-----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, UK+O7Mz69Gvc23bP9ITv5oUo4YZvv6GIMIc13oaiNJc1fw8kYUwb9aXQie8ZLjUk +t/rUpoMa6S7PiYDDt8Yzg== 0000950135-02-002715.txt : 20020515 0000950135-02-002715.hdr.sgml : 20020515 20020515135925 ACCESSION NUMBER: 0000950135-02-002715 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03720 FILM NUMBER: 02650599 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: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /NY/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FRESENIUS NATIONAL MEDICAL CARE HOLDINGS INC DATE OF NAME CHANGE: 19961015 10-Q 1 b43057fme10-q.txt FRESENIUS MEDICAL CARE HOLDINGS INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________________TO__________________ COMMISSION FILE NUMBER: 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-3461988 -------- ---------- (State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.) 95 HAYDEN AVENUE, LEXINGTON, MA 02420 ----------------------------- ----- (Address of Principal Executive Office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 781-402-9000 ---------------------------------------------------------------- - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicated by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 1 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of the date hereof, 90,000,000 shares of common stock, par value $1.00 per share, are outstanding, all of which are held by Fresenius Medical Care AG. 2 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES TABLE OF CONTENTS PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PAGE Unaudited Consolidated Statements of Earnings ............... 4 Unaudited Consolidated Statements of Comprehensive Income.... 5 Unaudited Consolidated Balance Sheets....................... 6 Unaudited Consolidated Statements of Cash Flows............. 7 Notes to Unaudited Consolidated Financial Statements......... 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 20 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................... 24 PART II: OTHER INFORMATION ITEM 1: Legal Proceedings........................................... 25 ITEM 6: Exhibits and Reports on Form 8-K............................ 28 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ----------------------------------- 2002 2001 ------------- ------------- NET REVENUES Health care services............................ $ 784,022 $ 754,199 Medical supplies................................ 109,882 114,077 ------------- -------------- 893,904 868,276 ------------- -------------- EXPENSES Cost of health care services.................... 563,655 518,284 Cost of medical supplies........................ 73,123 83,982 General and administrative expenses............. 76,171 86,525 Provision for doubtful accounts................. 21,340 18,273 Depreciation and amortization................... 35,435 61,693 Research and development........................ 1,998 1,084 Interest expense, net, and related financing costs including $33,679 and $31,179, of interest with affiliates...................... 55,023 55,479 ------------- -------------- 826,745 825,320 ------------- -------------- INCOME BEFORE INCOME TAXES ......................... 67,159 42,956 PROVISION FOR INCOME TAXES........................... 26,701 20,510 ------------- -------------- NET INCOME........................................... $ 40,458 $ 22,446 ============= ============== Basic and fully dilutive earnings per share Net Income ....................................... $ 0.45 $ 0.25
See accompanying Notes to Unaudited, Consolidated Financial Statements 4 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS) THREE MONTHS ENDED MARCH 31, -------------------------- 2002 2001 --------- --------- NET INCOME .................................. $ 40,458 $ 22,446 Other comprehensive income................... Foreign currency translation adjustments.. (432) (408) Derivative instruments (net of deferred tax expense (benefit) of $3,813 and ($18,692))............................... 5,910 (28,039) --------- --------- Total other comprehensive income (loss)... 5,478 (28,447) --------- --------- COMPREHENSIVE INCOME (LOSS) ................. $ 45,936 $ (6,001) ========= ========= See accompanying Notes to Unaudited, Consolidated Financial Statements 5 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 2002 2001 ------------ --------------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents..................... $ 34,386 $ 26,786 Accounts receivable, less allowances of $110,287 and $103,859....................... 395,517 423,912 Inventories................................... 211,286 202,221 Deferred income taxes......................... 188,044 196,831 Other current assets.......................... 125,295 119,592 ------------ ------------ Total Current Assets..................... 954,528 969,342 ------------ ------------ Properties and equipment, net..................... 523,102 520,620 ------------ ------------ Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $730,992 and $718,939................................. 3,408,906 3,418,544 Other assets and deferred charges............. 100,053 94,460 ------------ ------------ Total Other Assets....................... 3,508,959 3,513,004 ------------ ------------ Total Assets....................................... $ 4,986,589 $ 5,002,966 ============ ============ LIABILITIES AND EQUITY Current Liabilities: Current portion of long-term debt and capitalized lease obligations................ $ 152,212 $ 152,046 Current portion of borrowing from affiliates.. 292,425 291,360 Accounts payable.............................. 145,573 125,530 Accrued liabilities........................... 217,831 229,153 Accrued special charge for legal matters...... 219,741 224,037 Net accounts payable to affiliates............ 25,149 39,934 Accrued income taxes.......................... 72,755 83,654 ------------ ------------ Total Current Liabilities................ 1,125,686 1,145,714 Long-term debt..................................... 272,200 300,600 Non-current borrowings from affiliates............. 1,005,687 1,005,669 Capitalized lease obligations...................... 2,497 1,675 Deferred income taxes.............................. 117,800 113,046 Other liabilities.................................. 136,405 146,170 ------------ ------------ Total Liabilities........................ 2,660,275 2,712,874 ------------ ------------ Mandatorily Redeemable Preferred Securities........ 682,746 692,330 ------------ ------------ 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................................. 1,945,014 1,945,014 Retained deficit................................ (362,421) (402,749) Accumulated comprehensive (loss)................ (45,343) (50,821) ------------ ------------ Total Equity............................... 1,643,568 1,597,762 ------------ ------------ Total Liabilities and Equity $ 4,986,589 $ 5,002,966 ============ ============
See accompanying Notes to Unaudited, Consolidated Financial Statements. 6 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------------------- 2002 2001 -------------- ------------- Cash Flows from Operating Activities: Net income ........................................... $ 40,458 $ 22,446 Adjustments to reconcile net income to net cash from Operating activities: Depreciation and amortization.................... 35,435 61,693 Provision for doubtful accounts.................. 21,340 18,273 Deferred income taxes............................ 9,728 (17,553) Loss on disposal of properties and equipment..... 461 210 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable.................. (21,945) (57,612) Increase in inventories.......................... (9,044) (4,647) Increase in other current assets................. (8,981) (4,373) Decrease in IDPN accounts receivable............. -- 5,189 (Increase) decrease in other assets and deferred charges............................. (2,616) 4,509 Increase (decrease) in accounts payable.......... 20,043 (5,232) (Decrease) increase in accrued income taxes...... (10,899) 28,880 Decrease in accrued liabilities.................. (14,770) (3,835) Decrease in accrued special charge for legal matters........................................ (4,296) -- (Decrease) increase in other long-term liabilities.................................... (7,354) 2,535 Net changes due to/from affiliates............... (14,785) 5,847 Other, net....................................... 3,849 2,763 ----------- ----------- Net cash provided by operating activities............. 36,624 59,093 ----------- ----------- Cash Flows from Investing Activities: Capital expenditures............................. (27,364) (35,482) Payments for acquisitions, net of cash acquired.. (2,333) (246,756) ----------- ----------- Net cash used in investing activities................. (29,697) (282,238) ----------- ----------- Cash Flows from Financing Activities: Payments on settlement of investigation.......... -- (34,734) Net increase in borrowings from affiliates....... 1,084 216,282 Cash dividends paid.............................. (130) (130) (Payments) proceeds from receivable financing facility ...................................... 29,000 (5,600) Net (decrease) increase on debt and capitalized leases......................................... (28,837) 45,340 Equity contribution.............................. -- 10,000 ----------- ----------- Net cash provided by financing activities.............. 1,117 231,158 ----------- ----------- Effects of changes in foreign exchange rates............... (444) (416) ----------- ----------- Change in cash and cash equivalents........................ 7,600 7,597 Cash and cash equivalents at beginning of period........... 26,786 33,327 ----------- ----------- Cash and cash equivalents at end of period................. $ 34,386 $ 40,924 =========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements 7 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------------- 2002 2001 ----------- ----------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net.................................... $ 75,666 $ 41,710 Income taxes paid, net........................... 27,982 1,269 Details for Acquisitions: Assets acquired....................................... 3,572 295,068 Liabilities assumed................................... 1,239 48,312 ----------- ---------- Net cash paid for acquisitions........................ $ 2,333 $ 246,756 =========== ==========
See accompanying Notes to Unaudited, Consolidated Financial Statements 8 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY Fresenius Medical Care Holdings, Inc., a New York corporation ("the Company") is a subsidiary of Fresenius Medical Care AG, a German corporation ("FMC" or "Fresenius Medical Care"). The Company conducts its operations through five principal subsidiaries, National Medical Care, Inc., ("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 and those financial statements where the Company controls professional corporations in accordance with Emerging Issues Task Force Issue 97-2. The Company is primarily engaged in (i) providing kidney dialysis services, and clinical laboratory testing, and (ii) manufacturing and distributing products and equipment for dialysis treatment. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at March 31, 2002 and 2001 and for the three month interim periods then ended are unaudited and should be read in conjunction with the audited, consolidated financial statements in the Company's 2001 report on Form 10-K. Such interim financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented. Certain amounts in the prior periods' consolidated financial statements have been reclassified to conform to the current periods' basis of presentation. The results of operations for the three month period ended March 31, 2002 are not necessarily indicative of the results of operations for the fiscal year ending December 31, 2002. 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. THREE MONTHS ENDED MARCH 31, ---------------------- 2002 2001 -------- -------- The weighted average number of shares of Common Stock were as follows................ 90,000 90,000 ======== ======== 9 Net income used in the computation of earnings per share is as follows: THREE MONTHS ENDED MARCH 31, -------------------- 2002 2001 ------- -------- CONSOLIDATED Net income ......................................... $ 40,458 $ 22,446 Dividends paid on preferred stocks.................. (130) (130) ------- -------- Income used in per share computation of earnings ... $ 40,328 $ 22,316 ======== ======== Basic and fully dilutive earnings per share......... $ 0.45 $ 0.25 ======== ======== DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and the related amendments of SFAS No. 138. The cumulative effect of adopting SFAS 133 as of January 1, 2001 was not material to the Company's consolidated financial statements. The Company is exposed to market risk due to changes in interest rates and foreign currencies. 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 debt obligations, forecasted raw material purchases and Euro denominated mandatorily redeemable preferred stock. The interest rate swaps are designated as cash flow hedges effectively converting certain variable interest rate payments into fixed interest rate payments. After tax gains of $6.3 million ($10.3 million pretax) for the three months ended March 31, 2002 were deferred in other comprehensive income. Interest payable and interest receivable under the swap terms are accrued and recorded as an adjustment to interest expense at each reporting date. The Company enters into forward rate agreements that are designated and effective as hedges of forecasted raw material purchases. After tax losses of $0.3 million ($0.5 million pretax) for the three months ended March 31, 2002 were deferred in other comprehensive income and will be reclassified into cost of sales in the period during which the hedged transactions affect earnings. All deferred amounts will be reclassified into earnings within the next twelve months. The Company enters into forward rate agreements that are designated and effective as hedges of changes in the fair value of the Euro denominated mandatorily redeemable preferred stock. Changes in fair value are recorded in earnings and offset against gains and losses resulting from the underlying exposures. After tax loss of $0.1 million ($0.1 million pretax) for the three months ended March 31, 2002 were deferred in other comprehensive income. Ineffective amounts had no material impact on earnings for the three months ended March 31, 2002. Periodically, the Company enters into derivative instruments with related parties to form a natural hedge for currency exposures on intercompany obligations. These instruments are reflected in the balance sheet at fair value with changes in fair value recognized in earnings. EVEREST ACQUISITION On January 8, 2001, FMC acquired Everest Healthcare Services Corporation (now known as Everest Healthcare Holdings, Inc., "Everest") through a merger of Everest into a subsidiary of FMC at a purchase price of $341 million. Approximately $99 million was funded by the issuance of 2.25 million FMC preference shares to Everest. The remaining purchase price was paid with cash of $242 million, including assumed debt. Everest owned, operated or managed approximately 70 clinic facilities providing therapy to approximately 6,800 patients in the United States. Everest also operated extracorporeal blood services and acute dialysis businesses that provide acute dialysis, apheresis and hemoperfusion services to approximately 100 hospitals. On August 22, 2001 FMC transferred its interests in Everest to the Company at its book value. There was no gain or loss recorded on this sale as it is a transfer 10 between entities under common control. The consolidated operations and cash flows of the Company for the twelve months ended December 31, 2001 include the consolidated operations and cash flows of Everest retroactive to January 1, 2001. Accordingly, the Company's previously reported revenues and results of operations for the three months ended March 31, 2001 have been restated to include Everest revenues and earnings of $63 million and $0.7 million, respectively. NEW PRONOUNCEMENTS In July 2001, the FASB issued SFAS No.141, Business Combinations ("SFAS 141"), and SFAS No.142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No.144, Accounting for the Impairment or Diposal of Long-Lived Assets. The Company adopted the provisions of SFAS 141 immediately, and adopted SFAS 142 effective January 1, 2002. Accordingly, any goodwill or intangible asset determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001 has not been amortized, but will be evaluated for impairment in accordance with SFAS 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 were amortized through December 31, 2001. SFAS 141 requires that the Company evaluate existing intangible assets and goodwill that were acquired in prior purchase business combinations, and that it make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. The Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss should be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, SFAS 142 requires that the Company perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company then has up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss should be recognized as the cumulative effect of a change in accounting principle in its statement of operations. The Company is currently estimating the impact of SFAS 142 on the Company's financial statements, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. Management does not believe that transitional impairment losses will be incurred. However, based on our current assessments and subject to continuing analysis, had SFAS 142 been effective as of January 1, 2001 the Company estimates that there would have been a favorable impact to pre-tax earnings of approximately $107 million. The favorable impact in 2002 should approximate $97 million. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting requirements for the retirement of tangible long-lived assets and asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for 11 fiscal years beginning after June 15, 2002. The Company is currently reviewing the impact of adopting this statement. In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less selling costs. SFAS 144 also broadens the reporting of discontinued operations and will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 31, 2001. The Company is currently reviewing the impact of adopting this statement. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("SFAS 145"). SFAS 145 rescinds Statement No. 4 and requires the criteria under Opinion 30 to determine if losses from extinguishment of debt should be classified as extraordinary items. SFAS 145 rescinds Statement No. 44 which is no longer necessary. SFAS 145 amends Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback arrangements be accounted for in a similar manner as sale-leaseback transactions. NOTE 2. INVENTORIES
MARCH 31, DECEMBER 31, 2002 2001 ---------- ---------- Inventories: Raw materials............................................... $ 43,703 $ 40,834 Manufactured goods in process............................... 9,897 11,053 Manufactured and purchased inventory available for sale..... 92,379 84,789 ---------- ---------- 145,979 136,676 Health care supplies....................................... 65,307 65,545 ---------- ---------- Total.................................................. $ 211,286 $ 202,221 ========== ==========
NOTE 3. DEBT
MARCH 31, DECEMBER 31, 2002 2001 ---------- ----------- Long-term debt to outside parties consists of: NMC Credit Facility .......................................... $ 422,200 $ 450,600 Other ........................................................ 1,475 27 ---------- ---------- 423,675 450,627 Less amounts classified as current ........................... 151,475 150,027 ---------- ---------- $ 272,200 $ 300,600 ========== ==========
Borrowings (receivables) from affiliates consists of:
MARCH 31, DECEMBER 31, 2002 2001 ---------- ------------ Fresenius Medical Care AG borrowings primarily at interest rates approximating 2.57% and 2.85%, respectively......... $ 208,031 $ 191,967 Fresenius AG borrowing at interest rates approximating 2.73%.. -- 15,000 Fresenius Medical Care Trust Finance S.a.r.l. borrowings at interest rates of 8.25%, 8.43% and 9.25%................... 1,005,239 1,005,239 Franconia Acquisition, LLC at interest rates approximating 2.15% and 2.40%, respectively............................. 83,721 83,721 Other......................................................... 1,121 1,102 ---------- ---------- 1,298,112 1,297,029 Less amounts classified as current............................ 292,425 291,360 ---------- ---------- Total......................................................... $1,005,687 $1,005,669 ========== ==========
12 NOTE 4. MANDATORILY REDEEMABLE PREFERRED SECURITIES During 2001 and 2000, a wholly-owned subsidiary of the Company issued to NMC shares of various series of Preferred Stock ("Redeemable Preferred Securities") which were then transferred to FMC for proceeds totaling $392,037 in 2001 and $305,500 in 2000. No Redeemable Preferred Securities were issued for the three months ended March 31, 2002. The table below provides information for Redeemable Preferred Securities for the periods indicated. MARCH 31, DECEMBER 31, MANDATORILY REDEEMABLE PREFERRED SECURITIES 2002 2001 ----------- ----------- Series A Preferred Stock, 1,000 shares........ $ 113,500 $ 113,500 Series B Preferred Stock, 300 shares.......... 34,000 34,000 Series C Preferred Stock, 1,700 shares........ 192,000 192,000 Series D Preferred Stock, 870 shares.......... 97,500 97,500 Series E Preferred Stock, 1,300 shares........ 147,500 147,500 Series F Preferred Stock, 980 shares.......... 113,037 113,037 ----------- ---------- 697,537 697,537 Mark to Market Adjustment..................... (14,791) (5,207) ----------- ---------- Total......................................... $ 682,746 $ 692,330 =========== ========== These securities are similar in substance except for the order preference both as to dividends and liquidation, dissolution or winding-up of the subsidiary. The order of preference is alphabetically Series A through Series F. In addition, the holders of the Redeemable Preferred Securities are entitled to receive dividends in an amount of dollars per share that varies from approximately 5% to 8% depending on the Series. The dividends will be declared and paid in cash at least annually. All the Redeemable Preferred Securities have a par value of $.01 per share. Upon liquidation or dissolution or winding up of the issuer of the Redeemable Preferred Securities, 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 back to the Company two years from their respective date of issuance for a total amount equal to Euros 501,773 (Series A, B, C, and F) and US dollars $245,000 (Series D and E) plus any accrued and unpaid dividends. For the three months ended March 31, 2002 and 2001, dividends of $9,929 and $5,200, respectively, were recorded and classified as part of interest expense in the consolidated statement of operations. During the three months ended March 31, 2002, a cash dividend payment was made totaling $29,850. Accordingly, the Euro Redeemable Preferred Securities are deemed to be a Euro liability and the risk of foreign currency fluctuations are hedged through forward currency contracts. The holders of the Redeemable Preferred Securities have the same participation rights as the holders of all other classes of capital stock of the issuing subsidiary. NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142 Net income and net income adjusted to exclude amortization expense (including any related tax effect) recognized in those periods relating to goodwill and specific intangible assets that are no longer being amortized. THREE MONTHS ENDED MARCH 31, ---------------------------- ($000 EXCEPT FOR EARNINGS PER SHARE) 2002 2001 -------- -------- Net Income $ 40,458 $ 22,446 Net Income Adjusted $ 40,458 $ 46,726 13 Reconciliation of net income to adjusted net income and earnings per share to adjusted earnings per share. THREE MONTHS ENDED MARCH 31, --------------------------- ($000 EXCEPT FOR EARNINGS PER SHARE) 2002 2001 -------- --------- Reported Net Income $ 40,458 $ 22,446 Addback: Amortization -- 24,280 -------- --------- Adjusted Net Income $ 40,458 $ 46,726 ======== ========= BASIC AND FULLY DILUTIVE EARNINGS PER SHARE Reported Net Income $ 0.45 $ 0.25 Addback: Amortization -- 0.27 -------- --------- Adjusted Net Income $ 0.45 $ 0.52 ======== ========= The total pre-tax amortization expense associated with goodwill and specific intangible assets recognized during the three months ended March 31, 2001 totaled $29,559. The effective tax rate for restatement of amortization was 17.9%. The effective tax rate is less than the corporate statutory rate primarily due to permanent differences related to non-deductible goodwill. The gross currying value and accumulated amortization of intangible assets is as follows:
MARCH 31, 2002 DECEMBER 31, 2001 ------------------------ ------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED VALUE AMORTIZATION VALUE AMORTIZATION -------- ------------ -------- ------------ Patient Relationships $236,608 $(165,693) $233,490 $(155,769) Other Intangibles $107,318 $(52,394) $109,545 $(50,406)
Amortization expense for amortizable intangible assets at March 31, 2002 is estimated to be $30,000 for the remainder of 2002, $19,500 for 2003, $15,500 for 2004, $11,700 for 2005, and $9,200 for 2006. NOTE 6: SPECIAL CHARGE FOR LEGAL MATTERS In the fourth quarter of 2001, the Company recorded a $258 million ($177 million after tax) special charge to address 1996 merger related legal matters, estimated liabilities including legal expenses arising in connection with the W.R. Grace Chapter 11 proceedings and the cost of resolving pending litigation and other disputes with certain commercial insurers. In January 2002, the Company reached an agreement in principle to resolve pending litigation with Aetna Life Insurance Company (Aetna). The special charge is primarily comprised of three major components relating to (i) the W.R. Grace bankruptcy, (ii) litigation with commercial insurers and (iii) other legal matters. The Company has assessed the extent of potential liabilities as a result of the W.R. Grace Chapter 11 proceedings. The Company accrued $172 million principally representing a provision for income taxes payable for the years prior to the 1996 merger for which the Company has been indemnified by W.R. Grace, but may ultimately be obligated to pay as a result of W.R. Grace's Chapter 11 filing. In addition, that amount included the costs of defending the Company in litigation arising out of W.R. Grace's Chapter 11 filing. The Company entered into an agreement in principle with Aetna to establish a process for resolving its pending litigation. The Company included in the special charge the amount of $55 million to provide for settlement obligations, legal expenses and the resolution of disputed accounts receivable for Aetna and the other commercial litigants. If the Company is unable to settle the pending matters with any of the remaining commercial insurers, whether on the basis of the Aetna agreement in principle or otherwise, the Company believes that this charge reasonably estimates the costs and expenses associated with such litigation. The remaining amount of $31 million pre-tax was accrued for (i) assets and receivables that are impaired in connection with other legal matters and (ii) anticipated expenses associated with the continued defense and resolution of the legal matters. See also Note 8- "Commitment and Contingencies- Legal Proceedings." At March 31, 2002, there is a remaining balance of approximately $220 million for the accrued special charge for legal matters. During the three months ended March 31, 2002, approximately $4 million in payments have been applied against the accrued special charge for legal matters. 14 NOTE 7. PENSION PLANS During the first quarter of 2002, the Company recorded a gain of approximately $13.1 million resulting from the curtailment of the Company's defined benefit and supplemental executive retirement plans. The Company has retained all employee pension obligations as of the closing date for the fully-vested and frozen benefits for all employees. NOTE 8. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS COMMERCIAL LITIGATION 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. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. Proceedings have been brought against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.-Conn., principally alleging that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act, and constituted a conspiracy. See discussion of "Mesquita v. W.R. Grace and Company" below. Pre-merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); that during those years Grace deducted approximately $122.1 million in interest attributable to corporate owned life insurance ("COLI") policy loans; that Grace has paid $21.2 million of tax and interest related to COLI deductions taken in tax years prior to 1993; and that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation. Subject to certain representations made by Grace, the Company and Fresenius AG, Grace and certain of its affiliates agreed to indemnify the Company against this or other pre-Merger or Merger related tax liabilities. Subsequent to the Merger, Grace was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Subsequent to the Sealed Air transaction, Grace and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result of the Company's continuing observation and analysis of the Service's on-going audit of Grace's pre-Merger tax returns, the Sealed Air litigation and the Grace bankruptcy proceedings, and based on its current assessment of the potential impact of these matters on the Company, the Company recorded a pre-tax accrual of $171.5 million at December 31, 2001 to reflect the Company's estimated exposure for liabilities and legal expenses related to the Grace bankruptcy. The Company intends to continue to pursue vigorously its rights to indemnification from Grace and its insurers and former and current affiliates, including Sealed Air, for all costs incurred by the Company relating to pre-Merger tax and Merger-related claims. Since 1997, the Company, NMC, and certain NMC subsidiaries have been engaged in litigation with Aetna Life Insurance Company and certain of its affiliates ("Aetna") concerning allegations of inappropriate billing practices for nutritional therapy and diagnostic and clinical laboratory tests and misrepresentations. In January 2002, the Company entered into an agreement in principle with Aetna to establish a process for resolving these claims and the Company's counterclaims relating to overdue payments for services rendered by the Company to Aetna's beneficiaries. Other insurance companies have filed claims against the Company, similar to those filed by Aetna, that seek unspecified damages and costs. The Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend all lawsuits. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate 15 claim denials and delays in claim payments. Other private payors have contacted the Company and may assert that NMC received excess payments and, similarly, may join the lawsuits or file their own lawsuit seeking reimbursement and other damages. 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 results of operations. In light of the Aetna agreement in principle the Company established a pre-tax accrual of $55 million at December 31, 2001 to provide for the anticipated settlement of the Aetna lawsuit and estimated legal expenses related to the continued defense of other commercial insurer claims and resolution of these claims, including overdue payments for services rendered by the Company to these insurers' beneficiaries. No assurance can be given that the anticipated Aetna settlement will be consummated or that the costs associated with such a settlement or a litigated resolution of Aetna's claims and the other commercial insurers' claims will not exceed the $55 million pre-tax accrual. 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 W. R. Grace & Co.-Conn ("Grace Chemicals") against Grace Chemicals, the Company and other defendants, principally alleging that the Merger which resulted in the original formation of the Company was a fraudulent transfer, violated the uniform fraudulent transfer act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R. Grace & Company, et al.) and additional class actions were filed subsequently with substantially similar allegations; all cases have been stayed and transferred to the U.S. District Court, have been dismissed without prejudice or are pending before the U.S. Bankruptcy Court in Delaware in connection with Grace's Chapter 11 proceeding. The Company has requested indemnification from Grace Chemicals and Sealed Air Corporation pursuant to the Merger agreements. 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, from W.R. Grace & Co., Sealed Air Corporation, or their affiliates or former affiliates or their insurers, and if the Company is not able to collect against any party that may have received distributions from W.R. Grace & Co., a judgment could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is confident that no fraudulent transfer or conspiracy occurred and intends to defend the cases vigorously. 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 Centers for Medicare and Medicaid Services (CMS) (formerly known as the Health Care Financing Administration, or HCFA) 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, CMS 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. CMS 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 CMS 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 CMS 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 CMS' retroactive application of the April 1995 rule was legally invalid. CMS 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 16 favor of NMC, holding CMS' retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also permanently enjoined CMS from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on CMS' 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 CMS' prospective application of the April 1995 rule invalid and permanently enjoin CMS from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. CMS elected not to appeal the Court's June 1995 and January 1998 orders. CMS may, however, appeal all rulings at the conclusion of the litigation. If CMS 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 CMS' 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. The Company's agreement in principle with Aetna establishes a process for resolving these claims. 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 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 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 affiliated 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. 17 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. At December 31, 2001, the Company recorded a pre-tax accrual to reflect anticipated expenses associated with the continued defense and resolution of these claims. No assurances can be given that the actual costs incurred by the Company in connection with the continued defense and resolution of these claims will not exceed the amount of this accrual. 18 NOTE 9. INDUSTRY SEGMENTS INFORMATION The Company's reportable segments are Dialysis Services and Dialysis Products. For purposes of segment reporting, the Dialysis Services Division and Spectra Renal Management are combined and reported as Dialysis Services. These divisions are aggregated because of their similar economic classifications. These include the fact that they are both health care service providers whose services are provided to a common patient population, and both receive a significant portion of their net revenue from Medicare and other government and non-government third party payors. The Dialysis Products segment reflects the activity of the Dialysis Products Division only. The table below provides information for the three months ended March 31, 2002 and 2001 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT SERVICES PRODUCTS SALES TOTAL --------- -------- ------------ --------- NET REVENUES FOR THREE MONTHS ENDED 3/31/02 $788,533 $183,207 $77,836 $893,904 3/31/01 $758,508 $178,679 $68,911 $868,276 OPERATING EARNINGS FOR THREE MONTHS ENDED 3/31/02 93,192 35,330 -- 128,522 3/31/01 102,773 29,618 -- 132,391 ASSETS AT 3/31/2002 2,654,004 659,171 -- 3,313,175 12/31/2001 2,650,561 645,956 -- 3,296,517 DEPRECIATION AND AMORTIZATION FOR THE THREE MONTHS ENDED 3/31/2002 25,627 4,357 -- 29,984 12/31/2001 36,178 5,969 -- 42,147
Total assets of $4,986,589 is comprised of total assets for reportable segments, $3,313,175; intangible assets not allocated to segments, $1,884,703; accounts receivable financing agreement ($471,000); and other corporate assets, $259,711. The table below provides the reconciliations of reportable segment operating earnings to the Company's consolidated totals. THREE MONTHS ENDED SEGMENT RECONCILIATION MARCH 31, --------------------------- 2002 2001 --------- ---------- INCOME BEFORE INCOME TAXES: Total operating earnings for reportable segments $ 128,522 $ 132,391 Corporate G&A 1,109 (13,326) Corporate depreciation and amortization (5,451) (19,546) Research and development expense (1,998) (1,084) Net interest expense (55,023) (55,479) --------- --------- Income Before Income Taxes $ 67,159 $ 42,956 ========= ========= 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company. The discussion should be read in conjunction with the 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 2 and in the Company's reports filed from time to time with the Securities and Exchange Commission, could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. RESULTS OF OPERATIONS The following table summarizes certain operating results of the Company by principal business unit for the periods indicated. Intercompany eliminations primarily reflect sales of medical supplies by Dialysis Products to Dialysis Services. THREE MONTHS ENDED MARCH 31, ----------------------- (DOLLARS IN MILLIONS) 2002 2001 ------ ------- NET REVENUES Dialysis Services......................... $ 789 $ 759 Dialysis Products......................... 183 179 Intercompany Eliminations................. (78) (69) ------ ------- Total Net Revenues............................ $ 894 $ 869 ====== ======= Operating Earnings: Dialysis Services......................... $ 93 $ 103 Dialysis Products......................... 35 29 ------ ------- Total Operating Earnings...................... 128 132 ------ ------- Other Expenses: General Corporate......................... $ 4 $ 33 Research & Development.................... 2 1 Interest Expense, Net..................... 55 55 ------ ------- Total Other Expenses.......................... 61 89 ------ ------- Earnings Before Income Taxes.................. 67 43 Provision for Income Taxes.................... 27 21 ------ ------- Net Income.................................. $ 40 $ 22 ====== ======= 20 THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 Net revenues for the first three months of 2002 increased by 3% ($25 million) over the comparable period in 2001. Net income for the first three months of 2002 increased by 82% ($18 million) over the comparable period in 2001 as a result of decreased general corporate expenses ($29 million) partially offset by decreased operating earnings ($4 million) and increased income taxes ($6 million). Had the adoption of SFAS 142 been effective January 1, 2001 net income for the first three months of 2002 would have decreased 13% ($6 million) over the comparable period in 2001. DIALYSIS SERVICES Dialysis Services net revenues for the first three months of 2002 increased by 4% to $784 million (net of $5 million of intercompany sales) primarily attributable to base business revenue growth. The increase in dialysis service revenue growth resulted primarily from a 3% increase in treatment volume, reflecting both base business growth and the impact of 2002 and 2001 acquisitions. Revenue was also favorably impacted by a 1.4% increase in revenue per treatment due to the 1.2% increase in Medicare reimbursement rate and increased ancillary services in 2002 as compared to 2001. Dialysis Services operating earnings for the first three months of 2002 decreased 10% ($10 million) over the comparable period of 2001, primarily due to lower ancillary margins ($9 million), higher personnel costs resulting from severance and workforce reductions ($7 million), Amgen price increases ($5 million), expenses associated with the Company's conversion from re-use to single use dialyzers ($3 million), higher expenses for certification of de novo clinics ($2) and higher provisions for doubtful accounts ($2 million). These increases were partially offset by the impact of increased Medicare reimbursement rates ($3 million), general cost improvements ($2 million) and lower amortization expense ($11 million) as a result of the adoption of SFAS 142, which became effective January 1, 2002. DIALYSIS PRODUCTS Dialysis Products gross revenues increased by 2% to $183 million in the first quarter of 2002 as compared to $179 million in the comparable period 2001. Internal sales to Dialysis Services increased by 7% to $73 million and were partially offset by a decrease in external sales of 1% to $108 million. External sales include sales of machines to a third party leasing company which are utilized by Dialysis Services to provide services to our customers and Method II PD revenues for dialysis services patients. Dialysis Products measures its external sales performance based on its sales to the "net available external market". The net available external market excludes machine sales to third parties for machines utilized by the service division, Method II revenues and sales to other vertically integrated dialysis companies. Net available external market sales increased by 8% to $89 million in the first quarter 2002 over the comparable period 2001. Dialysis Products operating earnings for the first three months of 2002 increased by 21% ($6 million) over the comparable period of 2001. This increase was primarily due to improvements in gross margin and reductions in other manufacturing costs, as well as lower amortization expense ($2 million) as a result of the adoption of SFAS 142, which became effective January 1, 2002, partially offset by costs related to the conversion from re-use to single use dialyzers. OTHER EXPENSES The Company's other expenses for the first three months of 2002 decreased by 31% ($28 million) over the comparable period of 2001. General corporate expenses decreased by $29 million and interest expense remained constant. The decreases in general corporate expenses were primarily due to foreign exchange fluctuations ($7 million resulting from $2 million foreign exchange losses for the three months ended 2002 versus $9 million foreign exchange losses for the three months ended 2001), a gain on the curtailment of the Company's defined benefit and supplemental executive retirement plan ($13 million), and decreased amortization expense ($16 million, resulting from the adoption of SFAS 142) offset somewhat by increases in other general corporate expenses ($7 million). INCOME TAX RATE The effective tax rate from operations for the first three months of 2002 (39.8%) is lower than the rate for the comparable period of 2001 (47.7%), due to the expected higher earnings and the adoption of SFAS 142 which eliminates the amortization of non-deductible goodwill. 21 LIQUIDITY AND CAPITAL RESOURCES Cash from operations decreased by $22 million from $59 million for the three months ended March 31, 2001 to $37 million for the three months ended March 31, 2002. This decrease is primarily related to unfavorable changes in operating assets and liabilities of $44 million partially offset by increases in net income adjustments of $4 million and increased earnings of $18 million. Increases in accounts receivable of $22 million for the three months ended March 31, 2002 are primarily due to the Company's revenue growth and impact of acquisitions. Increases in accounts payable were primarily due to timing of disbursements. Cash on hand was $34 million and $41 million at March 31, 2002 and 2001, respectively. Net cash flows used in investing activities of operations totaled $30 million in 2002 compared to $282 million in 2001. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations and intercompany borrowings. Cash expenditures for acquisitions totaled $2 million and $247 million in 2002 and 2001, respectively, net of cash acquired. The decrease in acquisition spending in 2002 over the comparable period in 2001 is primarily due to the Everest acquisition in 2001. In January 2001, the Company completed the acquisition of Everest. Approximately $99 million was funded by the issuance of 2.25 million FMC preference shares to Everest. The remaining purchase price was paid with cash of $242 million including assumed debt. Capital expenditures of $27 million and $35 million in 2002 and 2001, respectively, were made for new clinics improvements to existing clinics, and expansion and maintenance of production facilities. For the three months ended March 31, 2002, net cash flows provided by financing activities totaled $1 million in 2002 compared to $231 million in 2001. The Company increased its borrowings under its accounts receivable facility (the "Accounts Receivable Facility") by $29 million to $471 million at March 31, 2002. The proceeds from the accounts receivable facility were offset by payments of $29 million on debt and capital lease obligations. Outstanding amounts under the Accounts Receivable Facility are reflected as reductions in accounts receivable. The Company's capacity to generate cash flow from the accounts receivable facility depends on the availability of sufficient accounts receivable that meet certain criteria defined in the agreement with the third party funding corporation. A lack of availability of such accounts receivable may have a material impact on the Company's ability to utilize the facility for its financial needs. CRITICAL ACCOUNTING POLICIES The Company has identified the following selected accounting policies and issues that the Company believes are critical to understand the financial reporting risks presented in the current economic environment. These matters and judgments, and uncertainties affecting them, are also essential to understanding the Company's reported and future operating results. See Notes to Consolidated Financial Statements - Note 2, "Summary of Significant Accounting Policies" included in the Company's 2001 report on Form 10K. RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS The growth of the Company's business through acquisitions has created a significant amount of intangible assets, including goodwill, patient relationships, tradenames and other. At March 31, 2002, the carrying amount of net intangible assets amounted to $3,409 million representing approximately 68% of the Company's total assets. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews the carrying value of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. As discussed in Note 2 to the Consolidated Financial Statements, any impairment is tested by a comparison of the carrying amount of intangible assets to future net cash flows expected to be generated. If such intangible assets are considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. A prolonged downturn in the healthcare industry with lower than expected increases in reimbursement rates and/or higher than expected costs for providing our healthcare services could adversely affect the Company's estimates of future net cash flows in any segment. Consequently, it is possible that the Company's future operating results could be materially and adversely affected by impairment charges related to goodwill or other indefinite lived intangibles. 22 LEGAL CONTINGENCIES The Company is a party to litigation relating to a number of matters, including the commercial insurer litigation, OBRA 93, W.R. Grace & Co. bankruptcy and Sealed Air Corporation indemnification litigation and other litigation arising in the ordinary course of the Company's business as described in Note 8 "Commitments and Contingencies" in the Company's Consolidated Financial Statements. Any adverse outcome in any of these matters would have a material adverse effect on the Company's financial position, results of operations and cash flows. The Company regularly analyzes current information relating to these litigation matters and provides accruals for probable contingent losses including the estimated legal expenses to resolve the matter. The Company's internal legal department and external lawyers participate in the assessments. In its decisions regarding the recording of litigation accruals, the Company considers the probability of an unfavorable outcome and its ability to make a reasonable estimate of the amount of contingent loss. If an unfavorable outcome is probable but the amount of loss cannot be reasonably estimated by management, appropriate disclosure is provided, but no contingent losses are accrued. The mere filing of a suit or formal assertion of a claim or assessment does not necessarily require the recording of an accrual. 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 records an allowance for estimated uncollectible accounts receivable based upon an analysis of historical collection experience. The analysis considers difference in collection experience by payor mix and aging of the accounts receivable. From time to time, the Company reviews the accounts receivable for changes in historical collection experience to ensure the appropriateness of the allowances. 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 the three months ended March 31, 2002 and 2001 was $6.7 million and $10.3 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. 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. 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. Moreover non-governmental payors continue to exert 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. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. 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 forecasted purchase transactions. 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 to mitigate the impact of interest rate fluctuations. Gains and losses on foreign exchange contracts accounted for as hedges are deferred in other 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 recognized in other liabilities 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. At March 31, 2002, the fair value of the Company's interest rate agreements, which consisted entirely of interest rate swaps, is approximately ($55.8 million) and the fair value of Company's foreign exchange contracts, which consisted entirely of forward agreements, is valued at approximately ($25.7 million). The Company had outstanding contracts covering the purchase of 653.4 million Euros ("EUR") at an average contract price of $.90751 per EUR, for delivery between April 2002 and November 2003, contracts for the purchases of 63.0 million Mexican Pesos at an average contract price of 10.1211 pesos per US dollar, and contracts for the delivery of 10.6 million Canadian Dollars at an average contract price of $.6386 per Canadian Dollar. 24 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS COMMERCIAL LITIGATION 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. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. Proceedings have been brought against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.-Conn., principally alleging that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act, and constituted a conspiracy. See discussion of "Mesquita v. W.R. Grace and Company" below. Pre-merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); that during those years Grace deducted approximately $122.1 million in interest attributable to corporate owned life insurance ("COLI") policy loans; that Grace has paid $21.2 million of tax and interest related to COLI deductions taken in tax years prior to 1993; and that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation. Subject to certain representations made by Grace, the Company and Fresenius AG, Grace and certain of its affiliates agreed to indemnify the Company against this or other pre-Merger or Merger related tax liabilities. Subsequent to the Merger, Grace was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Subsequent to the Sealed Air transaction, Grace and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result of the Company's continuing observation and analysis of the Service's on-going audit of Grace's pre-Merger tax returns, the Sealed Air litigation and the Grace bankruptcy proceedings, and based on its current assessment of the potential impact of these matters on the Company, the Company recorded a pre-tax accrual of $171.5 million at December 31, 2001 to reflect the Company's estimated exposure for liabilities and legal expenses related to the Grace bankruptcy. The Company intends to continue to pursue vigorously its rights to indemnification from Grace and its insurers and former and current affiliates, including Sealed Air, for all costs incurred by the Company relating to pre-Merger tax and Merger-related claims. Since 1997, the Company, NMC, and certain NMC subsidiaries have been engaged in litigation with Aetna Life Insurance Company and certain of its affiliates ("Aetna") concerning allegations of inappropriate billing practices for nutritional therapy and diagnostic and clinical laboratory tests and misrepresentations. In January 2002, the Company entered into an agreement in principle with Aetna to establish a process for resolving these claims and the Company's counterclaims relating to overdue payments for services rendered by the Company to Aetna's beneficiaries. Other insurance companies have filed claims against the Company, similar to those filed by Aetna, that seek unspecified damages and costs. The Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend all lawsuits. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. Other private payors have contacted the Company and may assert that NMC received excess payments and, similarly, may join the lawsuits or file their own lawsuit seeking reimbursement and other damages. 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 results of operations. In light of the Aetna agreement in principle the Company established a pre-tax accrual of $55 million at December 31, 2001 to provide for the anticipated settlement of the Aetna lawsuit and estimated legal expenses related to the continued defense of other commercial insurer claims and resolution of these claims, including overdue payments for services rendered by the Company to these 25 insurers' beneficiaries. No assurance can be given that the anticipated Aetna settlement will be consummated or that the costs associated with such a settlement or a litigated resolution of Aetna's claims and the other commercial insurers' claims will not exceed the $55 million pre-tax accrual. 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 W. R. Grace & Co.-Conn ("Grace Chemicals") against Grace Chemicals, the Company and other defendants, principally alleging that the Merger which resulted in the original formation of the Company was a fraudulent transfer, violated the uniform fraudulent transfer act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R. Grace & Company, et al.) and additional class actions were filed subsequently with substantially similar allegations; all cases have been stayed and transferred to the U.S. District Court, have been dismissed without prejudice or are pending before the U.S. Bankruptcy Court in Delaware in connection with Grace's Chapter 11 proceeding. The Company has requested indemnification from Grace Chemicals and Sealed Air Corporation pursuant to the Merger agreements. 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, from W.R. Grace & Co., Sealed Air Corporation, or their affiliates or former affiliates or their insurers, and if the Company is not able to collect against any party that may have received distributions from W.R. Grace & Co., a judgment could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is confident that no fraudulent transfer or conspiracy occurred and intends to defend the cases vigorously. 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 Centers for Medicare and Medicaid Services (CMS) (formerly known as the Health Care Financing Administration, or HCFA) 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, CMS 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. CMS 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 CMS 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 CMS 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 CMS' retroactive application of the April 1995 rule was legally invalid. CMS 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 CMS' retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also permanently enjoined CMS from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on CMS' 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 CMS' prospective application of the April 1995 rule invalid and permanently enjoin CMS from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. CMS elected not to appeal the Court's June 1995 and January 1998 orders. CMS may, however, appeal all rulings at the conclusion of the litigation. If CMS 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 CMS' original implementation, and to re-bill Medicare for the same services, which would result in a loss to NMC of approximately 26 $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. The Company's agreement in principle with Aetna establishes a process for resolving these claims. 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 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 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 affiliated 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. At December 31, 2001, the Company recorded a pre-tax accrual to reflect anticipated expenses associated with the continued defense and resolution of these claims. No assurances can be given that the actual costs incurred by the Company in connection with the continued defense and resolution of these claims will not exceed the amount of this accrual. 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-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 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. dated July 6, 2001 (authorizing action by majority written consent of the shareholders) (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 2001). Exhibit 3.7 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). 28 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, Bank of America, N.A. (formerly known as 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, Bank of America, N.A. (formerly known as 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, Bank of America, N.A. (formerly known as 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, Bank of America, N.A. (formerly known as 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, Bank of America, N.A. (formerly known as NationsBank, N.A.), 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, Bank of America, N.A. (formerly known as NationsBank, N.A.), 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, Bank of America, N.A. (formerly known as 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). 29 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, Bank of America, N.A. (formerly known as 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, Bank of America, N.A. (formerly known as 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 Amendment No. 11 dated as of May 31, 2001 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, Bank of America, N.A. (formerly known as 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 by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 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, Bank of America, N.A. (formerly known as 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 by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 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, Bank of America, N.A. (formerly known as 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 April 1, 2001). Exhibit 4.16 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 4.17 Fresenius Medical Care Aktiengesellschaft 2001 International Stock Incentive Plan (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG filed August 2, 2001 (Registration No. 333-66558)). Exhibit 4.18 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 4.19 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 4.20 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 30 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.21 Senior Subordinated Indenture dated as of June 6, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 4.22 Senior Subordinated Indenture dated as of June 15, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). 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, 2002 between Amgen USA, Inc. and National Medical Care, Inc. (filed herewith). Exhibit 10.4 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 10.5 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 10.6 Amended and Restated Transfer and Administration Agreement dated as September 27, 1999 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 30, 2000). Exhibit 10.7 Amendment No. 2 to 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 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.8 Amendment No. 5 to Amended and Restated Transfer and Administration Agreement dated as December 21, 2001 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 1, 2001). Exhibit 10.9 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). 31 Exhibit 10.10 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 10.11 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 10.12 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 10.13 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 10.14 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.15 Employment Agreement dated June 1, 2000 by and between John F. Markus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.16 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 10.17 Corporate Integrity Agreement between the Offices of Inspector General of the Department of Health and Human Services and Fresenius Medical Care Holdings, Inc. dated as of January 18, 2000 (incorporated herein by reference to the Form 8-K of the Registrant filed with the Commission on January 21, 2000). Exhibit 11 Statement re: Computation of Per Share Earnings. (b) Reports on Form 8-K On February 13, 2002, Fresenius Medical Care Holdings, Inc., filed a report on Form 8-K with respect to the announcement by Fresenius Medical Care AG, the parent corporation of Fresenius Medical Care Holdings, Inc., that a special charge was to be taken in the fourth quarter of 2001. On March 27, 2002, Fresenius Medical Care Holdings, Inc., filed a report on Form 8-K with respect to the announcement by Fresenius Medical Care AG, the parent corporation of Fresenius Medical Care Holdings, Inc., that based on its calculation of its cumulative adjusted cash flow for the five years ended December 31, 2001, no special dividend would be payable on the Class D Special Dividend Preferred Stock of Fresenius Medical Care Holdings, Inc. * Confidential treatment has been requested as to certain portions of this Exhibit 32 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fresenius Medical Care Holdings, Inc. DATE: May 15, 2002 /s/ Ben J. Lipps -------------- ------------------------------------------ NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: May 15, 2002 /s/ Jerry A. Schneider ------------- ------------------------------------------ NAME: Jerry Schneider TITLE: Chief Financial Officer 33 EX-10.3 3 b43057fmex10-3.txt PRODUCT PURCHASE AGREEMENT EXHIBIT 10.3 AMAGEN FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- This Agreement ("Agreement"), between Amgen USA Inc. ("Amgen") and National Medical Care, Inc. including all subsidiaries and affiliates that are at least fifty and one-tenth percent (50.10%) owned by National Medical Care, Inc. and listed on Appendix B (collectively, "NMC"), sets forth the terms and conditions for the purchase of EPOGEN(R) (Epoetin alfa) and Aranesp(TM) (darbepoetin alfa) (collectively, "Products") by NMC, exclusively for the treatment of dialysis patients. 1. TERM OF AGREEMENT. The "Term" of this Agreement shall be defined as January 1, 2002 ("Commencement Date") through December 31, 2003 ("Termination Date"). 2. QUALIFIED PURCHASES. All terms contained herein apply only to purchases made hereunder, as confirmed by Amgen ("Qualified Purchases"), by NMC and, subject to the terms of Section 11, all Affiliates (as such term is defined in Section 11 below) opened, acquired, or managed by NMC during the Term, for so long as such Affiliates remain at least fifty and one-tenth percent (50.10%) owned or managed by National Medical Care, Inc., through wholesalers chosen by NMC and authorized by Amgen to participate in the program ("Authorized Wholesalers") or directly from Amgen. In addition, and also subject to the terms of Section 11, Renaissance Health Care, Inc., Optimal Renal Care, L.L.C., Integrated Renal Care of the Pacific, and/or any joint venture of NMC in which NMC holds at least a fifty and one-tenth percent (50.10%) ownership interest, will also be eligible to participate, although not required to purchase under this Agreement. Amgen agrees to reasonably approve Authorized Wholesalers requested by NMC. The option to purchase on a direct basis from Amgen is subject to receipt and approval, not to be unreasonably withheld, of an "Application for Direct Ship Account". 3. PRICING. See Appendix A. 4. PAYMENT TERMS. The terms and conditions of this Agreement shall apply whether NMC and/or Affiliates purchase Products through an Authorized Wholesaler or from Amgen directly. 5. DISCOUNT. Amgen will pay discounts and incentives in accordance with the schedule and terms set forth in Appendix A attached hereto. 6. PAYMENT OF DISCOUNTS. Any discount (hereinafter defined as including a discount at time of purchase, rebate, incentive or other concession impacting the total pricing of a Product) earned hereunder which is applicable to purchases of EPOGEN(R) shall be calculated in accordance with this Agreement, based on Qualified Purchases, using [*] as the basis for the calculation price, and shall be paid in the form of a [*] to National Medical Care Inc.'s corporate headquarters, except as otherwise provided hereunder. Any discount earned hereunder which is applicable to purchases of Aranesp(TM) used to treat dialysis patients shall be calculated in accordance with this Agreement, based on Qualified Purchases, using [*] as the basis for the calculation price. NMC and Affiliates shall make available to Amgen any records concerning NMC's and Affiliates' purchase amounts that Amgen or its auditors may reasonably request for purposes of verifying discounts. [*]. In the event of a discrepancy between data provided by NMC and that provided by an Authorized Wholesaler, verifiable data submitted by NMC shall be used. Amgen will use its best efforts to make any discount (excluding discounts at time of purchase) pursuant to this Agreement available in accordance with the terms referenced in Appendix A. Availability of discounts is contingent upon Amgen receiving all relevant purchase data from all Authorized Wholesalers designated by NMC, in a form reasonably acceptable to Amgen, detailing NMC's and Affiliates' Qualified Purchases of Products for the relevant period, along with any other data required by the terms of Appendix A. In the event of any purchases directly from Amgen, all such purchase data shall be included in the calculation of all discounts. In no event shall Amgen pay any discount on Products distributed by NMC or Affiliates to non-Affiliates of NMC. In the event that Amgen is notified in writing that National Medical Care, Inc. and/or any of its subsidiaries or Affiliates (the "Acquiree") is acquired by another entity or a change of control otherwise occurs with respect to the Acquiree, any discount or rebate which may have been earned and vested hereunder prior to the effective date of the acquisition shall be paid in the form of a [*] to National Medical Care Inc.'s corporate headquarters subject to the conditions described herein. 7. TREATMENT OF DISCOUNTS. The parties agree that they will account for any discount or rebate earned hereunder in a way that complies with all applicable federal, state, and local laws and regulations, including without limitation, Section 1128B(b) of the Social Security Act and its implementing regulations, and if required by such statutes or regulations (a) claim the benefit of such discount received, in whatever form, in the fiscal year in which such discount was earned or the year after, (b) fully and accurately report the value of such discount in any cost reports filed under Title XVIII or Title XIX of the Social Security Act, or - 1 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- a state health care program, and (c) provide, upon request by the U.S. Department of Health and Human Services or a state agency or any other federally funded state health care program, the information furnished by Amgen concerning the amount or value of such discount. NMC agrees that it will advise all Affiliates, in writing, of any discount received by National Medical Care's corporate headquarters hereunder with respect to purchases made by such Affiliates and that NMC will advise said Affiliates as to their requirement to account for any such discount in accordance with the above stated requirements. 8. COMMITMENT TO PURCHASE. NMC and Affiliates agrees to purchase EPOGEN(R) for all of its dialysis use requirements in the United States, Puerto Rico and Guam for recombinant human erythropoietin. Amgen agrees to make such EPOGEN(R) available to NMC and Affiliates through its Authorized Wholesalers or directly from Amgen. In addition to other remedies available to NMC and Affiliates, NMC and Affiliates may purchase another brand of recombinant human erythropoietin for its dialysis use requirements in the United States, Puerto Rico and Guam if, and only if, NMC and/or any Affiliates have informed Amgen, in writing, that NMC and Affiliates are unable to acquire sufficient amounts of EPOGEN(R) to meet NMC's and Affiliates' reasonable dialysis use requirements, and Amgen by itself, or through its Authorized Wholesalers, is actually unable to supply NMC and Affiliates with their reasonable dialysis use requirements of EPOGEN(R) within the time period reasonably required by NMC and Affiliates, which, in no event will be less than five (5) business days after Amgen's receipt of NMC's and Affiliates' written notice. If the preceding requirements are met, NMC and Affiliates will only be allowed to purchase another brand of recombinant human erythropoietin for the time period, and to the extent, that Amgen is unable to provide NMC and Affiliates with EPOGEN(R) to meet NMC's and Affiliates' reasonable dialysis use requirements. 9. OWN USE. NMC hereby certifies that Products purchased hereunder will be for the "own use" by NMC and the Affiliates of NMC. NMC hereby further certifies that all of the Products purchased hereunder shall be for the exclusive use of treating dialysis patients. 10. AUTHORIZED WHOLESALERS. A complete list of NMC's and Affiliates' current Authorized Wholesalers, through which NMC and Affiliates may purchase Products hereunder is attached as Appendix C. NMC and Affiliates agree to promptly provide Amgen with any additions, deletions, or changes to the initial list of Authorized Wholesalers. Amgen requires no less than 30 days notice before the effective date of change for any addition or deletion of Authorized Wholesalers hereunder. Any proposed changes to the initial list of Authorized Wholesalers must be in writing and are subject to reasonable approval by Amgen. 11. SUBSIDIARIES AND AFFILIATES. Within thirty (30) days of execution of this Agreement, NMC shall provide a current listing of all affiliates, and other entities, that will be participating in this Agreement, designating which affiliates are owned and/or managed by NMC. Affiliates so designated by NMC and approved by Amgen will be deemed "Affiliates" for the purposes of this Agreement. Subsequent to approval and acceptance by Amgen, a list of Affiliates shall be attached to this Agreement as Appendix B and incorporated herein. Only those Affiliates approved by Amgen and referenced in Appendix B will be eligible to participate under this Agreement. Any NMC managed Affiliate, or other entity with an existing contract, may participate in either their existing agreement with Amgen, or this Agreement, but not both. Each managed Affiliate or entity must declare under which single Amgen contract it will participate. Only Qualified Purchases under this Agreement will be used in the calculation of pricing, discounts or other incentives under this Agreement. NMC will notify Amgen of changes to Appendix B, and the effective date of change. Such effective date of change may not be earlier than the date the notice is received by Amgen. Any proposed change to Appendix B will be subject to the reasonable approval of Amgen based upon Amgen's then current legal and contractual requirements, and such proposed affiliate's classification as a freestanding dialysis center or a home dialysis support facility. 12. TERMINATION. If either party materially breaches this Agreement, then the other party may terminate this Agreement upon thirty (30) days advance written notice. In the event that NMC materially breaches any provision of this Agreement, Amgen shall have no obligation to continue to offer the terms described herein or pay any further unvested discounts to NMC. [*]. [*]. 13. CONFIDENTIALITY. Both Amgen and NMC agree that this Agreement represents and contains confidential information which will not be disclosed to any third party, or otherwise made public, without prior written authorization of the other party, except where such disclosure is contemplated hereunder or required by law or court order. In the event NMC believes it is obligated to disclose any such information as required by law or court order, NMC will provide Amgen with prior written notice and an opportunity to seek a protective order and NMC shall furnish only that portion of the information that its counsel advises is required to be disclosed by law. - 2 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- 14. WARRANTIES. Each party represents and warrants to the other that this Agreement (a) has been duly authorized, executed, and delivered by it, (b) constitutes a valid, legal, and binding agreement enforceable against it in accordance with the terms contained herein, and (c) does not conflict with or violate any of its other contractual obligations, expressed or implied, to which it is a party or by which it may be bound. NMC represents and warrants that it has the power to bind National Medical Care, Inc. and the subsidiaries and owned Affiliates listed on Appendix B to the terms contained herein. NMC shall cause each managed Affiliate to be bound by the terms and conditions of this Agreement through the execution of a joinder agreement executed between NMC and each such managed Affiliate. 15. GOVERNING LAW. This Agreement will be governed by the laws of the State of Delaware and the parties submit to the jurisdiction of Delaware courts, both state and federal. 16. NOTICES. Any notice or other communication required or permitted hereunder will be in writing and shall be deemed given or made when delivered in person or when received by the other party sent by U.S. Mail, return receipt requested, at the respective party's address set forth below or at such other address as the party shall have furnished to the other in accordance with this provision. 17. COMPLIANCE WITH HEALTH CARE PRICING AND PATIENT PRIVACY LEGISLATION AND STATUTES. a) Notwithstanding anything contained herein to the contrary, at any time following the enactment of any federal, state, or local law or regulation that materially reforms, modifies, alters, restricts, or otherwise affects the pricing of or reimbursement available for any of the Products, including a reimbursement or use decision by Centers for Medicare and Medicaid Services ("CMS"), either party may initiate good faith negotiations to modify this Agreement. If the parties, after 30 days, are unable to agree upon such a modification (i) either party may terminate this Agreement immediately, or (ii) Amgen may exclude any owned or managed Affiliates from participating in this Agreement unless such owned or managed Affiliate(s) certifies in writing that they are, or will be, exempt from the provisions of such enacted law or regulation. Additionally, in order to assure compliance with any existing federal, state or local statute, regulation or ordinance, Amgen reserves the right, in its reasonable discretion, to exclude any owned or managed Affiliates from the pricing, discount, and incentive provisions of this Agreement. In the event there is a future change in Medicare, Medicaid, or other federal or state statutes or regulations or in the interpretation thereof, which renders any of the material terms of this Agreement unlawful or unenforceable, this Agreement shall continue only if amended by the parties as a result of good faith negotiations as necessary to bring the Agreement into compliance with such statute and regulation. b) Notwithstanding anything contained herein to the contrary, in order to assure compliance, as determined by either party in its reasonable discretion, with any existing federal, state or local statute, regulation or ordinance relating to patient privacy of medical records, or at any time following the enactment of any federal, state, or local law or regulation relating to patient privacy of medical records that in any manner reforms, modifies, alters, restricts, or otherwise affects any of the data received or to be received in connection with any of the incentives contemplated under this Agreement, either party may upon thirty (30) days' notice, seek to modify this Agreement. NMC and Amgen shall meet and in good faith seek to mutually agree to modify this Agreement to accommodate any such change in law or regulation, [*]. If the parties in good faith determine that such modification is not possible, the parties shall seek to modify the Agreement in another manner acceptable to both parties. If the parties, after a reasonable time, are unable to agree upon such a modification, Amgen shall be entitled to terminate the affected incentive upon thirty (30) days' notice or upon the date such change in law or regulation goes into effect, whichever is earlier. [*]. 18. INSURANCE AND INDEMNITY. During the Term of this Agreement, Amgen shall insure coverage of its obligations hereunder consistent with Amgen corporate policy through such programs of self-insurance and/or policies of general liability insurance through third-party carriers as Amgen shall determine in its sole discretion. Amgen agrees to indemnify, defend and hold harmless NMC and its respective employees, officers and directors from and against any and all liabilities, losses, claims, or costs, including reasonable attorneys' fees, which result directly from Direct Product (as such term is defined in Section 20 herein) which as of the date of shipment by Amgen: (i) contain defects in material and workmanship, (ii) are adulterated or misbranded within the meaning of applicable provisions of the Federal Food, Drug and Cosmetic Act (the "FDC Act"), or (iii) are prohibited from being introduced into interstate commerce by Section 301 of the FDC Act or Section 351 of the Public Health Service Act; provided that such indemnity shall not apply to claims arising out of the negligent or willful actions or omissions of NMC or its agents, employees, representatives, successors or assigns or due to defects in the Direct Product caused by persons other than Amgen which - 3 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- result from neglect, misuse, unauthorized adulteration or modification, improper testing, handling or storage or any cause beyond the range of normal usage; and further provided that (a) Amgen is promptly notified in writing of any such claim, (b) Amgen shall have sole control of the defense and settlement thereof, and (c) NMC cooperates fully and gives Amgen all requested information and assistance for such defense. Notwithstanding the foregoing, Amgen shall not be liable for loss of profit or loss of use, incidental or consequential damages arising out of any claim asserted by NMC under this Agreement or otherwise. The preceding paragraph sets forth NMC's sole remedy for claims of Product defect, adulteration or misbranding. 19. MISCELLANEOUS. No modification of this Agreement shall be effective unless made in writing and signed by a duly authorized representative of each party. This Agreement constitutes the entire agreement of the parties pertaining to the subject matter hereof and supersedes all prior written and oral agreements and understandings pertaining hereto including without limitation, any previous or existing contract or amendment for the purchase of Products for use in the treatment of dialysis patients. Neither party shall have the right to assign this Agreement to a third party without the prior written consent of the other party provided, however, that Amgen may assign this Agreement to any of its subsidiaries or affiliates without the written consent of NMC. Neither party shall be liable for delays in performance and nonperformance of this Agreement or any covenant contained herein caused by fire, flood, storm, earthquake or other act of God, war, terrorist acts, rebellion, riot, failure of carriers to furnish transportation, strike, lockout or other labor disturbances, act of government authority, inability to obtain material or equipment, or any other cause of like or different nature beyond the control of such party. However, during any time of nonperformance by Amgen which involves NMC's and Affiliates' inability to obtain sufficient Products to meet NMC's and Affiliates' reasonable dialysis use requirements, the [*] for such nonperformance, [*] and NMC and Affiliates may purchase Products from another supplier. The parties shall execute and deliver all documents, provide all information, and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. This Agreement may be executed in one or more counterparts, each of which is deemed to be an original but all of which taken together constitutes one and the same agreement. Amgen reserves the right to rescind this offer if the parties fail to execute this Agreement within thirty (30) days from the date of its offering. 20. DIRECT PURCHASE OF PRODUCTS. NMC may purchase EPOGEN(R) M20, 20,000U, 1mL vials, NDC 55513-478-10 packaged as ten (10) vials per pack and four (4) packs per case and Aranesp(TM) 25 mcg, 1.0 mL vials, NDC 55513-010-04 packaged as four (4) vials per pack and ten (10) packs per case, 40 mcg, 1.0 mL vials, NDC 55513-011-04 packaged as four (4) vials per pack and ten (10) packs per case, 60 mcg, 1.0 mL vials, NDC 55513-012-04 packaged as four (4) vials per pack and ten (10) packs per case, 100 mcg, 1.0 mL vials, NDC 55513-013-04 packaged as four (4) vials per pack and ten (10) packs per case, and 200 mcg, 1.0 mL vials, NDC 55513-011-04 packaged as one (1) vial per pack and four (4) packs per case, (the "Direct Product") on a direct basis from Amgen in accordance with the terms set forth under Appendix D which is incorporated herein by reference. Please retain one fully executed original for your records and return the other fully executed original to Amgen. THE PARTIES EXECUTED THIS AMENDMENT AS OF THE DATES SET FORTH BELOW.
AMGEN USA INC. NATIONAL MEDICAL CARE, INC. Signature: /s/ Michael Narachi Signature: /s/ Ben Lipps --------------------------------- ------------------------------ Print Name: Michael Narachi Print Name: Ben Lipps --------------------------------- ------------------------------ Print Title: Vice President and General Manager Print Title: President ---------------------------------- ------------------------------ Date: February 14, 2002 Date: ---------------------------------- ------------------------------
- 4 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- APPENDIX A: DISCOUNT PRICING, SCHEDULE, AND TERMS 1. PRICING - ARANESP(TM). NMC and Affiliates may purchase Aranesp(TM)through Authorized Wholesalers [*]. [*]. [*]. 2. PRICING - EPOGEN(R). NMC and Affiliates may purchase EPOGEN(R) directly from Amgen or through Authorized Wholesalers [*] during the period from the Commencement Date through December 31, 2002 ("CY1"). NMC and Affiliates may purchase EPOGEN(R) directly from Amgen or through Authorized Wholesalers [*] during the period from January 1, 2003 through December 31, 2003 ("CY2"). [*]. [*]. 3. BASE SALES FOR 2001. For purposes of calculating growth in CY1, Amgen will compare the [*]. For purposes of calculating growth in CY2, Amgen will compare the [*]. Aggregated Qualified Purchases of EPOGEN(R) for calendar year 2001 shall be calculated [*]. Total aggregate Qualified Purchases for CY1 and CY2 shall be calculated using [*]. [*] 4. [*]. 5. [*] For the period beginning January 1, 2002 and ending March 31, 2002 NMC shall be eligible to receive a [*] if certain data elements are transmitted to Amgen [*]. Beginning April 1, 2002 through the remainder of the Term of the Agreement, the [*]. [*] 6. [*]. NMC may qualify for [*] provided it meets the criteria described below: a. CALCULATION: NMC's [*] will be calculated in accordance with the following formula and with the [*] listed below: [*]. [*] For the purposes of calculating [*], Amgen will incorporate purchases of any newly created facility (but not facilities added through acquisition). [*]. b. VESTING: Notwithstanding the foregoing, NMC's [*] will vest annually on the [*], and will be paid in accordance with the terms and conditions described above. 7. [*], NMC and Affiliates may qualify for a [*] provided it meets the criteria described below in this Section. [*]. a. REQUIREMENTS: In order to qualify for [*], NMC must provide Amgen [*]. b. CALCULATION: Assuming NMC has fulfilled all requirements as described in Section 7(a) above, the [*] for NMC will be calculated as follows: [*]. c. PAYMENT: The [*] will be calculated on a [*] basis and paid to NMC's corporate headquarters, except as otherwise provided hereunder. [*]. d. VESTING: Notwithstanding the foregoing, NMC's [*] will vest annually on [*], and will be paid in accordance with the terms and conditions described above. - 5 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- APPENDIX B: LIST OF NMC SUBSIDIARIES AND AFFILIATES SUBSIDIARIES: Bio-Medical Applications Management Co., Inc. and its subsidiaries Dialysis America, Georgia, LLC. Erika, Inc. Integrated Renal Care of the Pacific, LLC. Infusion Care, Inc. National Medical Care HomeCare Division, Inc. Renal Research Institute, LLC. SRC Holding Company, Inc. and its subsidiaries Everest Healthcare Holdings, Inc. and its subsidiaries Extracorporeal Alliance/CVR Fresenius Medical Care Pharmacy Services, Inc. AFFILIATES: See Contract List Attached - 6 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- APPENDIX C: LIST OF NMC AUTHORIZED WHOLESALERS TO ENSURE YOU RECEIVE THE APPROPRIATE DISCOUNT, IT IS IMPORTANT THAT WE HAVE YOUR CURRENT LIST OF AUTHORIZED WHOLESALERS. THE FOLLOWING LIST REPRESENTS THE WHOLESALERS AMGEN CURRENTLY HAS ASSOCIATED WITH YOUR CONTRACT. PLEASE UPDATE THE LIST BY ADDING OR DELETING WHOLESALERS AS NECESSARY. Bergen Brunswig Corporation 4000 Metropolitan Drive Orange, CA 92668 J.M. Blanco Inc. Calle D - Lote No. 21 Guaynabo, PR 00965 Metro Medical Supply, Inc. 3332 Powell Avenue Nashville, TN 37204 Bellco Drug Corporation 101 East Hoffman Avenue Lindenhurst, NY 11757 - 7 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- APPENDIX D: TERMS FOR PURCHASE OF DIRECT PRODUCT Pursuant to Section 19 of the Agreement, the terms under which NMC may purchase Products on a direct basis from Amgen are as follows: 1. ORDERS/INVOICES. NMC will transmit orders and receive corresponding invoices via electronic data interchange ("EDI") in Orders may be submitted via facsimile, mail, or telephone to the address and telephone/fax numbers listed below. [*]. [*]. Amgen Customer Service may be reached at the following address and phone numbers: Amgen USA Inc. CUSTOMER SERVICE DEPARTMENT FAX 1-800-292-6436 One Amgen Center Drive Tel: 1-800-282-6436 Thousand Oaks, CA 91320-1799 2. SHIPPING, TRANSPORTATION AND CHARGES. [*]. 3. TITLE AND RISK OF LOSS. [*]. 4. PRICING FOR DIRECT PRODUCT. NMC may purchase Direct Product from Amgen on a direct basis in accordance with Appendix A of the Agreement. 5. TERMS OF PAYMENT. NMC agrees to pay for Direct Product ordered, at terms of [*]. - 8 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- APPENDIX E: LIST OF APPROVED DISTRIBUTION CENTERS Fresenius USA Manufacturing, Inc. d/b/a Nephromed and affiliates 95 Hayden Avenue Lexington, MA 92420-9192 - 9 - FREESTANDING DIALYSIS CENTER AGREEMENT - -------------------------------------------------------------------------------- EXHIBIT #1 SAMPLE CERTIFICATION LETTER Month X, 2002 FSDC Legal Name Street Address City, ST Zip RE: Agreement No. _________________ Dear ____________: Thank you for your participation in the [*] Incentive Program. In order for us to enroll you, we require that a duly authorized representative of your organization sign the certification below. Upon receipt of this executed document, we will calculate the value of your incentive. If we do not receive the executed certification, we cannot provide you with this incentive. If you have any questions regarding this letter please contact me at [*]. Thank you for your assistance in returning this certification. Sincerely, [*] CERTIFICATION: On behalf of FSDC Legal Name and all eligible Affiliates participating in the [*] Incentive Program under Agreement No. __________ , the undersigned hereby certifies that the [*] data submitted for each eligible Affiliate includes the required [*] results from all dialysis patients of such Affiliate, and does not include [*] results from non-patients. The party executing this document also represents and warrants that it (i) has no reason to believe that the submitted [*] data is incorrect, and (ii) is authorized to make this certification on behalf of all eligible Affiliates submitting [*] data. FSDC LEGAL NAME Signature: _____________________________ Print Name: _____________________________ Print Title: _____________________________ Date: _____________________________ - 10 - EX-11 4 b43057fmex11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 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) THREE MONTHS ENDED MARCH 31, -------------------------- 2002 2001 --------- ---------- The weighted average number of shares of Common Stock were as follows.................. 90,000 90,000 ========= ========= Income used in the computation of earnings per share were as follows: THREE MONTHS ENDED MARCH 31, ------------------------- CONSOLIDATED 2002 2001 --------- --------- Net earnings..................................... $ 40,458 $ 22,446 Dividends paid on preferred stocks............... (130) (130) --------- --------- Income used in per share computation of earnings...................................... $ 40,328 $ 22,316 ========= ========= Basic and fully dilutive earnings per share...... $ 0.45 $ 0.25 ========= ========= -----END PRIVACY-ENHANCED MESSAGE-----