof upon the receipt by the Agent of each of the following: (a) counterparts of this Amendment duly executed by the Transferor, the Collection Agent, the Conduit Investors (including GMFC), the Bank Investors, the Administrative Agents (including BLB) and the Agent; (b) a reaffirmation of the Parent Agreement, substantially in the form of Exhibit A attached hereto, duly executed by each of FMC and FMCH; (c) a copy of the resolutions of the Board of Directors of each of the Transferor, the Collection Agent and each member of the Spectra Renal Management Group certified by its Secretary approving the execution, delivery and performance by such Person of this Amendment and the other Transaction Documents to be delivered by such Person hereunder or thereunder; (d) the Certificate of Incorporation of each member of the Spectra Renal Management Group certified by the Secretary of State or other similar official of the such Persons' jurisdiction of incorporation; 6 7 (e) a Good Standing Certificate for the Transferor, the Collection Agent and each member of the Spectra Renal Management Group issued by the Secretary of State or a similar official of such Person's jurisdiction of incorporation; (f) a Certificate of the Secretary of each of the Transferor, the Collection Agent and each member of the Spectra Renal Management Group substantially in the form of Exhibit L to the TAA; (g) for each member of the Spectra Renal Management Group, copies of proper financing statements (Form UCC-1), dated a date reasonably near to the date hereof naming such Person as the debtor in favor of the Agent, for the benefit of the Investors, as the secured party or other similar instruments or documents as may be necessary or in the reasonable opinion of the Agent desirable under the UCC of all appropriate jurisdictions or any comparable law to perfect the Agent's undivided percentage interest in all Receivables and the Related Security and Collections relating thereto; (h) file stamped copies of UCC-3 Termination Statements relating to the financing statements naming Spectra Laboratories, Inc. as debtor and Bank of the West as secured party filed with the Secretary of State of California; (i) an opinion of Douglas G. Kott, Deputy General Counsel for FMCH, NMC and each Transferring Affiliate, acting as counsel to FMC, FMCH, the Transferor, the Collection Agent and the Originating Entities, in form and substance satisfactory to each Administrative Agent; (j) an opinion of Dr. Rainier Runte, acting as counsel to FMC, in form and substance satisfactory to each Administrative Agent; (k) an opinion of Arent Fox Kintner Plotkin & Kahn, PLLC special counsel to FMC, FMCH, the Transferor and the Seller, covering certain bankruptcy and general corporate matters in form and substance satisfactory to each Administrative Agent; (l) an opinion of Nutter, McClennen & Fish, LLP, special Massachusetts counsel to the Transferor and the Originating Entities, in form and substance satisfactory to each Administrative Agent; (m) an executed copy of (i) an amended and restated Fee Letter for the Related Group that includes Enterprise, (ii) an amended and restated Fee Letter for the Related Group that includes WestLB and (iii) a Fee Letter for the Related Group that includes BLB; (n) an Amendment to the Receivables Purchase Agreement, duly executed by each of the Transferor and the Seller, in the form attached hereto as Exhibit B; (o) an Amendment to the Transferring Affiliate Letter, duly executed and delivered by the Seller and each of the Transferring Affiliates, in the form attached hereto as Exhibit C; 7 8 (p) confirmation from each of S&P and Moody's that the execution and delivery of this Amendment and the transactions contemplated hereby will not result in the reduction or withdrawal of the then current rating of the Commercial Paper issued by GMFC or the Related CP Issuer for Compass; and (q) such other documents, instruments, certificates and opinions as the Agent or any Administrative Agent shall reasonably request. SECTION 3. Covenants, Representations and Warranties of the Transferor and the Collection Agent. 3.1 Upon the effectiveness of this Amendment, each of the Transferor and the Collection Agent hereby reaffirms all covenants, representations and warranties made by it in the TAA and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. 3.2 Each of the Transferor and the Collection Agent hereby represents and warrants that (i) this Amendment constitutes the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms and (ii) upon the effectiveness of this Amendment, no Termination Event or Potential Termination Event shall exist under the TAA. SECTION 4. Reference to and Effect on the TAA. 4.1 Upon the effectiveness of this Amendment, each reference in the TAA to "this Agreement," "hereunder," "hereof," "herein," "hereby" or words of like import shall mean and be a reference to the TAA as amended hereby, and each reference to the TAA in any other document, instrument and agreement executed and/or delivered in connection with the TAA shall mean and be a reference to the TAA as amended hereby. 4.2 Except as specifically amended hereby, the TAA and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. 4.3 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any Investor, any Administrative Agent or the Agent under the TAA or any other document, instrument, or agreement executed in connection therewith, nor constitute a waiver of any provision contained therein. SECTION 5. Governing Law. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 6. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 8 9 SECTION 7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 9 10 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. NMC FUNDING CORPORATION, as Transferor By: /s/ James V. Luther ------------------- Name: James V. Luther Title: President NATIONAL MEDICAL CARE, INC., as Collection Agent By: /s/ James V. Luther ------------------- Name: James V. Luther Title: Assistant Treasurer ENTERPRISE FUNDING CORPORATION, as a Conduit Investor By: /s/ Andrew L. Stidd ------------------- Name: Andrew L. Stidd Title: President COMPASS US ACQUISITION, LLC, as a Conduit Investor By: /s/ Juliana C. Johnson ----------------------- Name: Juliana C. Johnson Title: Vice President GIRO MULTI-FUNDING CORPORATION, as a Conduit Investor By: /s/ David O. Taylor ------------------- Name: David O. Taylor Title: Vice President Signature Page to Amendment No. 2 11 BANK OF AMERICA, N.A., as a Bank Investor, as Administrative Agent and as Agent By: /s/ Brian D. Krum ----------------- Name: Brian D. Krum Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH, as a Bank Investor and as Administrative Agent By: /s/ Christian Brune ------------------- Name: Christian Brune Title: Associate Director Securitization By: /s/ Michael Cheng ----------------- Name: Michael Cheng Title: Associate Director Securitization BAYERISCHE LANDESBANK, NEW YORK BRANCH, as a Bank Investor and as Administrative Agent By: /s/ Hereward Drummond --------------------- Name: Hereward Drummond Title: Senior Vice President By: /s/ Alex Kohnert ---------------- Name: Alex Kohnert Title: First Vice President Signature Page to Amendment No. 2 12 LANDESBANK HESSEN-THUERINGEN GIROZENTRALE, as a Bank Investor By: /s/ Schultheis -------------- Name: Schultheis Title: Senior Vice President By: /s/ Scheele ----------- Name: Scheele Title: Vice President Signature Page to Amendment No. 2 13 EXHIBIT A REAFFIRMATION OF PARENT AGREEMENT October 26, 2000 NMC Funding Corporation 95 Hayden Avenue Lexington, Massachusetts 02420-9192 Bank of America, N.A., as Administrative Agent and Agent Bank of America Corporate Center--10th Floor Charlotte, North Carolina 28255 Westdeutsche Landesbank Girozentrale, New York Branch, as Administrative Agent 1211 Avenue of the Americas New York, New York 10036 Bayerische Landesbank, New York Branch, as an Administrative Agent 560 Lexington Avenue New York, New York 10022 Each of the undersigned, FRESENIUS MEDICAL CARE AG and FRESENIUS MEDICAL CARE HOLDINGS, INC. (i) acknowledges, and consents to, the execution of (A) that certain Amendment No. 2 dated as of October 26, 2000 (the "TAA Amendment") to the Amended and Restated Transfer and Administration Agreement, dated as of September 27, 1999, among NMC Funding Corporation, National Medical Care, Inc., the entities parties thereto as "Conduit Investors", the financial institutions parties thereto as "Bank Investors", the financial institutions parties thereto as "Administrative Agents" and Bank of America, N.A., as "Agent" (as amended or otherwise modified from time to time, the "TAA"), (B) that certain Amendment to the Receivables Purchase Agreement (the "RPA Amendment") in the form attached as Exhibit B to the TAA Amendment and (C) that certain Amendment to the Transferring Affiliate Letter (the "Transferring Affiliate Amendment" and, together with the TAA Amendment and the RPA Amendment, the "Amendments") attached as Exhibit C to the TAA Amendment, (ii) reaffirms all of its obligations under that certain Parent Agreement dated as of August 28, 1997 made by the undersigned (as amended or otherwise modified from time to time, the "Parent Agreement") and (iii) acknowledges and agrees that, after giving effect to the Amendments, such Parent Agreement remains in full force and effect and such Parent Agreement is hereby ratified and confirmed. FRESENIUS MEDICAL CARE FRESENIUS MEDICAL CARE AG HOLDINGS, INC. By: __________________ By: _____________________ Name: Name: Title: Title: I1 14 EXHIBIT B FORM OF AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT (Attached) 15 EXHIBIT C FORM OF AMENDMENT TO TRANSFERRING AFFILIATE LETTER (Attached) 16 NEW SCHEDULE I to AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT NOTICE ADDRESSES FOR BANK INVESTORS BANK OF AMERICA, N.A. Bank of America Corporate Center--10th Floor Charlotte, North Carolina 28255 Attention: Michelle M. Heath-- Structured Finance Telephone: (704) 386-7922 Telecopy: (704) 388-9169 WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH 1211 Avenue of the Americas New York, New York 10036 Attention: Michael Fitzgerald Telephone: (212) 597-8356 Telecopy: (212) 852-5971 BAYERISCHE LANDESBANK, NEW YORK BRANCH 560 Lexington Avenue New York, New York 10022 Attention: Lori-Ann Wynter Tel: 212/230-9005 Telecopy: 212/230-9020 LANDESBANK HESSEN - THUERINGEN GIROZENTRALE Neue Mainzer Strasse 52-58 D-60297 Frankfurt am Main Germany Attention: Friedrich Bacmeister Tel: 01149-69-9132-4102 Fax: 01149-69-9132-2999 17 NEW SCHEDULE II to AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT COMMITMENTS OF BANK INVESTORS
Bank Investor Commitment - ------------- ---------- Bank of America, N.A. $200,000,000 Westdeutsche Landesbank Girozentrale, New York Branch $150,000,000 Bayerische Landesbank, New York Branch $100,000,000 Landesbank Hessen - Thueringen Girozentrale $ 50,000,000
EX-10.16 3 b38153fmex10-16.txt EMPLOYMENT AGREEMENT DATED MARCH 15, 2000 1 EXHIBIT 10.16 EMPLOYMENT AGREEMENT THIS AGREEMENT, is made and entered into this 15th day of March, 2000, by and between Fresenius Medical Care North America ("FMC" or the "EMPLOYER"), with principal offices located at 95 Hayden Avenue, Lexington, MA 02420 and Robert "Rice" M. Powell, Jr. ("EMPLOYEE") currently residing at 59 Rocky Brook Road, North Andover, MA 01845. WITNESSETH: WHEREAS, FMC desires to employ EMPLOYEE as President, Marketing, Sales and Services of The Renal Products and Laboratory Services Group, and, WHEREAS, the parties hereto desire to express the terms and conditions of such employment. NOW THEREFORE, it is understood and agreed to between the parties as follows: 1. EMPLOYMENT. FMC hereby employs EMPLOYEE as President, Marketing, Sales and Services of The Renal Products and Laboratory Services Group, and, EMPLOYEE hereby accepts the employment upon the terms and conditions of this Agreement. 2. TERM. The term of this Agreement shall commence as of March 15, 2000 and shall terminate as of March 15, 2002 in accordance with the provisions hereinafter stated. THE INITIAL TERM SHALL BE RENEWED BY A SUCCESSIVE TWO (2) YEAR PERIOD UNLESS EITHER PARTY GIVES WRITTEN NOTICE OF NON-RENEWAL TO THE OTHER PARTY AT LEAST THIRTY (30) DAYS PRIOR TO ANY TERMINATION DATE. THE INITIAL TERM AND ANY SUBSEQUENT RENEWAL PERIODS SHALL BE CALLED THE "EMPLOYMENT TERM."] 3. DUTIES AND RESPONSIBILITIES. EMPLOYEE shall serve full time as President, Marketing, Sales and Services of The Renal Products and Laboratory Services Group and in this position, EMPLOYEE will have full management responsibility for all marketing, sales and services of The Renal Products and Laboratory Services Group. EMPLOYEE shall report directly to the Executive Vice President of The Renal Products and Laboratory Services Group. EMPLOYEE shall to the best of his ability and experience competently, loyally, diligently and conscientiously perform all of the duties and obligations expressly or implicitly required under this Agreement. EMPLOYEE further agrees that, in conducting business in the interest of the EMPLOYER, he will not engage in, knowingly permit others under his control to carry on, or induce others to engage in any practice or commit any acts in violation of any federal or state or local law or ordinance. 4. COMPENSATION AND BENEFITS. a) Base Salary. EMPLOYER shall pay EMPLOYEE for all services rendered a base salary of Two Hundred Fifty Six Thousand, Five Hundred Dollars ($256,500) per year, (the "Base Salary"), payable in accordance with FMC's payroll procedures, subject to customary withholding and employment taxes. At the end of each year of employment hereunder, EMPLOYEE's performance for the prior year shall be reviewed and evaluated. If EMPLOYEE's performance is satisfactory, EMPLOYEE shall receive an increase in his base salary commensurate with level of achievement. b) Incentive Compensation. During EMPLOYEE's employment with FMC, EMPLOYEE shall be entitled to participate in FMC's Management Bonus Plan and any other such incentive compensation plans as are now available or may become available to other similarly positioned senior executives of FMC. EMPLOYEE will be in the senior executive eligibility Level II, wherein the target level bonus is forty percent (40%) and the maximum bonus is eighty percent (80%) of base salary. Funding for the plan is based upon attainment of specific individual and company financial objectives. EMPLOYEE's entitlement to a bonus under the Management Bonus Plan will be governed by terms of that Plan. 2 c) Stock Plan. EMPLOYEE shall be eligible to participate in the current Fresenius Medical Care AG Stock Incentive Plan, and any future stock incentive plan (individually a "Stock Plan" and collectively, the "Stock Plans"), subject to IRS approval of such respective Stock Plans. In addition to the existing options to purchase Fresenius Medical Care AG Preference Shares previously granted to EMPLOYEE (the "Existing Options"), EMPLOYEE shall be eligible to receive additional option grants in amounts as and if approved by the Fresenius Medical Care AG Managing Board. d) Benefit Programs. EMPLOYEE shall continue to be eligible to participate in the group employee benefits programs at the senior executive level as now established or which subsequently become available. e) Life Insurance. EMPLOYEE will be provided with life insurance in accordance with FMC's policy, currently capped at Four Hundred Thousand Dollars ($400,000). EMPLOYEE will be provided with the opportunity to purchase supplemental life insurance of an additional Six Hundred Thousand Dollars ($600,000) beyond the current policy of coverage at his own expense, with proof of good health. f) Automobile. EMPLOYEE will be provided with a company car allowance of Five Hundred Dollars ($500) paid monthly and treated as ordinary income. g) Financial Planning/Tax Preparation. EMPLOYEE will be provided with an allowance of One Thousand Dollars ($1,000) to be paid based upon submitted documentation of expenses incurred as a result of financial planning assistance or income tax preparation. Reimbursement will be treated as ordinary income. h) Expenses. EMPLOYEE will be reimbursed for travel and other expenses related to the performance of his duties under the Agreement and in accordance with the EMPLOYER's policies. i) Vacation/PTO. EMPLOYEE shall be allowed to carry-over up to two hundred (200) hours from year-to-year without losing such time. EMPLOYEE shall also accrue PTO days at the maximum available to senior executives under the Executive Vacation Policy which currently provides for thirty (30) days of PTO per year. 5. TERMINATION OF EMPLOYMENT. EMPLOYEE's employment hereunder may be terminated under the following circumstances: a) Death. EMPLOYEE's employment hereunder shall terminate upon his death. b) Total Disability. The EMPLOYER may terminate EMPLOYEE's employment hereunder upon EMPLOYEE becoming "Totally Disabled." For purposes of this Agreement, EMPLOYEE shall be "Totally Disabled" if EMPLOYEE is physically or mentally incapacitated so as to render EMPLOYEE incapable of performing EMPLOYEE's usual and customary duties under this Agreement. EMPLOYEE's receipt of Social Security disability benefits or disability benefits under a Company-sponsored long-term disability plan shall be deemed conclusive evidence of Total Disability for purpose of this Agreement; provided, however, that in the absence of EMPLOYEE's receipt of such Social Security or long-term disability benefits, the Company's Board of Directors may, in its reasonable discretion (but based upon medical evidence), determine that EMPLOYEE is Totally Disabled. c) Voluntary Termination. EMPLOYER or EMPLOYEE may terminate EMPLOYEE's employment hereunder at any time after providing written notice to the other party. The EMPLOYEE is required to give the EMPLOYER at least thirty (30) days written notice if he wishes to terminate his employment pursuant to this provision. d) Termination by the EMPLOYER for Cause. The EMPLOYER may terminate EMPLOYEE's employment for Cause at any time after providing written notice to EMPLOYEE. For purposes of this Agreement, the term "Cause" shall mean, with respect to the EMPLOYEE, any of the following: (i) commission by EMPLOYEE of a felony or of any criminal act involving moral turpitude which results in an arrest or indictment; (ii) deliberate 2 3 and continual refusal to satisfactorily perform employment duties reasonably requested by the EMPLOYER after 20 days' written notice by certified mail of such failure to perform, specifying that the failure constitutes cause (other than as a result of vacation, sickness, illness or injury); (iii) fraud or embezzlement determined in accordance with the EMPLOYER's normal, internal investigative procedures consistently applied in comparable circumstances to EMPLOYEES; (iv) gross misconduct or gross negligence in connection with the business of the EMPLOYER which has substantial effect on the EMPLOYER; (v) failure to obtain and maintain in good order any licenses required for EMPLOYEE to perform his duties under this Agreement; or (vi) a breach of any of the covenants set forth in Section 7 below. EMPLOYEE will be considered to have been terminated for "Cause" if the EMPLOYER determines that EMPLOYEE engaged in an act constituting "Cause," regardless of whether the individual terminates employment voluntarily or is terminated involuntarily, and regardless of whether the individual's termination initially was considered to have been for "Cause." The determination of "Cause" shall be made by the EMPLOYER in its sole discretion, and shall be final and binding on all parties. e) Termination by EMPLOYEE for Cause. This Agreement may be terminated by EMPLOYEE in the event of a breach by FMC of any of its obligations under this Agreement, provided EMPLOYEE gives FMC written notice specifying the manner in which he believes FMC has breached this Agreement and FMC has thirty (30) days from receipt of such notice to cure such breach, or in the case of other than a non-payment of money breach, if such breach cannot be cured within thirty (30) days, to commence a good faith effort to cure. f) Notice of Termination. Any termination by the EMPLOYER or the EMPLOYEE under this Agreement shall be communicated by notice of termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a notice in writing which shall indicate the specific termination provision in this Agreement relied upon to terminate EMPLOYEE's employment and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of EMPLOYEE's employment under the provision so indicated. 6. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT. a) Under all circumstances, upon termination the EMPLOYEE shall be entitled to receive: (i) Any accrued but unpaid Base Salary for services rendered to the date of termination; and (ii) Any benefits to which EMPLOYEE may be entitled upon termination pursuant to the plans, policies and arrangements referred to in Section 4 hereof shall be determined and paid in accordance with the terms of such plans, policies and arrangements. ** EMPLOYEE shall have three (3) years from any such termination to exercise his Vested Stock Options. Should he fail to exercise these options within this period, they will be forfeited at the end of that period. b) In the event that EMPLOYEE's employment hereunder is voluntarily terminated by the EMPLOYER in accordance with Section 5(c), or in the event that EMPLOYEE's employment hereunder is terminated by the EMPLOYEE in accordance with Section 5(e), the EMPLOYEE shall also be entitled to receive: (iii) A payment equal to twelve (12) months Base Salary, at the rate in effect on the date of termination of employment, such amount to be paid in a lump sum as soon as is practicable thereafter; and (iv) A pro-rated portion of the EMPLOYEE's annual bonus based upon termination of work date. c) Any stock options or other awards will continue to vest in accordance with the terms of the award and the plan pursuant to which it was made. If the terms of any award and governing plan are silent with respect to termination of employment, such award will lapse immediately upon such termination. 7. NON-DISCLOSURE/NON COMPETITION AGREEMENT. EMPLOYEE acknowledges that during the term of employment with EMPLOYER, he will have access to and become acquainted with Confidential Information of 3 4 the EMPLOYER. Confidential Information means all information related to the present or planned business of FMC that has not been released publicly by authorized representatives of FMC, and shall include but not be limited to, trade secrets and know-how, inventions, marketing and sales programs, employee, customer, patient and supplier information, information from patient medical records, financial data, pricing information, regulatory approval and reimbursement strategies, data, operations and clinical manuals. EMPLOYEE agrees not to use or disclose, directly or indirectly, any Confidential Information of FMC at any time and in any manner, except as required in the course of his employment with FMC or with the express written authority of FMC. EMPLOYEE understands that his non-disclosure obligations will continue following his termination of employment. EMPLOYEE agrees that during the term of his employment, and for a period of one (1) year immediately after, he leaves the employment of FMC for any reason or the end of the period during which EMPLOYEE continues to receive salary continuation after leaving the employment of FMC, whichever is greater, EMPLOYEE will not directly or indirectly for his own benefit or the benefit of others: a) render services for a competing organization in connection with competing products as an employee, officer, agent, broker, consultant, partner, stockholder (except that EMPLOYEE may own three percent (3%) or less of the equity securities of any publicly-traded company); b) hire or seek to persuade any employee of FMC to discontinue employment or to become employed in any competing organization or seek to persuade any independent contractor or supplier to discontinue its relationship with FMC; and c) solicit, direct, take away or attempt to take away any business or customers of FMC. Nothing in this Agreement would preclude EMPLOYEE from working for a competitor of FMC's subsequent to termination of EMPLOYEE's employment provided EMPLOYEE will not be engaged, directly or indirectly, in any business in which FMC is actively engaged at the time of EMPLOYEE's termination or in any new business which FMC is in the process of setting up in which EMPLOYEE had direct involvement while employed by FMC. EMPLOYEE also agrees to inform FMC of any such employment with a competitor before beginning such employment. 8. ENFORCEMENT OF COVENANTS. a) Termination of Employment and Forfeiture of Compensation. EMPLOYEE agrees that in the event that the EMPLOYER determines that EMPLOYEE has breached any of the covenants set forth in Section 7 hereof during EMPLOYEE's employment, the EMPLOYER shall have the right to terminate EMPLOYEE's employment for "Cause." For purposes of this Agreement, the term "Cause" shall mean, with respect to the EMPLOYEE, any of the following: (i) commission by EMPLOYEE of a felony or of any criminal act involving moral turpitude which results in an arrest or indictment; (ii) deliberate and continual refusal to satisfactorily perform employment duties reasonably requested by the EMPLOYER after 20 days' written notice by certified mail of such failure to perform, specifying that the failure constitutes cause (other than as a result of vacation, sickness, illness or injury); (iii) fraud or embezzlement determined in accordance with the EMPLOYER's normal, internal investigative procedures consistently applied in comparable circumstances to EMPLOYEES; (iv) gross misconduct or gross negligence in connection with the business of the EMPLOYER which has substantial effect on the EMPLOYER; (v) failure to obtain and maintain in good order any licenses required for EMPLOYEE to perform his duties under this Agreement; or (vi) a breach of any of the covenants set forth in Section 7 above. EMPLOYEE will be considered to have been terminated for "Cause" if the EMPLOYER determines that EMPLOYEE engaged in an act constituting "Cause," regardless of whether the individual terminates employment voluntarily or is terminated involuntarily, and regardless of whether the 4 5 individual's termination initially was considered to have been for "Cause." The determination of "Cause" shall be made by the EMPLOYER in its sole discretion, and shall be final and binding on all parties. In addition, EMPLOYEE agrees that if the EMPLOYER determines that EMPLOYEE has breached any of the covenants set forth in Section 7 at any time, the EMPLOYER shall have the right, notwithstanding anything herein to the contrary, to discontinue any or all amounts otherwise payable to EMPLOYEE hereunder. Such termination of employment or discontinuance of payments shall be in addition to and shall not limit any and all other rights and remedies that the EMPLOYER may have against EMPLOYEE. b) Right to Injunction. EMPLOYEE acknowledges that a breach of the covenants set forth in Section 7 hereof will cause irreparable damage to the EMPLOYER with respect to which the EMPLOYER's remedy at law for damages will be inadequate. Therefore, in the event of breach or anticipatory breach of the covenants set forth in this section by EMPLOYEE, EMPLOYEE and the EMPLOYER agree that the EMPLOYER shall be entitled to the following particular forms of relief, in addition to remedies otherwise available to it at law or equity: (i) injunctions, both preliminary and permanent, enjoining or retraining such breach or anticipatory breach and EMPLOYEE hereby consents to the issuance thereof forthwith and without bond by any court of competent jurisdiction; and (ii) recovery of all reasonable sums expended and costs, including reasonable attorney's fees, incurred by the EMPLOYER to enforce the covenants set forth in this section. c) Separability of Covenants. The covenants contained in Section 7 hereof constitute a series of separate covenants, one for each applicable State in the United States and the District of Columbia, and one for each applicable foreign country. If in any judicial proceeding, a court shall hold that any of the covenants set forth in Section 7 exceed the time, geographic, or occupational limitations permitted by applicable laws, EMPLOYEE and the EMPLOYER agree that such provisions shall and are hereby reformed to the maximum time, geographic, or occupational limitations permitted by such laws. Further, in the event a court shall hold unenforceable any of the separate covenants deemed included herein, then such unenforceable covenant or covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceeding. EMPLOYEE and the EMPLOYER further agree that the covenants in Section 7 shall each be construed as a separate agreement independent of any other provisions of this Agreement, and the existence of any claim or cause of action by Employee against the Company whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants in Section 7. 9. FMC DOCUMENTS AND EQUIPMENT. All documents and equipment relating to the business of FMC, whether prepared by EMPLOYEE or otherwise coming into EMPLOYEE's possession, are the exclusive property of FMC, and must not be removed from the premises of FMC except as required in the course of employment. Any such documents and equipment must be returned to FMC when EMPLOYEE leaves the employment of FMC. 10. WITHHOLDING OF TAXES. The EMPLOYER may withhold from any compensation and benefits payable under this Agreement all applicable federal, state, local, or other taxes. 11. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement shall constitute the entire agreement between the parties and supersedes all existing agreements between them, whether oral or written, with respect to the subject matter hereof. Any waiver, alteration, or modification of any of the provisions of this Agreement, or cancellation or replacement of this Agreement shall be accomplished in writing and signed by the respective parties. 12. NOTICES. Any notice, consent, request or other communication made or given in connection with this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by registered or certified mail, return receipt requested, to those listed below at their following respective addresses or at such other address as each may specify by notice to the others: 5 6 To the Employer: Fresenius Medical Care North America Corporate Headquarters Two Ledgemont Center 95 Hayden Avenue Lexington, MA 02420-9192 Attention: Vice President, Human Resources To Employee: At the address for Employee set forth above 13. GOVERNING LAW. This Agreement shall be construed in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Massachusetts. 14. SEPARABILITY. If any term or provision of this Agreement is declared illegal or unenforceable by any court of competent jurisdiction and cannot be modified to be enforceable, such term or provision shall immediately become null and void, leaving the remainder of this Agreement in full force and effect. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the undersigned duly authorized persons as of the day and year first stated above. NATIONAL MEDICAL, INC. d/b/a FRESENIUS MEDICAL CARE WITNESS NORTH AMERICA, EMPLOYER /s/Brian O'Connell By: /s/Ben J. Lipps 4/20/00 - ------------------ --------------- ------- Ben J. Lipps (DATE) Chief Executive Officer WITNESS ROBERT "RICE" M. POWELL, JR. /s/Guinella Lacoche /s/Robert M. Powell, Jr. 4/3/00 - ------------------- ------------------------- -------- (Employee Signature) (DATE) 6 EX-10.17 4 b38153fmex10-17.txt EMPLOYMENT AGREEMENT DATED JUNE 1, 2000 1 EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS AGREEMENT, is made and entered into this 1st day of June, 2000, by and between Fresenius Medical Care North America ("FMC" or the "EMPLOYER"), with principal offices located at 95 Hayden Avenue, Lexington, MA 02420 and John F. Markus ("EMPLOYEE") currently residing at 228 Ponus Ridge Road, New Canaan, CT 06840. WITNESSETH: WHEREAS, FMC desires to employ EMPLOYEE as Senior Vice President of Corporate Compliance at FMC and its affiliated corporations in North America, and WHEREAS, the parties hereto desire to express the terms and conditions of such employment. NOW THEREFORE, it is understood and agreed to between the parties as follows: 1. EMPLOYMENT. FMC hereby employs EMPLOYEE as Senior Vice President of Corporate Compliance, and EMPLOYEE hereby accepts the employment upon the terms and conditions of this Agreement. 2. TERM. The term of this Agreement shall commence as of June 1, 2000 and shall terminate as of May 31, 2002 in accordance with the provisions hereinafter stated. THE INITIAL TERM SHALL BE RENEWED BY A SUCCESSIVE TWO (2) YEAR PERIOD UNLESS EITHER PARTY GIVES WRITTEN NOTICE OF NON-RENEWAL TO THE OTHER PARTY AT LEAST THIRTY (30) DAYS PRIOR TO ANY TERMINATION DATE. THE INITIAL TERM AND ANY SUBSEQUENT RENEWAL PERIODS SHALL BE CALLED THE "EMPLOYMENT TERM." 3. DUTIES AND RESPONSIBILITIES. EMPLOYEE shall serve full time as FMC's Senior Vice President of Corporate Compliance and will be responsible for promoting company-wide compliance with applicable federal and state laws and regulatory requirements. EMPLOYEE shall report directly to the Chief Executive Officer of FMC. EMPLOYEE shall to the best of his ability and experience competently, loyally, diligently and conscientiously perform all of the duties and obligations expressly or implicitly required under this Agreement. EMPLOYEE further agrees that, in conducting business in the interest of the EMPLOYER, he will not engage in, knowingly permit others under his control to carry on, or induce others to engage in any practice or commit any acts in violation of any federal or state or local law or ordinance. 4. COMPENSATION AND BENEFITS. a) Base Salary. EMPLOYER shall pay EMPLOYEE for all services rendered a base salary of Two Hundred Eighty Five Thousand Dollars ($285,000) per year, (the "Base Salary"), payable in accordance with FMC's payroll procedures, subject to customary withholding and employment taxes. At the end of each year of employment hereunder, EMPLOYEE's performance for the prior year shall be reviewed and evaluated. If EMPLOYEE's performance is satisfactory, EMPLOYEE shall receive an increase in his base salary commensurate with level of achievement. b) Incentive Compensation. During EMPLOYEE's employment with FMC, EMPLOYEE shall be entitled to participate in FMC's Management Bonus Plan and any other such incentive compensation plans as are now available or may become available to other similarly positioned senior executives of FMC. EMPLOYEE will be in the senior executive eligibility Level I, wherein the target level bonus is forty percent (40%) and the maximum bonus is eighty percent (80%) of base salary. Funding for the plan is based upon attainment of specific individual and company financial objectives. EMPLOYEE's entitlement to a bonus under the Management Bonus Plan will be governed by terms of that Plan. For the business year 2000, your targeted Management Bonus is 40 percent or One Hundred Fourteen Thousand Dollars ($114,000). Based on the efforts this year, we will guarantee a minimum payment of fifty percent (50%) of that target or Fifty Seven Thousand Dollars ($57,000) for the calendar year 2000. 2 c) Stock Plan. EMPLOYEE shall be eligible to participate in the current Fresenius Medical Care AG Stock Incentive Plan, and any future stock incentive plan (individually a "Stock Plan" and collectively, the "Stock Plans"), subject to IRS approval of such respective Stock Plans. In addition to the existing options to purchase Fresenius Medical Care AG Preference Shares previously granted to EMPLOYEE (the "Existing Options"), EMPLOYEE shall be eligible to receive additional option grants in amounts as and if approved by the Fresenius Medical Care AG Managing Board. d) Benefit Programs. EMPLOYEE shall continue to be eligible to participate in the group employee benefits programs at the senior executive level as now established or which subsequently become available. e) Life Insurance. EMPLOYEE will be provided with life insurance in accordance with FMC's policy, currently capped at Four Hundred Thousand Dollars ($400,000). EMPLOYEE will be provided with the opportunity to purchase supplemental life insurance of an additional Six Hundred Thousand Dollars ($600,000) beyond the current policy of coverage at his own expense, with proof of good health. f) Automobile. EMPLOYEE will be provided with a company car allowance of Seven Hundred Dollars ($700) paid monthly and treated as ordinary income. g) Financial Planning/Tax Preparation. EMPLOYEE will be provided with an allowance of Two Thousand Dollars ($2,000) to be paid based upon submitted documentation of expenses incurred as a result of financial planning assistance or income tax preparation. Reimbursement will be treated as ordinary income. h) Expenses. EMPLOYEE will be reimbursed for travel and other expenses related to the performance of his duties under the Agreement and in accordance with the EMPLOYER's policies. i) Vacation/PTO. EMPLOYEE shall be allowed to carry-over up to two hundred (200) hours from year-to-year without losing such time. EMPLOYEE shall also accrue PTO days at the maximum available to senior executives under the Executive Vacation Policy which currently provides for thirty (30) days of PTO per year. j) Relocation: All relocation expenses inclusive of temporary living and travel costs will be paid per our relocation policy. 5. TERMINATION OF EMPLOYMENT. EMPLOYEE's employment hereunder may be terminated under the following circumstances: a) Death. EMPLOYEE's employment hereunder shall terminate upon his death. b) Total Disability. The EMPLOYER may terminate EMPLOYEE's employment hereunder upon EMPLOYEE becoming "Totally Disabled." For purposes of this Agreement, EMPLOYEE shall be "Totally Disabled" if EMPLOYEE is physically or mentally incapacitated so as to render EMPLOYEE incapable of performing EMPLOYEE's usual and customary duties under this Agreement. EMPLOYEE's receipt of Social Security disability benefits or disability benefits under a Company-sponsored long-term disability plan shall be deemed conclusive evidence of Total Disability for purpose of this Agreement; provided, however, that in the absence of EMPLOYEE's receipt of such Social Security or long-term disability benefits, the Company's Board of Directors may, in its reasonable discretion (but based upon medical evidence), determine that EMPLOYEE is Totally Disabled. c) Voluntary Termination. EMPLOYER or EMPLOYEE may terminate EMPLOYEE's employment hereunder at any time after providing written notice to the other party. The EMPLOYEE is required to give the EMPLOYER at least thirty (30) days written notice if he wishes to terminate his employment pursuant to this provision. 2 3 d) Termination by the EMPLOYER for Cause. The EMPLOYER may terminate EMPLOYEE's employment for Cause at any time after providing written notice to EMPLOYEE. For purposes of this Agreement, the term "Cause" shall mean, with respect to the EMPLOYEE, any of the following: (i) commission by EMPLOYEE of a felony or of any criminal act involving moral turpitude; (ii) deliberate and continual refusal to satisfactorily perform employment duties reasonably requested by the EMPLOYER after 20 days' written notice by certified mail of such failure to perform, specifying that the failure constitutes cause (other than as a result of vacation, sickness, illness or injury); (iii) fraud or embezzlement determined in accordance with the EMPLOYER's normal, internal investigative procedures consistently applied in comparable circumstances to EMPLOYEES; (iv) gross misconduct or gross negligence in connection with the business of the EMPLOYER which has substantial effect on the EMPLOYER; (v) failure to obtain and maintain in good order any licenses required for EMPLOYEE to perform his duties under this Agreement; or (vi) a breach of any of the covenants set forth in Section 7 below. EMPLOYEE will be considered to have been terminated for "Cause" if the EMPLOYER determines that EMPLOYEE engaged in an act constituting "Cause," regardless of whether the individual terminates employment voluntarily or is terminated involuntarily, and regardless of whether the individual's termination initially was considered to have been for "Cause." e) Termination by EMPLOYEE for Cause. This Agreement may be terminated by EMPLOYEE in the event of a breach by FMC of any of its obligations under this Agreement, provided EMPLOYEE gives FMC written notice specifying the manner in which he believes FMC has breached this Agreement and FMC has thirty (30) days from receipt of such notice to cure such breach, or in the case of other than a non-payment of money breach, if such breach cannot be cured within thirty (30) days, to commence a good faith effort to cure. Additionally, this Agreement may be terminated by Employee, if there is a reduction in Employee's responsibilities or FMC experiences a change in control defined as any of the following: i) the transfer (whether by sale, dividend, exchange, lease, merger, consolidation or otherwise) of greater that fifty percent (50%) of the voting power of FMC; ii) the transfer (whether by sale, dividend, exchange, lease, merger, consolidation or otherwise) of all or substantially all the assets or stock of FMC; or iii) any other action which results in persons other than the current majority shareholders of FMC, having the voting power to direct the management of FMC or if FMC relocates its corporate headquarters more than fifty (50) miles from its present location in Lexington, Massachusetts. f) Notice of Termination. Any termination by the EMPLOYER or the EMPLOYEE under this Agreement shall be communicated by notice of termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a notice in writing which shall indicate the specific termination provision in this Agreement relied upon to terminate EMPLOYEE's employment and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of EMPLOYEE's employment under the provision so indicated. 6. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT. a) Under all circumstances, upon termination the EMPLOYEE shall be entitled to receive: (i) Any accrued but unpaid Base Salary for services rendered to the date of termination; and (ii) Any benefits to which EMPLOYEE may be entitled upon termination pursuant to the plans, policies and arrangements referred to in Section 4 hereof shall be determined and paid in accordance with the terms of such plans, policies and arrangements. b) In the event that EMPLOYEE's employment hereunder is voluntarily terminated by the EMPLOYER in accordance with Section 5(c), or in the event that EMPLOYEE's employment hereunder is terminated by the EMPLOYEE in accordance with Section 5(e), the EMPLOYEE shall also be entitled to receive: 3 4 (i) The balance of the salary payments equivalent to the number of months remaining in the term of the Employment Agreement or twelve (12) months, whichever is longer, at the rate in effect on the date of termination of employment, such amount to be paid in a lump sum as soon as is practicable thereafter; and (ii) A pro-rated portion of the EMPLOYEE's annual bonus based upon termination of work date. c) Any stock options or other awards will continue to vest in accordance with the terms of the award and the plan pursuant to which it was made. EMPLOYEE shall have three (3) years from any such termination to exercise his Vested Stock Options. Should he fail to exercise these options within this period, they will be forfeited at the end of that period. d) In the event the contract expires without renewal, employee shall receive a one (1) year consulting contract with then salary and benefits. 7. NON-DISCLOSURE/NON COMPETITION AGREEMENT. EMPLOYEE acknowledges that during the term of employment with EMPLOYER, he will have access to and become acquainted with Confidential Information of the EMPLOYER. Confidential Information means all information related to the present or planned business of FMC that has not been released publicly by authorized representatives of FMC, and shall include but not be limited to, trade secrets and know-how, inventions, marketing and sales programs, employee, customer, patient and supplier information, information from patient medical records, financial data, pricing information, regulatory approval and reimbursement strategies, data, operations and clinical manuals. EMPLOYEE agrees not to use or disclose, directly or indirectly, any Confidential Information of FMC at any time and in any manner, except as required in the course of his employment with FMC or with the express written authority of FMC. EMPLOYEE understands that his non-disclosure obligations will continue following his termination of employment. EMPLOYEE agrees that during the term of his employment, and for a period of one (1) year immediately after, he leaves the employment of FMC for any reason or the end of the period during which EMPLOYEE continues to receive salary continuation after leaving the employment of FMC, whichever is greater, EMPLOYEE will not directly or indirectly for his own benefit or the benefit of others: a) render services for a competing organization in connection with competing products as an employee, officer, agent, broker, consultant, partner, stockholder (except that EMPLOYEE may own three percent (3%) or less of the equity securities of any publicly-traded company); b) hire or seek to persuade any employee of FMC to discontinue employment or to become employed in any competing organization or seek to persuade any independent contractor or supplier to discontinue its relationship with FMC; and c) solicit, direct, take away or attempt to take away any business or customers of FMC. Nothing in this Agreement would preclude EMPLOYEE from working for a competitor of FMC's subsequent to termination of EMPLOYEE's employment provided EMPLOYEE will not be engaged, directly or indirectly, in any business in which FMC is actively engaged at the time of EMPLOYEE's termination or in any new business which FMC is in the process of setting up in which EMPLOYEE had direct involvement while employed by FMC. EMPLOYEE also agrees to inform FMC of any such employment with a competitor before beginning such employment. 4 5 8. ENFORCEMENT OF COVENANTS. a) Termination of Employment and Forfeiture of Compensation. EMPLOYEE agrees that in the event that the EMPLOYER determines that EMPLOYEE has breached any of the covenants set forth in Section 7 hereof during EMPLOYEE's employment, the EMPLOYER shall have the right to terminate EMPLOYEE's employment for "Cause." In addition, EMPLOYEE agrees that if the EMPLOYER determines that EMPLOYEE has breached any of the covenants set forth in Section 7 at any time, the EMPLOYER shall have the right, notwithstanding anything herein to the contrary, to discontinue any or all amounts otherwise payable to EMPLOYEE hereunder. Such termination of employment or discontinuance of payments shall be in addition to and shall not limit any and all other rights and remedies that the EMPLOYER may have against EMPLOYEE. b) Right to Injunction. EMPLOYEE acknowledges that a breach of the covenants set forth in Section 7 hereof will cause irreparable damage to the EMPLOYER with respect to which the EMPLOYER's remedy at law for damages will be inadequate. Therefore, in the event of breach or anticipatory breach of the covenants set forth in this section by EMPLOYEE, EMPLOYEE and the EMPLOYER agree that the EMPLOYER shall be entitled to the following particular forms of relief, in addition to remedies otherwise available to it at law or equity: (i) injunctions, both preliminary and permanent, enjoining or retraining such breach or anticipatory breach and EMPLOYEE hereby consents to the issuance thereof forthwith and without bond by any court of competent jurisdiction; and (ii) recovery of all reasonable sums expended and costs, including reasonable attorney's fees, incurred by the EMPLOYER to enforce the covenants set forth in this section. c) Separability of Covenants. The covenants contained in Section 7 hereof constitute a series of separate covenants, one for each applicable State in the United States and the District of Columbia, and one for each applicable foreign country. If in any judicial proceeding, a court shall hold that any of the covenants set forth in Section 7 exceed the time, geographic, or occupational limitations permitted by applicable laws, EMPLOYEE and the EMPLOYER agree that such provisions shall and are hereby reformed to the maximum time, geographic, or occupational limitations permitted by such laws. Further, in the event a court shall hold unenforceable any of the separate covenants deemed included herein, then such unenforceable covenant or covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceeding. EMPLOYEE and the EMPLOYER further agree that the covenants in Section 7 shall each be construed as a separate agreement independent of any other provisions of this Agreement, and the existence of any claim or cause of action by Employee against the Company whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants in Section 7. 9. FMC DOCUMENTS AND EQUIPMENT. All documents and equipment relating to the business of FMC, whether prepared by EMPLOYEE or otherwise coming into EMPLOYEE's possession, are the exclusive property of FMC, and must not be removed from the premises of FMC except in the course of employment. Any such documents and equipment must be returned to FMC when EMPLOYEE leaves the employment of FMC. 10. WITHHOLDING OF TAXES. The EMPLOYER may withhold from any compensation and benefits payable under this Agreement all applicable federal, state, local, or other taxes. 11. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement shall constitute the entire agreement between the parties and supersedes all existing agreements between them, whether oral or written, with respect to the subject matter hereof except for stock option awards. Any waiver, alteration, or modification of any of the provisions of this Agreement, or cancellation or replacement of this Agreement shall be accomplished in writing and signed by the respective parties. 5 6 a) OIG Retention Payments. This Agreement includes the compensation payments outlined in the November 22, 1999 Special OIG Retention plan correspondence. 12. NOTICES. Any notice, consent, request or other communication made or given in connection with this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by registered or certified mail, return receipt requested, to those listed below at their following respective addresses or at such other address as each may specify by notice to the others: To the Employer: Fresenius Medical Care North America Corporate Headquarters Two Ledgemont Center 95 Hayden Avenue Lexington, MA 02420-9192 Attention: Vice President, Human Resources To Employee: 228 Ponus Ridge Road New Canaan, CT 06840 13. GOVERNING LAW. This Agreement shall be construed in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Massachusetts. 14. SEPARABILITY. If any term or provision of this Agreement is declared illegal or unenforceable by any court of competent jurisdiction and cannot be modified to be enforceable, such term or provision shall immediately become null and void, leaving the remainder of this Agreement in full force and effect. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the undersigned duly authorized persons as of the day and year first stated above. NATIONAL MEDICAL, INC. d/b/a FRESENIUS MEDICAL CARE NORTH AMERICA, WITNESS EMPLOYER /s/Lorraine Gettings By: /s/Ben J. Lipps 6/8/00 - -------------------- --------------- ------ Ben J. Lipps (DATE) Chief Executive Officer WITNESS JOHN F. MARKUS /s/Brian O'Connell /s/John F. Markus 6/8/00 - ------------------ ------------------ ------- (Employee Signature) (DATE) 6 EX-10.18 5 b38153fmex10-18.txt EMPLOYMENT AGREEMENT DATED JANUARY 1, 2001 1 EXHIBIT 10.18 EMPLOYMENT AGREEMENT THIS AGREEMENT, is made and entered into this 1st day of January, 2001, by and between Fresenius Medical Care North America ("FMC" or the "EMPLOYER"), with principal offices located at 95 Hayden Avenue, Lexington, MA 02420 and E. Craig Dawson ("EMPLOYEE") currently residing at 45 Anselm Way, Sudbury, MA 01776. WITNESSETH: WHEREAS, FMC desires to employ EMPLOYEE as Senior Vice President, Fresenius Medical Care NA and President, Spectra Renal Management, and, WHEREAS, the parties hereto desire to express the terms and conditions of such employment. NOW THEREFORE, it is understood and agreed to between the parties as follows: 1. EMPLOYMENT. FMC hereby employs EMPLOYEE as Senior Vice President of Fresenius Medical Care NA and President, Spectra Renal Management, and EMPLOYEE hereby accepts the employment upon the terms and conditions of this Agreement. 2. TERM. The term of this Agreement shall commence as of January 15, 2001 and shall terminate as of January 1, 2003 in accordance with the provisions hereinafter stated. THE INITIAL TERM SHALL BE RENEWED BY A SUCCESSIVE TWO (2) YEAR PERIOD UNLESS EITHER PARTY GIVES WRITTEN NOTICE OF NON-RENEWAL TO THE OTHER PARTY AT LEAST THIRTY (30) DAYS PRIOR TO ANY TERMINATION DATE. THE INITIAL TERM AND ANY SUBSEQUENT RENEWAL PERIODS SHALL BE CALLED THE "EMPLOYMENT TERM." 3. DUTIES AND RESPONSIBILITIES. EMPLOYEE shall serve full time as Senior Vice President of Fresenius Medical Care NA and President of Spectra Renal Management and in this position, EMPLOYEE will have full p & l and management responsibilities for Spectra Renal Management and the FMCNA Information Services Group. EMPLOYEE shall report directly to the President and Chief Executive Officer of FMCNA. EMPLOYEE shall to the best of his ability and experience competently, loyally, diligently and conscientiously perform all of the duties and obligations expressly or implicitly required under this Agreement. EMPLOYEE further agrees that, in conducting business in the interest of the EMPLOYER, he will not engage in, knowingly permit others under his control to carry on, or induce others to engage in any practice or commit any acts in violation of any federal or state or local law or ordinance. 4. COMPENSATION AND BENEFITS. a) Base Salary. EMPLOYER shall pay EMPLOYEE for all services rendered a base salary of Two Hundred Sixty Thousand Dollars ($260,000) per year, (the "Base Salary"), payable in accordance with FMC's payroll procedures, subject to customary withholding and employment taxes. At the end of each year of employment hereunder, EMPLOYEE's performance for the prior year shall be reviewed and evaluated. If EMPLOYEE's performance is satisfactory, EMPLOYEE shall receive an increase in his base salary commensurate with level of achievement. b) Incentive Compensation. During EMPLOYEE's employment with FMC, EMPLOYEE shall be entitled to participate in FMC's Management Bonus Plan and any other such incentive compensation plans as are now available or may become available to other similarly positioned senior executives of FMC. EMPLOYEE will be in the senior executive eligibility Level II, wherein the target level bonus is forty percent (40%) and the maximum bonus is eighty percent (80%) of base salary. Funding for the plan is based upon attainment of specific individual and company financial objectives. EMPLOYEE's entitlement to a bonus under the Management Bonus Plan will be governed by terms of that Plan. 2 c) Stock Plan. EMPLOYEE shall be eligible to participate in the current Fresenius Medical Care AG Stock Incentive Plan, and any future stock incentive plan (individually a "Stock Plan" and collectively, the "Stock Plans"), subject to IRS approval of such respective Stock Plans. In addition to the existing options to purchase Fresenius Medical Care AG Preference Shares previously granted to EMPLOYEE (the "Existing Options"), EMPLOYEE shall be eligible to receive additional option grants in amounts as and if approved by the Fresenius Medical Care AG Managing Board. d) Benefit Programs. EMPLOYEE shall continue to be eligible to participate in the group employee benefits programs at the senior executive level as now established or which subsequently become available. e) Life Insurance. EMPLOYEE will be provided with life insurance in accordance with FMC's policy, currently capped at Four Hundred Thousand Dollars ($400,000). EMPLOYEE will be provided with the opportunity to purchase supplemental life insurance of an additional Six Hundred Thousand Dollars ($600,000) beyond the current policy of coverage at his own expense, with proof of good health. f) Automobile. EMPLOYEE will be provided with a company car allowance of Five Hundred Dollars ($500) paid monthly and treated as ordinary income. g) Financial Planning/Tax Preparation. EMPLOYEE will be provided with an allowance of One Thousand Dollars ($1,000) to be paid based upon submitted documentation of expenses incurred as a result of financial planning assistance or income tax preparation. Reimbursement will be treated as ordinary income. h) Expenses. EMPLOYEE will be reimbursed for travel and other expenses related to the performance of his duties under the Agreement and in accordance with the EMPLOYER's policies. i) Vacation/PTO. EMPLOYEE shall be allowed to carry-over up to two hundred (200) hours from year-to-year without losing such time. EMPLOYEE shall also accrue PTO days at the maximum available to senior executives under the Executive Vacation Policy which currently provides for thirty (30) days of PTO per year. 5. TERMINATION OF EMPLOYMENT. EMPLOYEE's employment hereunder may be terminated under the following circumstances: a) Death. EMPLOYEE's employment hereunder shall terminate upon his death. b) Total Disability. The EMPLOYER may terminate EMPLOYEE's employment hereunder upon EMPLOYEE becoming "Totally Disabled." For purposes of this Agreement, EMPLOYEE shall be "Totally Disabled" if EMPLOYEE is physically or mentally incapacitated so as to render EMPLOYEE incapable of performing EMPLOYEE's usual and customary duties under this Agreement. EMPLOYEE's receipt of Social Security disability benefits or disability benefits under a Company-sponsored long-term disability plan shall be deemed conclusive evidence of Total Disability for purpose of this Agreement; provided, however, that in the absence of EMPLOYEE's receipt of such Social Security or long-term disability benefits, the Company's Board of Directors may, in its reasonable discretion (but based upon medical evidence), determine that EMPLOYEE is Totally Disabled. c) Voluntary Termination. EMPLOYER or EMPLOYEE may terminate EMPLOYEE's employment hereunder at any time after providing written notice to the other party. The EMPLOYEE is required to give the EMPLOYER at least thirty (30) days written notice if he wishes to terminate his employment pursuant to this provision. EMPLOYEE is employed as a Senior Vice President of FMCNA with the P&L responsibility of Spectra Renal Management and the Information Services Group. Any reduction in this level of management responsibility or reduction of base salary can be determined by the EMPLOYEE to be a breach of this contract, and at his option, be terminated. If the EMPLOYEE elects to terminate this contract, the company would compensate the EMPLOYEE under Section 6. 2 3 d) Termination by the EMPLOYER for Cause. The EMPLOYER may terminate EMPLOYEE's employment for Cause at any time after providing written notice to EMPLOYEE. For purposes of this Agreement, the term "Cause" shall mean, with respect to the EMPLOYEE, any of the following: (i) commission by EMPLOYEE of a felony or of any criminal act involving moral turpitude which results in an arrest or indictment; (ii) deliberate and continual refusal to satisfactorily perform employment duties reasonably requested by the EMPLOYER after 20 days' written notice by certified mail of such failure to perform, specifying that the failure constitutes cause (other than as a result of vacation, sickness, illness or injury); (iii) fraud or embezzlement determined in accordance with the EMPLOYER's normal, internal investigative procedures consistently applied in comparable circumstances to EMPLOYEES; (iv) gross misconduct or gross negligence in connection with the business of the EMPLOYER which has substantial effect on the EMPLOYER; (v) failure to obtain and maintain in good order any licenses required for EMPLOYEE to perform his duties under this Agreement; or (vi) a breach of any of the covenants set forth in Section 7 below. EMPLOYEE will be considered to have been terminated for "Cause" if the EMPLOYER determines that EMPLOYEE engaged in an act constituting "Cause," regardless of whether the individual terminates employment voluntarily or is terminated involuntarily, and regardless of whether the individual's termination initially was considered to have been for "Cause." The determination of "Cause" shall be made by the EMPLOYER in its sole discretion, and shall be final and binding on all parties. e) Termination by EMPLOYEE for Cause. This Agreement may be terminated by EMPLOYEE in the event of a breach by FMC of any of its obligations under this Agreement, provided EMPLOYEE gives FMC written notice specifying the manner in which he believes FMC has breached this Agreement and FMC has thirty (30) days from receipt of such notice to cure such breach, or in the case of other than a non-payment of money breach, if such breach cannot be cured within thirty (30) days, to commence a good faith effort to cure. f) Notice of Termination. Any termination by the EMPLOYER or the EMPLOYEE under this Agreement shall be communicated by notice of termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a notice in writing which shall indicate the specific termination provision in this Agreement relied upon to terminate EMPLOYEE's employment and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of EMPLOYEE's employment under the provision so indicated. 6. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT. a) Under all circumstances, upon termination the EMPLOYEE shall be entitled to receive: (i) Any accrued but unpaid Base Salary for services rendered to the date of termination; and (ii) Any benefits to which EMPLOYEE may be entitled upon termination pursuant to the plans, policies and arrangements referred to in Section 4 hereof shall be determined and paid in accordance with the terms of such plans, policies and arrangements. ** EMPLOYEE shall have three (3) years from any such termination to exercise his Vested Stock Options. Should he fail to exercise these options within this period, they will be forfeited at the end of that period. b) In the event that EMPLOYEE's employment hereunder is voluntarily terminated by the EMPLOYER in accordance with Section 5(c), or in the event that EMPLOYEE's employment hereunder is terminated by the EMPLOYEE in accordance with Section 5(e), the EMPLOYEE shall also be entitled to receive: (i) A payment equal to twenty-four (24) months Base Salary, at the rate in effect on the date of termination of employment, such amount to be paid in a lump sum as soon as is practicable thereafter; and (ii) A pro-rated portion of the EMPLOYEE's annual bonus based upon termination of work date. 3 4 c) Any stock options or other awards will continue to vest in accordance with the terms of the award and the plan pursuant to which it was made. If the terms of any award and governing plan are silent with respect to termination of employment, such award will lapse immediately upon such termination. 7. NON-DISCLOSURE/NON COMPETITION AGREEMENT. EMPLOYEE acknowledges that during the term of employment with EMPLOYER, he will have access to and become acquainted with Confidential Information of the EMPLOYER. Confidential Information means all information related to the present or planned business of FMC that has not been released publicly by authorized representatives of FMC, and shall include but not be limited to, trade secrets and know-how, inventions, marketing and sales programs, employee, customer, patient and supplier information, information from patient medical records, financial data, pricing information, regulatory approval and reimbursement strategies, data, operations and clinical manuals. EMPLOYEE agrees not to use or disclose, directly or indirectly, any Confidential Information of FMC at any time and in any manner, except as required in the course of his employment with FMC or with the express written authority of FMC. EMPLOYEE understands that his non-disclosure obligations will continue following his termination of employment. EMPLOYEE agrees that during the term of his employment, and for a period of one (1) year immediately after, he leaves the employment of FMC for any reason or the end of the period during which EMPLOYEE continues to receive salary continuation after leaving the employment of FMC, whichever is greater, EMPLOYEE will not directly or indirectly for his own benefit or the benefit of others: a) render services for a competing organization in connection with competing products as an employee, officer, agent, broker, consultant, partner, stockholder (except that EMPLOYEE may own three percent (3%) or less of the equity securities of any publicly-traded company); b) hire or seek to persuade any employee of FMC to discontinue employment or to become employed in any competing organization or seek to persuade any independent contractor or supplier to discontinue its relationship with FMC; and c) solicit, direct, take away or attempt to take away any business or customers of FMC. Nothing in this Agreement would preclude EMPLOYEE from working for a competitor of FMC's subsequent to termination of EMPLOYEE's employment provided EMPLOYEE will not be engaged, directly or indirectly, in any business in which FMC is actively engaged at the time of EMPLOYEE's termination or in any new business which FMC is in the process of setting up in which EMPLOYEE had direct involvement while employed by FMC. EMPLOYEE also agrees to inform FMC of any such employment with a competitor before beginning such employment. 8. ENFORCEMENT OF COVENANTS. a) Termination of Employment and Forfeiture of Compensation. EMPLOYEE agrees that in the event that the EMPLOYER determines that EMPLOYEE has breached any of the covenants set forth in Section 7 hereof during EMPLOYEE's employment, the EMPLOYER shall have the right to terminate EMPLOYEE's employment for "Cause." For purposes of this Agreement, the term "Cause" shall mean, with respect to the EMPLOYEE, any of the following: (i) commission by EMPLOYEE of a felony or of any criminal act involving moral turpitude which results in an arrest or indictment; (ii) deliberate and continual refusal to satisfactorily perform employment duties reasonably requested by the EMPLOYER after 20 days' written notice by certified mail of such failure to perform, specifying that the failure constitutes cause (other than as a result of vacation, sickness, illness or injury); (iii) fraud or embezzlement determined in accordance with the EMPLOYER's normal, internal investigative procedures consistently applied in comparable circumstances to EMPLOYEES; (iv) gross misconduct or gross negligence in connection with the business of the EMPLOYER 4 5 which has substantial effect on the EMPLOYER; (v) failure to obtain and maintain in good order any licenses required for EMPLOYEE to perform his duties under this Agreement; or (vi) a breach of any of the covenants set forth in Section 7 above. EMPLOYEE will be considered to have been terminated for "Cause" if the EMPLOYER determines that EMPLOYEE engaged in an act constituting "Cause," regardless of whether the individual terminates employment voluntarily or is terminated involuntarily, and regardless of whether the individual's termination initially was considered to have been for "Cause." The determination of "Cause" shall be made by the EMPLOYER in its sole discretion, and shall be final and binding on all parties. In addition, EMPLOYEE agrees that if the EMPLOYER determines that EMPLOYEE has breached any of the covenants set forth in Section 7 at any time, the EMPLOYER shall have the right, notwithstanding anything herein to the contrary, to discontinue any or all amounts otherwise payable to EMPLOYEE hereunder. Such termination of employment or discontinuance of payments shall be in addition to and shall not limit any and all other rights and remedies that the EMPLOYER may have against EMPLOYEE. b) Right to Injunction. EMPLOYEE acknowledges that a breach of the covenants set forth in Section 7 hereof will cause irreparable damage to the EMPLOYER with respect to which the EMPLOYER's remedy at law for damages will be inadequate. Therefore, in the event of breach or anticipatory breach of the covenants set forth in this section by EMPLOYEE, EMPLOYEE and the EMPLOYER agree that the EMPLOYER shall be entitled to the following particular forms of relief, in addition to remedies otherwise available to it at law or equity: (i) injunctions, both preliminary and permanent, enjoining or retraining such breach or anticipatory breach and EMPLOYEE hereby consents to the issuance thereof forthwith and without bond by any court of competent jurisdiction; and (ii) recovery of all reasonable sums expended and costs, including reasonable attorney's fees, incurred by the EMPLOYER to enforce the covenants set forth in this section. c) Separability of Covenants. The covenants contained in Section 7 hereof constitute a series of separate covenants, one for each applicable State in the United States and the District of Columbia, and one for each applicable foreign country. If in any judicial proceeding, a court shall hold that any of the covenants set forth in Section 7 exceed the time, geographic, or occupational limitations permitted by applicable laws, EMPLOYEE and the EMPLOYER agree that such provisions shall and are hereby reformed to the maximum time, geographic, or occupational limitations permitted by such laws. Further, in the event a court shall hold unenforceable any of the separate covenants deemed included herein, then such unenforceable covenant or covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceeding. EMPLOYEE and the EMPLOYER further agree that the covenants in Section 7 shall each be construed as a separate agreement independent of any other provisions of this Agreement, and the existence of any claim or cause of action by Employee against the Company whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants in Section 7. 9. FMC DOCUMENTS AND EQUIPMENT. All documents and equipment relating to the business of FMC, whether prepared by EMPLOYEE or otherwise coming into EMPLOYEE's possession, are the exclusive property of FMC, and must not be removed from the premises of FMC except as required in the course of employment. Any such documents and equipment must be returned to FMC when EMPLOYEE leaves the employment of FMC. 10. WITHHOLDING OF TAXES. The EMPLOYER may withhold from any compensation and benefits payable under this Agreement all applicable federal, state, local, or other taxes. 11. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement shall constitute the entire agreement between the parties and supersedes all existing agreements between them, whether oral or written, with respect to the subject matter hereof. Any waiver, alteration, or modification of any of the provisions of this Agreement, or cancellation or replacement of this Agreement shall be accomplished in writing and signed by the respective parties. 5 6 12. NOTICES. Any notice, consent, request or other communication made or given in connection with this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by registered or certified mail, return receipt requested, to those listed below at their following respective addresses or at such other address as each may specify by notice to the others: To the Employer: Fresenius Medical Care North America Corporate Headquarters Two Ledgemont Center 95 Hayden Avenue Lexington, MA 02420-9192 Attention: Vice President, Human Resources To Employee: At the address for Employee set forth above 13. GOVERNING LAW. This Agreement shall be construed in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Massachusetts. 14. SEPARABILITY. If any term or provision of this Agreement is declared illegal or unenforceable by any court of competent jurisdiction and cannot be modified to be enforceable, such term or provision shall immediately become null and void, leaving the remainder of this Agreement in full force and effect. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the undersigned duly authorized persons as of the day and year first stated above. NATIONAL MEDICAL, INC. d/b/a FRESENIUS MEDICAL CARE NORTH AMERICA WITNESS EMPLOYER /s/Brian O'Connell By: /s/Ben J. Lipps 4/20/00 - ------------------ --------------- ------- Ben J. Lipps (DATE) Chief Executive Officer WITNESS E. CRAIG DAWSON /s/Lorraine Gettings /s/E.Craig Dawson 4/1/00 - -------------------- ----------------- ------ (Employee Signature) (DATE) 6 EX-11 6 b38153fmex11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION (DOLLARS AND SHARES IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 ------ ------ ------ The weighted average number of shares of Common Stock were as follows ......... 90,000 90,000 90,000 ====== ====== ======
Income (loss) used in the computation of earnings per share were as follows:
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------------- CONTINUED OPERATIONS 2000 1999 1998 -------- --------- -------- Net Income/(Loss) ........................................ $105,250 $(327,027) $51,837 Dividends paid on preferred stocks ....................... (520) (520) (520) -------- --------- ------- Income/loss used in per share computation of earnings .... $104,730 $(327,547) $51,317 ======== ========= ======= Basic and fully dilutive earnings (loss) per share ....... $ 1.16 $ (3.64) $ 0.57 ======== ========= =======
TWELVE MONTHS ENDED DECEMBER 31, DISCONTINUED OPERATIONS ------------------------------------------------ 2000 1999 1998 -------- --------- ----------- Net Loss ................................................. $ -- $ -- $(105,897) Dividends paid on preferred stocks ....................... -- -- -- ------ ------ --------- Income/loss used in per share computation of earnings .... $ -- $ -- $(105,897) ====== ====== ========= Basic and fully dilutive earnings (loss) per share ....... $ -- $ -- $ (1.18) ====== ====== =========
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------------- CUMULATIVE EFFECT OF ACCOUNTING CHANGE 2000 1999 1998 -------- ------ ------- Cumulative effect of accounting change ................... $ -- $ -- $(4,890) Dividends paid on preferred stocks ....................... -- -- -- ------ ------ ------- Loss used in per share computation of earnings ........... $ -- $ -- $(4,890) ====== ====== ======= Basic and fully dilutive earnings (loss) per share ....... $ -- $ -- $ (0.05) ====== ====== =======
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------------- CONSOLIDATED 2000 1999 1998 -------- --------- -------- Net Income/(Loss) ........................................ $105,250 $(327,027) $(58,950) Dividends paid on preferred stocks ....................... (520) (520) (520) -------- --------- -------- Income (loss) used in per share computation of earnings .. $104,730 $(327,547) $(59,470) ======== ========= ======== Basic and fully dilutive earnings (loss) per share ....... $ 1.16 $ (3.64) $ (0.66) ======== ========= ========
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