-----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, CX2joZkOZaKXS5GuAqwmTpNEBy6kyf+YcXxSQhtOVAAV+tCw0ADtWeHT4j+pQpQp sddDbN9Kpto8g/DCoHPAZg== 0000950135-99-002679.txt : 19990517 0000950135-99-002679.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950135-99-002679 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRESENIUS NATIONAL MEDICAL CARE HOLDINGS INC 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: SEC FILE NUMBER: 001-03720 FILM NUMBER: 99621462 BUSINESS ADDRESS: STREET 1: TWO LEDGEMONT CENTER STREET 2: 95 HAYDEN AVE CITY: LEXINGTON STATE: MA ZIP: 02173 BUSINESS PHONE: 6174029000 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /NY/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 10-Q 1 FRESENIUS MEDICAL CARE HOLDINGS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________________TO__________________ COMMISSION FILE NUMBER: 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New York 13-3461988 (State or Other Jurisdiction of Incorporation) (I.R.S. Employer ID No.) Two Ledgemont Center, 95 Hayden Avenue, Lexington, MA 02420 (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code: 781-402-9000 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicated by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ _____ 1 2 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of the date hereof, 90,000,000 shares of common stock, par value $1.00 per share, are outstanding, all of which are held by Fresenius Medical Care AG. 2 3 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PAGE Consolidated Statements of Earnings .......................... 4 Consolidated Statements of Comprehensive Income............... 5 Consolidated Balance Sheets................................... 6 Consolidated Statements of Cash Flows......................... 7 Notes to Consolidated Financial Statements.................... 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 24 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................... 30 PART II: OTHER INFORMATION ITEM 1: Legal Proceedings............................................. 31 ITEM 5: Other Information............................................. 45 ITEM 6: Exhibits and Reports on Form 8-K.............................. 46
3 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, -------------------------- 1999 1998 --------- --------- NET REVENUES Health care services .............................. $ 553,457 $ 488,428 Medical supplies .................................. 118,683 121,618 --------- --------- 672,140 610,046 --------- --------- EXPENSES Cost of health care services ...................... 368,808 323,055 Cost of medical supplies .......................... 81,624 83,787 General and administrative expenses ............... 63,987 63,452 Provision for doubtful accounts ................... 15,058 18,588 Depreciation and amortization ..................... 53,934 53,184 Research and development .......................... 1,024 989 Interest expense, net, and related financing costs including $20,578 and $16,059, of interest with affiliates ................................... 50,126 47,099 --------- --------- 634,561 590,154 --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS ................... 37,579 19,892 PROVISION FOR INCOME TAXES ........................... 19,952 10,046 --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS ...................... $ 17,627 $ 9,846 --------- --------- DISCONTINUED OPERATIONS (NOTE 4) Loss from discontinued operations, net of income taxes .................................... -- (4,429) --------- --------- Loss from discontinued operations ................. $ -- $ (4,429) --------- --------- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS, NET OF TAX BENEFIT ............. -- (4,890) --------- --------- NET INCOME ........................................... $ 17,627 $ 527 ========= ========= Basic and fully dilutive earnings per share Continuing operations ............................. $ 0.19 $ 0.11 Discontinued operations ........................... $ -- $ (0.05) Cumulative effect of accounting change ............ $ -- $ (0.05) Net Income ........................................ $ 0.19 $ 0.01
See accompanying Notes to Unaudited, Consolidated Financial Statements 4 5 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------ 1999 1998 -------- -------- NET INCOME .................................. $ 17,627 $ 527 Other comprehensive income Foreign currency translation adjustments . (392) 1,026 -------- -------- Total other comprehensive income ......... (392) 1,026 -------- -------- COMPREHENSIVE INCOME ........................ $ 17,235 $ 1,553 ======== ========
5 6 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ----------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents ........................ $ 14,459 $ 6,579 Accounts receivable, less allowances of .......... 257,092 254,783 $54,814 and $49,209 Inventories ...................................... 176,196 169,789 Deferred income taxes ............................ 134,794 139,653 Other current assets ............................. 103,913 93,912 Net assets of discontinued operations (Note 4) ... 147,114 149,949 ----------- ----------- Total Current Assets ........................... 833,568 814,665 ----------- ----------- Properties and equipment, net ...................... 423,987 429,639 ----------- ----------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $321,897 and $289,167 .......................... 3,288,461 3,317,424 Other assets and deferred charges ................ 56,653 51,675 ----------- ----------- Total Other Assets ............................. 3,345,114 3,369,099 ----------- ----------- Total Assets ....................................... $ 4,602,669 $ 4,613,403 =========== =========== LIABILITIES AND EQUITY Current Liabilities: Current portion of long-term debt and capitalized lease obligations .................. $ 43,263 $ 43,348 Current portion of borrowing from affiliates ..... 18,288 32,716 Accounts payable ................................. 113,813 107,482 Accrued liabilities .............................. 294,459 306,333 Net accounts payable to affiliates ............... 17,942 17,966 Accrued income taxes ............................. 26,752 12,411 ----------- ----------- Total Current Liabilities ...................... 514,517 520,256 Long-term debt ..................................... 978,701 1,010,880 Non-current borrowings from affiliates ............. 958,800 956,284 Capitalized lease obligations ...................... 1,786 2,666 Deferred income taxes .............................. 144,660 144,605 Other liabilities .................................. 37,760 29,278 ----------- ----------- Total Liabilities .............................. 2,636,224 2,663,969 ----------- ----------- Equity: Preferred stock, $100 par value .................. 7,412 7,412 Preferred stock, $.10 par value .................. 8,906 8,906 Common stock, $1 par value; 300,000,000 shares authorized; outstanding 90,000,000 ............. 90,000 90,000 Paid in capital .................................. 1,942,141 1,942,235 Retained deficit ................................. (82,659) (100,156) Accumulated comprehensive income ................. 645 1,037 ----------- ----------- Total Equity ................................... 1,966,445 1,949,434 ----------- ----------- Total Liabilities and Equity ....................... $ 4,602,669 $ 4,613,403 =========== ===========
See accompanying Notes to Unaudited, Consolidated Financial Statements. 6 7 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------------- 1999 1998 --------- --------- Cash Flows from Operating Activities: Net income ................................................... $ 17,627 $ 527 Adjustments to reconcile net income to net cash from Operating activities: Depreciation and amortization .............................. 53,934 53,184 Loss from discontinued operations .......................... -- 4,429 Cumulative effect of change in accounting .................. -- 4,890 Provision for doubtful accounts ............................ 15,058 18,588 Deferred income taxes ...................................... 4,914 (1,154) Loss on disposal of properties and equipment ............... 187 (120) Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable ........................... (20,869) (53,954) Increase in inventories .................................... (6,388) (13,895) (Increase) decrease in other current assets ................ (10,001) 11,428 Increase in other assets and deferred charges .............. (4,991) (5,269) Increase in accounts payable ............................... 6,331 14,881 Increase in accrued income taxes ........................... 14,341 22,617 Decrease in accrued liabilities ............................ (11,873) (42,145) Increase in other long-term liabilities .................... 8,481 4,305 Net changes due to/from affiliates ......................... (25) (8,901) Other, net ................................................. 2,768 (2,673) --------- --------- Net cash provided by operating activities of continued operations ...................................... 69,494 6,738 --------- --------- Net cash provided by (used in) operating activities of discontinued operations ..................... 2,848 (2,093) --------- --------- Net cash provided by operating activities .................... 72,342 4,645 --------- --------- Cash Flows from Investing Activities: Capital expenditures ....................................... (17,457) (19,755) Payments for acquisitions, net of cash acquired ............ (4,926) (137,626) --------- --------- Net cash used in investing activities of continued operations ....................................... (22,383) (157,381) --------- --------- Net cash used in investing activities of discontinued operations .................................... (10) (4,489) --------- --------- Net cash used in investing activities ........................ (22,393) (161,870) --------- --------- Cash Flows from Financing Activities: (Decrease) increase in borrowings from affiliates .......... (11,912) 571,989 Cash dividends paid ........................................ (130) (130) Proceeds from issuance of debt ............................. 37 12,319 Proceeds from receivable financing facility ................ 3,500 125,000 Payments on debt and capitalized leases .................... (33,181) (540,744) Other net .................................................. (94) (651) --------- --------- Net cash provided by (used in) financing activities of continued operations ....................................... (41,780) 167,783 --------- --------- Net cash used in financing activities of discontinued operations ................................... -- (946) --------- --------- Net cash provided by (used in) financing activities .......... (41,780) 166,837 --------- --------- Effects of changes in foreign exchange rates ................... (289) 1,071 --------- --------- Change in cash and cash equivalents ............................ 7,880 10,683 Cash and cash equivalents at beginning of period ............... 6,579 12,437 --------- --------- Cash and cash equivalents at end of period ..................... $ 14,459 $ 23,120 ========= =========
See accompanying Notes to Unaudited, Consolidated Financial Statements 7 8 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------------- 1999 1998 --------- --------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ......................................... $ 29,297 $ 37,787 Income taxes (received)/paid, net ................ 924 (14,447) Details for Acquisitions: Assets acquired .................................... 4,926 139,960 Liabilities assumed ................................ -- 2,334 --------- --------- Net cash paid for acquisitions ..................... $ 4,926 $ 137,626 ========= =========
See accompanying Notes to Consolidated Financial Statements 8 9 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY, AND BASIS OF PRESENTATION 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"). The Company conducts its operations through three principal subsidiaries, National Medical Care, Inc., a Delaware corporation ("NMC"), Fresenius USA, Inc., a Massachusetts corporation ("FUSA") and SRC Holding Company, Inc., a Delaware corporation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, NMC and FUSA and those financial statements where the Company controls professional corporations in accordance with Emerging Issues Task Force Issue 97-2. The Company is primarily engaged in (i) providing kidney dialysis services, clinical laboratory testing and renal diagnostic services, and (ii) manufacturing and distributing products and equipment for dialysis treatment. The Merger, which was effective September 30, 1996, resulted from the culmination of the following transactions: (1) NMC, which was a subsidiary of W. R. Grace & Co. -- Conn. ("Grace Chemicals"), a wholly-owned subsidiary of Grace New York, borrowed $2,300,000 and paid a cash dividend of approximately $2,100,000 to Grace Chemicals; (2) the stock of NMC was transferred to Grace New York, so that NMC and Grace Chemicals became subsidiaries of Grace New York; (3) the stock of Grace Chemicals was transferred to a newly formed Delaware subsidiary of Grace New York ("New Grace") and the shares of New Grace were spun-off to the Grace New York shareholders in a pro rata distribution; (4) Grace New York was recapitalized such that each Grace New York shareholder received one share of Class D Preferred Stock of Grace New York for each share of Grace New York common stock held; and (5) Grace New York, with NMC as its sole business, merged with a wholly-owned subsidiary of FMC, and Fresenius AG's worldwide dialysis business (including its controlling interest in FUSA) ("FWD") was contributed as separate subsidiaries of FMC with the result that 44.8% of the ordinary shares of FMC were exchanged for the common stock held by Grace New York common shareholders in the merger transaction and the balance of the ordinary shares of FMC were received by Fresenius AG and the shareholders of FUSA, in consideration of the contribution of FWD to FMC. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at March 31, 1999 and 1998 and for the three month interim periods then ended are unaudited and should be read in conjunction with the consolidated financial statements in the Company's 1998 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, 1999 are not necessarily indicative of the results of operations for the fiscal year ending December 31, 1999. NEW STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. This statement requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The statement also sets forth the criteria for determining whether a derivative may be specifically designated as a hedge of a particular exposure with the intent of measuring the effectiveness of that hedge in the statement of operations. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is currently analyzing the complexities of SFAS 133 and its effect on the consolidated financial statements. 9 10 NOTE 2. INVENTORIES
MARCH 31, DECEMBER 31, 1999 1998 -------- ------------ Inventories: Raw materials ............................................ $ 37,585 $ 35,199 Manufactured goods in process ............................ 18,800 18,802 Manufactured and purchased inventory available for sale 90,621 86,615 -------- -------- 147,006 140,616 Health care supplies .................................... 29,190 29,173 -------- -------- Total ............................................... $176,196 $169,789 ======== ========
NOTE 3. DEBT
MARCH 31, DECEMBER 31, 1999 1998 ---------- ------------ Long-term debt to outside parties consists of: NMC Credit Facility ............................................ $1,000,800 $1,032,700 Third-party debt, primarily bank borrowings at variable interest rates (3% -14%) with various maturities ... 16,492 16,215 ---------- ---------- 1,017,292 1,048,915 Less amounts classified as current ............................. 38,591 38,035 ---------- ---------- $ 978,701 $1,010,880 ========== ==========
Non current borrowings from affiliates consists of:
MARCH 31, DECEMBER 31, 1999 1998 -------- ------------ Fresenius Medical Care AG non-current borrowings primarily at interest rates approximating 6 - 9.25% ... $ 95,321 $ 94,471 Fresenius AG non-current borrowing at interest rates approximating 6 - 7% .................................. 60,000 60,000 Fresenius Medical Care Finance SA borrowings primarily at interest rates approximating 6.5% ......... 33,236 47,665 Fresenius Medical Care Trust Finance S.a.r.l. at interest rate of 8.43% and 9.25% ................................ 786,524 786,524 Other ...................................................... 2,007 340 -------- -------- 977,088 989,000 Less amounts classified as current ......................... 18,288 32,716 -------- -------- Total ...................................................... $958,800 $956,284 ======== ========
10 11 NOTE 4. DISCONTINUED OPERATIONS Effective June 1, 1998, the Company classified its non-renal diagnostic services business ("Non-Renal Diagnostic Services") and homecare business ("Homecare") as discontinued operations. The Company disposed of its Non Renal Diagnostic Services division and its Homecare division on respectively, June 26, 1998 and July 29, 1998. In connection with the sale of Homecare, the Company retained the assets and the operations associated with the delivery of IDPN and records, for accounting purposes, its activity as part of discontinued operations. The Company recorded a net after tax loss of $97 million on the sale of these businesses. The net loss on the disposal of these businesses and their results of operations have been accounted for as discontinued operations. The remaining assets and liabilities of these discontinued operations at the balance sheet date have been classified in the consolidated balance sheet as Net Assets of Discontinued Operations. Included in net assets of discontinued operations is approximately $150 million of IDPN receivables. These assets have not been sold and will remain classified as discontinued operations until they have been settled. See Note 5 - "Commitments and Contingencies - Legal Proceedings." Operating results and net assets of discontinued operations are presented below: Discontinued Operations - Results of Operations The revenues and results of operations of the discontinued operations of Non Renal Diagnostic Services and Homecare divisions were as follows:
THREE MONTHS ENDED MARCH 31, ------------------------ 1999 1998 -------- -------- NET REVENUES ....................... $ -- $ 61,918 -------- -------- Loss before income tax benefit ..... -- (6,991) Income tax benefit ................. -- (2,562) -------- -------- Loss from discontinued operations .. $ -- $ (4,429) ======== ========
Discontinued Operations - Consolidated Balance Sheet The net assets, excluding intercompany assets, of the discontinued operations of the Non Renal Diagnostic Services and Homecare divisions, included in the consolidated balance sheet at March 31, 1999 are as follows:
Total Current assets ............... $164,766 Properties & equipment, net .. 211 Other assets ................. 594 -------- Total Assets .............. $165,571 ======== Current liabilities .......... 18,210 Other liabilities ............ 247 -------- Total Liabilities ......... 18,457 ======== Net assets ................ $147,114 ========
11 12 NOTE 5. COMMITMENTS AND CONTINGENCIES Contingent Non-NMC Liabilities of Grace New York (Now Known as Fresenius Medical Care Holdings, Inc.) In connection with the Merger, Grace Chemicals has agreed to indemnify the Company and NMC against all liabilities of the Company and its successors, whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC operations. After the Merger the Company will remain contingently liable for certain liabilities with respect to pre-Merger matters that are not related to NMC operations. The Company believes that in view of the nature of the non-NMC liabilities and the expected impact of the Merger on Grace Chemicals' financial position, the risk of significant loss from non-NMC liabilities is remote. Were events to violate the tax-free nature of the Merger, the resulting tax liability would be the obligation of the Company. Subject to representations by Grace Chemicals, the Company, and Fresenius AG, Grace Chemicals has agreed to indemnify the Company for such a tax liability. If the Company was not able to collect on the indemnity, the tax liability would have a material adverse effect on the Company's business, the financial condition of the Company and the results of operations. LEGAL PROCEEDINGS Government Investigations OIG INVESTIGATIVE SUBPOENAS In October 1995, NMC received five investigative subpoenas from the Office of the Inspector General ("OIG") of the Department of Health and Human Services. The subpoenas were issued in connection with an investigation being conducted by the OIG, the U.S. Attorney for the District of Massachusetts and others concerning possible violations of federal laws, including the anti-kickback statutes and the False Claims Act (the "OIG Investigation"). The subpoenas call for extensive document production relating to various aspects of NMC's business. In connection with the OIG Investigation, the Company continues to receive additional subpoenas directed to NMC or the Company to obtain supplemental information and documents regarding the above-noted issues, or to clarify the scope of the original subpoenas. The Company is cooperating with the OIG Investigation. The Company believes that the government continues to review and evaluate the voluminous information the Company has provided. As indicated above, the government continues, from time to time, to seek supplementing and/or clarifying information from the Company. The Company understands that the government has utilized a grand jury to investigate these matters. The Company expects that this process will continue while the government completes its evaluation of the issues. The OIG Investigation covers the following areas: (a) NMC's dialysis services business ("Dialysis Services"), principally relating to its Medical Director contracts and compensation; (b) NMC's treatment of credit balances resulting from overpayments received under the Medicare, Medicaid, CHAMPUS and other government and commercial payors, its billing for home dialysis services, and its payment of supplemental medical insurance premiums on behalf of indigent patients; (c) NMC's LifeChem laboratory subsidiary's ("LifeChem") business, including testing procedures, marketing, customer relationships, competition, overpayments totaling approximately $4.9 million that were received by LifeChem from the Medicare program with respect to laboratory services rendered between 1989 and 1993, a 1997 review of dialysis facilities' standing orders, and the provision of discounts on products from NMC's products division, grants, equipment and entertainment to customers; and (d) NMC's homecare division ("Homecare") and, in particular, information concerning intradialytic parenteral nutrition ("IDPN") utilization, documentation of claims and billing practices including various services, equipment and supplies and payments made to third parties as compensation for administering IDPN therapy. The government has indicated that the areas identified above are not exclusive, and that it may pursue additional areas. As noted, the penalties applicable under the anti-kickback statutes, the U.S. Federal False Claims Act (the "False Claims Act") and other federal and state statutes and regulations applicable to NMC's business can be substantial. While NMC asserts that it is able to offer legal and/or factual defenses with respect to many of the areas the government has identified, it is expected that the government will assert 12 13 that NMC has violated multiple statutory and regulatory provisions. Additionally, ten and possibly other qui tam actions alleging that NMC submitted false claims to the government have been filed under seal by former or current NMC employees or other individuals who may have familiarity with one or more of the issues under investigation. As noted, under the False Claims Act, any such private plaintiff could pursue an action against NMC in the name of the U.S. at his or her own expense if the government declines to do so. During the approximately three and one-half years since the initial subpoenas were served NMC and the government have met periodically to discuss issues in connection with the OIG Investigation, including theories of liability. Recently, NMC and the government have begun to explore the possibility of settling the matters which are encompassed by the OIG Investigation and, as referenced below, have reached an agreement in principle in connection with the diagnostics investigation matter. There can be no assurance that any of the other matters subject to the OIG Investigation will be settled. If however, one or more of the matters encompassed by the OIG Investigation is settled, it may result in NMC acknowledging that its past practices violated federal statutes, as well as NMC incurring substantial civil and criminal financial penalties which could have a material adverse effect on the Company. If one or more of these matters is not settled, the government may be expected to initiate litigation in which it would seek substantial civil and criminal financial penalties and other sanctions that could result in the exclusion of NMC and its subsidiaries from the Medicare program, Medicaid program and other federal health care programs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies." DIAGNOSTICS SUBPOENA In October 1996, Biotrax International, Inc. ("Biotrax") and NMC Diagnostics, Inc., ("DSI") both of which are subsidiaries of NMC, received an investigative subpoena from the OIG. The subpoena calls for the production of extensive documents and was issued in connection with an investigation being conducted by the OIG in conjunction with the U.S. Attorney for the Eastern District of Pennsylvania concerning the possible submission of false or improper claims to, and their payment by, the Medicare program. The subpoena calls for the production of documents on corporate organization, business plans, document retention, personnel files, sales and marketing and Medicare billing issues relating to certain procedures offered by the prior owner of the Biotrax business before its assets were acquired by NMC in March 1994 and by DSI following the acquisition. The Company has reviewed the subpoena with its legal counsel and has made extensive document production in response to the subpoena. The Company and the government have been negotiating a resolution to this matter, and negotiations have progressed to the point of a possible settlement. The Company and the government have reached an agreement in principle in which, among other things, the government has agreed to release the Company from liability in this matter in exchange for a payment of approximately $16.5 million from the Company. The Company and the government are currently negotiating the terms of a settlement agreement. The agreement is not final. For this reason, the eventual outcome of this matter, its duration, and its effect, if any, on NMC or the Company cannot be predicted at this time. The Company divested Non-Renal Diagnostic Services on June 26, 1998. See Note 4 - "Discontinued Operations." MEDICAL DIRECTOR COMPENSATION The government is investigating whether Dialysis Services compensation arrangements with its Medical Directors constitute payments to induce referrals, which would be illegal under the anti-kickback statutes, rather than payment for services rendered. Dialysis Services compensated the substantial majority of its Medical Directors on the basis of a percentage of the earnings of the dialysis center for which the Medical Director was responsible from the inception of NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II. Under the arrangements in effect prior to January 1, 1995, the compensation paid to Medical Directors was adjusted to include "add backs," which represented a portion of the profit earned by NMC's Medical Products Group ("MPG") on products purchased by the Medical Director's facility from MPG and (until January 1, 1992) a portion of the profit earned by LifeChem on laboratory services provided to patients at the Medical Director's facility. These adjustments were designed to allocate a profit factor to each dialysis center relating to the profits that could have been realized by the center if it had provided the items and services directly rather than through a subsidiary of NMC. The percentage of profits paid to any specific Medical Director was reached through negotiation, and was typically a provision of a multi-year consulting agreement. To comply with provisions of OBRA 93 (as hereafter defined) known as "Stark II" if Designated Health Services (as defined in Stark II) are involved, Medical Director compensation must not exceed fair market value and may not take into account the volume or value of referrals or other business generated between the parties. Since January 1, 1995, Dialysis Services has compensated its 13 14 Medical Directors on a fixed compensation arrangement intended to comply with the requirements of Stark II. In renegotiating its Medical Director compensation arrangements in connection with Stark II, Dialysis Services took and continues to take account of the compensation levels paid to its Medical Directors in prior years. Certain government representatives have expressed the view in meetings with counsel for NMC that arrangements where the Medical Director was or is paid amounts in excess of the "fair market value" of the services rendered may evidence illegal payments to induce referrals, and that hourly compensation is a relevant measure for evaluating the "fair market value" of the services. Dialysis Services does not compensate its Medical Directors on an hourly basis and has asserted to the government that hourly compensation is not a determinative measure of fair market value. Although the Company believes that the compensation paid to its Medical Directors is generally reflective of fair market value, there can be no assurances that the government will agree with this position or that the Company ultimately will be able to defend its position successfully. Because of the wide variation in local market factors and in the profit percentage contractually negotiated between Dialysis Services and its Medical Directors prior to January 1, 1995, there is a wide variation in the amounts that have been paid to Medical Directors. As a result, the compensation that Dialysis Services has paid and is continuing to pay to a material number of its Medical Directors could be viewed by the government as being in excess of "fair market value," both in absolute terms and in terms of hourly compensation. NMC has asserted to the government that its compensation arrangements do not constitute illegal payments to induce referrals. NMC has also asserted to the government that OIG auditors repeatedly reviewed NMC's compensation arrangements with its Medical Directors in connection with their audits of the costs claimed by Dialysis Services that the OIG stated in its audit reports that, with the exception of certain technical issues, NMC had complied with applicable Medicare laws and regulations pertaining to the ESRD program; and that NMC reasonably relied on these audit reports in concluding that its program for compensating Medical Directors was lawful. There has been no indication that the government will accept NMC's assertions concerning the legality of its arrangements generally or NMC's assertion that it reasonably relied on OIG audits, or that the government will not focus on specific arrangements that Dialysis Services has made with one or more Medical Directors and assert that those specific arrangements were or are unlawful. The government is also investigating whether Dialysis Services profit sharing arrangements with its Medical Directors influenced them to order unnecessary ancillary services and items. NMC has asserted to the government that the rate of utilization of ancillary services and items by its Medical Directors is reasonable and that it did not provide illegal inducements to Medical Directors to order ancillary services and items. CREDIT BALANCES In the ordinary course of business, medical service providers like Dialysis Services receive overpayments from Medicare intermediaries and other payors for services that they provide to patients. Medicare intermediaries commonly direct such providers to notify them of the overpayment and not remit such amounts to the intermediary by check or otherwise unless specifically requested to do so. In 1992, the Health Care Financing Administration ("HCFA") adopted a regulation requiring certain Medicare providers, including dialysis centers, to file a quarterly form listing unrecouped overpayments with the Medicare intermediary responsible for reimbursing the provider. The first such filing was required to be made as of June 30, 1992 for the period beginning with the initial date that the provider participated in the Medicare program and ending on June 30, 1992. The government is investigating whether Dialysis Services intentionally understated the Medicare credit balance reflected on its books and records for the period ending June 30, 1992 by reversing entries out of its credit balance account and taking overpayments into income in anticipation of the institution of the new filing requirement. Dialysis Services policy was to notify Medicare intermediaries in writing of overpayments upon receipt and to maintain unrecouped Medicare overpayments as credit balances on the books and records of Dialysis Services for four years; overpayments not recouped by Medicare within four years would be reversed from the credit balance account and would be available to be taken into income. NMC asserts that Medicare overpayments that have not been recouped by Medicare within four years are not subject to recovery under applicable regulations and that its initial filing with the intermediaries disclosed the credit balance on the books and records of Dialysis Services as shown in accordance with its policy, but there can be no assurance that the government will accept NMC's views. The government has inquired whether other divisions including Homecare, LifeChem and DSI have appropriately treated Medicare credit balances as well as credit balances of other payors. The government is also investigating whether Dialysis Services failed to disclose Medicare overpayments that resulted from 14 15 Dialysis Services obligation to rebill commercial payors for amounts originally billed to Medicare under HCFA's initial implementation of the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") amendments to the secondary payor provisions of the Medicare Act. Dialysis Service experienced delays in reporting a material amount of overpayments after the implementation of the OBRA 93 amendments. NMC asserts that most of these delays were the result of the substantial administrative burdens placed on Dialysis Services as a consequence of the changing and inconsistent instructions issued by HCFA with respect to the OBRA 93 amendments and were not intentional. Substantially all overpayments resulting from the rebilling effort associated with the OBRA 93 amendments have now been reported. Procedures are in place that are designed to ensure that subsequent overpayments resulting from the OBRA 93 amendments will be reported on a timely basis. SUPPLEMENTAL MEDICAL INSURANCE Dialysis Services provided grants or loans for the payment of premiums for supplemental medical insurance (under which Medicare Part B coverage is provided) on behalf of a small percentage of its patients who are financially needy. The practice of providing loans or grants for the payment of supplemental medical insurance premiums by NMC was one of the subjects of review by the government as part of the OIG Investigation. The Government, however, advised the Company orally that it is no longer pursuing this issue. Furthermore, as a result of the passage of HIPAA, the Company terminated making such payments on behalf of its patients. Instead, the Company, together with other representatives of the industry, obtained an advisory opinion from the OIG, whereby, consistent with specified conditions, the Company and other similarly situated providers may make contributions to a non-profit organization that has volunteered to make these payments on behalf of indigent ESRD patients, including patients of the Company. In addition, the government has indicated that it is investigating the method by which NMC made Medigap payments on behalf of its indigent patients. OVERPAYMENTS FOR HOME DIALYSIS SERVICES NMC acquired Home Intensive Care, Inc. ("HIC"), an in-center and home dialysis service provider, in 1993. At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC had received payments for home dialysis services in excess of the Medicare reasonable charge for services rendered prior to February 1, 1990. NMC settled the HCFA claim against HIC in 1994. The government is investigating whether the settlement concerning the alleged overpayments made to HIC resolved all issues relating to such alleged overpayments. The government is also investigating whether an NMC subsidiary, Home Dialysis Services, Inc. ("HDS"), received payments similar to the payments that HIC received, and whether HDS improperly billed for home dialysis services in excess of the monthly cost cap for services rendered on or after February 1, 1990. The government is investigating whether NMC was overpaid for services rendered. NMC asserts that the billings by HDS were proper, but there can be no assurance that the government will accept NMC's view. LIFECHEM Overpayments. On September 22, 1995, LifeChem voluntarily disclosed certain billing problems to the government that had resulted in LifeChem's receipt of approximately $4.9 million in overpayments from the Medicare program for laboratory services rendered between 1989 and 1993. LifeChem asserts that most of these overpayments relate to errors caused by a change in LifeChem's computer systems and that the remainder of the overpayments were the result of the incorrect practice of billing for a complete blood count with differential when only a complete blood count was ordered and performed, and of the incorrect practice of billing for a complete blood count when only a hemoglobin or hematocrit test was ordered. LifeChem asserts that the overpayments it received were not caused by fraudulent activity, but there can be no assurance that the government will accept LifeChem's view. LifeChem made these disclosures to the government as part of an application to be admitted to a voluntary disclosure program begun by the government in mid-1995. At the time of the disclosures, LifeChem tendered repayment to the government of the $4.9 million in overpayments. After the OIG Investigation was announced, the government indicated that LifeChem had not been accepted into its voluntary disclosure program. The government has deposited the $4.9 million check with NMC's approval. The matters disclosed in LifeChem's September 22, 1995 voluntary disclosure are a subject of the OIG Investigation. On June 7, 1996, LifeChem voluntarily disclosed an additional billing problem to the government that had resulted in LifeChem's receipt of between $40,000 and $160,000 in overpayments for laboratory services rendered in 1991. LifeChem advised the government that this overpayment resulted from the submission for payment of a computer billing tape that had not been subjected to 15 16 a "billing rules" program designed to eliminate requests for payments for laboratory tests that are included in the Composite Rate and that were not eligible for separate reimbursement. LifeChem also advised the government that there may have been additional instances during the period from 1990 to 1992 when other overpayments were received as a result of the submission of computer billing tapes containing similar errors and that it was in the process of determining whether such additional overpayments were received. On June 21, 1996, LifeChem advised the government that the 1991 billing problem disclosed on June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also advised the government that certain records suggested instances in July 1990 and August 31 through September 11, 1990, when billing tapes may have been processed without rules processing. LifeChem continued its effort to determine whether any other overpayments occurred relating to the "billing rules" problem and, in March 1997, advised the government that an additional overpayment of approximately $260,000 was made by Medicare. On April 6, 1999, LifeChem voluntarily disclosed an additional billing problem to the government that resulted in LifeChem's receipt of overpayments for laboratory services rendered between 1994 and 1999. In 1994, as a result of the advice of a billing consultant, LifeChem began to bill for platelet testing performed in connection with complete blood counts. This advice was confirmed by the consultant in 1997 as part of a review performed by the consultant under the auspices of LifeChem's then outside counsel. In 1999, however, an internal inquiry resulted in a reexamination of this advice and LifeChem determined that the prior advice was incorrect. As a result LifeChem voluntarily disclosed the overpayment to the Medicare carrier. LifeChem also has notified the government of the disclosure. The Company is still reviewing its records to determine an estimated aggregate amount of the overpayments. There can be no assurances that the government will agree that LifeChem's disclosure should not result in a sanction beyond repayment of the overpayment amount. Capitation for routine tests and panel design. In October 1994, the OIG issued a special fraud alert in which it stated its view that the industry practice of offering to perform or performing the routine tests covered by the composite rate payment method (the "Composite Rate") at a price below fair market value, coupled with an agreement by a dialysis center to refer all or most of its non-Composite Rate tests to the laboratory, violates the anti-kickback statutes. In response to this alert, LifeChem changed its practices with respect to testing covered by the Composite Rate to increase the amount charged to both Dialysis Services and third-party dialysis centers and reduce the number of tests provided for the fixed rate. The government is investigating LifeChem's practices with respect to these tests. Benefits provided to dialysis centers and persons associated with dialysis centers. The government is investigating whether Dialysis Services or any third-party dialysis center or any person associated with any such center was provided with benefits in order to induce them to use LifeChem services. Such benefits could include, for example, discounts on products or supplies, the provision of computer equipment, the provision of money for the purchase of computer equipment, the provision of research grants and the provision of entertainment to customers. NMC has identified certain instances in which benefits were provided to customers who purchased medical products from NMC Medical Products, Inc., NMC's products company, and used LifeChem's laboratory services. The government may assert that the provision of such benefits violates, among other things, the anti-kickback statutes. In December 1998, the former Vice President of Sales responsible for NMC's laboratory and products divisions plead guilty to the payment of illegal kickbacks to obtain laboratory business for NMC. In February 1999, the former President of NMC Medical Products, Inc. was indicted by the government for the payment of these same and/or similar kickbacks. Business and testing practices. As noted above, the government has identified a number of specific categories of documents that it is requiring NMC to produce in connection with LifeChem business and testing practices. In addition to documents relating to the areas discussed above, the government has also required LifeChem to produce documents relating to the equipment and systems used by LifeChem in performing and billing for clinical laboratory blood tests, the design of the test panels offered and requisition forms used by LifeChem, the utilization rate for certain tests performed by LifeChem, recommendations concerning diagnostic codes to be used in ordering tests for patients with given illnesses or conditions, internal and external audits and investigations relating to LifeChem's billing and testing. Subsequently, the government served an investigative subpoena for documents concerning the Company's 1997 review of dialysis facilities' standing orders, and responsive documents were provided. Recently the government served investigative subpoenas requiring NMC to update its production on the above issues and to produce contract files for twenty-three identified dialysis clinic customers. The government is investigating each of these areas, and asserts that LifeChem and/or NMC have violated the False Claims Act and/or the Anti-Kickback Statute through the test ordering, paneling, requisitioning, utilization, coding, billing and auditing practices described above. INTRADIALYTIC PARENTERAL NUTRITION Administration kits. One of the activities of SRM is to provide IDPN therapy to dialysis patients at both NMC-owned facilities and at facilities owned by other providers. IDPN therapy was provided by Homecare prior to its divestiture. IDPN therapy is typically provided to the patient 12-13 times per month during dialysis treatment. Bills are submitted to Medicare on a monthly basis and include separate claims for reimbursement for supplies, including, among other things, nutritional solutions, administration kits and infusion pumps. In February 1991, the Medicare carrier responsible for processing Homecare's IDPN claims issued a Medicare advisory to all parenteral and enteral nutrition suppliers announcing a coding change for reimbursement of administration kits provided in connection with IDPN therapy for claims filed for items provided on or after April 1, 1991. The Medicare allowance for administration kits during this period was approximately $625 per month per patient. The advisory stated that IDPN providers were to indicate the "total number of actual days" when administration kits were "used," instead of indicating that a one-month supply of administration kits had been provided. In response, Homecare billed for administration kits on the basis of the number of days that the 16 17 patient was on an IDPN treatment program during the billing period, which typically represented the entire month, as opposed to the number of days the treatment was actually administered. During the period from April 1991 to June 1992, Homecare had an average of approximately 1,200 IDPN patients on service. In May 1992, the carrier issued another Medicare advisory to all PEN suppliers in which it stated that it had come to the carrier's attention that some IDPN suppliers had not been prorating their billing for administration kits used by IDPN patients and that providers should not bill for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period. The advisory stated further that the carrier would be conducting "a special study to determine whether or not overpayments have occurred as a result of incorrect billing" and that "if overpayments have resulted, providers that have incorrectly billed" would "be contacted so that refunds can be recovered." Homecare revised its billing practices in response to this advisory for claims filed for items provided on or after July 1, 1992. Homecare was not asked to refund any amounts relating to its billings for administration kits following the issuance of the second advisory. The government asserts that NMC submitted false claims for administration kits during the period from 1988 to June 30, 1996, and that Homecare's billing for administration kits during this period violated, among other things, the False Claims Act. Infusion Pumps and IV Poles. During the time period covered by the subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for the infusion pumps and, until 1992, for IV poles provided to IDPN patients in connection with the administration of IDPN treatments. These regulations do not expressly specify that a particular pump and IV pole be dedicated to a specific patient, and NMC asserts that these regulations permitted Homecare to bill Medicare for an infusion pump and IV pole so long as the patient was infused using a pump and IV pole. Despite the absence of an express regulatory specification, Homecare developed a policy to deliver to a dialysis center a dedicated infusion pump and IV pole for each patient, although the Company cannot represent that Homecare followed this policy in every instance. The government is investigating the propriety of Homecare's billings for infusion pumps and IV poles and asserts that Homecare's billings violate the False Claims Act. As noted above, under the new policies published by HCFA with respect to IDPN therapy, the Company has not been able to bill for infusion pumps after July 1, 1996. The government discontinued reimbursement for IV poles in 1992. "Hang fees" and other payments. IDPN therapy is typically provided to the patient during dialysis by personnel employed by the dialysis center treating the patient with supplies provided and billed to Medicare by Homecare in accordance with the Medicare parenteral nutrition supplier rules. In order to compensate dialysis centers for the costs incurred in administering IDPN therapy and monitoring the patient during therapy, Homecare followed the practice common in the industry of paying a "hang fee" to the center. Dialysis centers are responsible for reporting such fees to HCFA on their cost reports. For Dialysis Services dialysis centers, the fee was $30 per administration, based upon internal Dialysis Services cost calculations. For third-party dialysis centers, the fee was negotiated with each center, typically pursuant to a written contract, and ranged from $15 to $65 per administration. The Company has identified instances in which other payments and amounts beyond that reflected in a contract were paid to these third-party centers. The Company has stopped paying "hang fees" to both Dialysis Services and third-party facilities. In July 1993, the OIG issued a management advisory alert to HCFA in which it stated that "hang fees" and other payments made by suppliers of IDPN to dialysis centers "appear to be illegal as well as unreasonably high." The government is investigating the nature and extent of the "hang fees" and other payments made by Homecare as well as payments by Homecare to physicians whose patients have received IDPN therapy. The government may assert that the payments by Homecare to dialysis centers violate, among other things, the anti-kickback statutes. Utilization of IDPN. Since 1984, when HCFA determined that Medicare should cover IDPN and other parenteral nutrition therapies, the Company has been an industry leader in identifying situations in which IDPN therapy is beneficial to end-stage renal disease ("ESRD") patients. It is the policy of the Company to seek Medicare reimbursement for IDPN therapy only when it is prescribed by a patient's treating physician and when it believes that the circumstances satisfy the requirements published by HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for payment more than 90% of the IDPN claims submitted by Homecare. After 1993, the rate of approval for Medicare reimbursement for IDPN claims submitted by Homecare for new patients and by the infusion industry in general, fell to approximately 9%. The Company contends that the reduction in rates of approval occurred because HCFA and its carriers implemented an unauthorized change in coverage policy without giving notice to providers. While NMC continued to offer IDPN to patients pursuant to the prescription of the patients' treating physicians and to submit claims for Medicare reimbursement when it believed the requirements stated in HCFA's published regulations were satisfied, other providers 17 18 responded to the drop in the approval rate for new Medicare IDPN patients by abandoning the Medicare IDPN business, cutting back on the number of Medicare patients to whom they provide IDPN, or declining to add new Medicare patients. Beginning in 1994 the number of patients to whom NMC provided IDPN increased as a result. The government is investigating the utilization rate of IDPN therapy among NMC patients, whether NMC submitted IDPN claims to Medicare for patients who were not eligible for coverage, and whether documentation of eligibility was adequate. NMC asserts that the utilization rate of IDPN therapy among its dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the factors discussed above and that it is the policy of Homecare to seek Medicare reimbursement for IDPN therapy prescribed by the patients' treating physician in accordance with the requirements published by HCFA and its carrier agents. There can be no assurance that the government will accept NMC's view. The government asserts that Homecare submitted IDPN claims for individuals who were not eligible for coverage and/or with inadequate documentation of eligibility. The Company believes that it has presented to the government substantial defenses which support NMC's interpretation of coverage rules of IDPN as HCFA and its carriers published and explained them, and which demonstrated that HCFA and its carriers improperly implemented unpublished, more restrictive criteria after 1993. Nevertheless, the government is expected to assert in the OIG Investigation that, on a widespread basis, NMC submitted and received payments on claims for IDPN to Medicare for patients who were not eligible for coverage, and for whom the documentation of eligibility was inadequate. In addition, the government asserts that, in a substantial number of cases, documentation of eligibility was false or inaccurate. With respect to some claims, the Company has determined that false or inaccurate documentation was submitted, deliberately or otherwise. The government continues to investigate the IDPN claims. QUI TAM ACTIONS The Company and NMC have become aware that ten qui tam actions have been filed in various jurisdictions. Each of these actions is under seal and in each action, pursuant to court order the seal has been modified to permit the Company, NMC and other affiliated defendants to disclose the complaint to any relevant investors, financial institutions and/or underwriters, their successors and assigns and their respective counsel and to disclose the allegations in the complaints in their respective U.S. Securities and Exchange Commission (the "SEC" or the "Commission") and New York Stock Exchange ("NYSE") periodically required filings. The first qui tam action was filed in the United States District Court for the Southern District of Florida in June 1994, amended on July 8, 1996 and disclosed to the Company on July 10, 1996. It alleges, among other things, that Grace Chemicals and NMC violated the False Claims Act in connection with certain billing practices regarding IDPN and the administration of EPO and that as a result of this allegedly wrongful conduct, the United States suffered actual damages in excess of $200 million. The Amended Complaint also seeks the imposition of a constructive trust on the proceeds of the NMC dividend to Grace Chemicals for the benefit of the United States on the ground that the Merger constitutes a fraudulent conveyance that will render NMC unable to satisfy the claims asserted in the Amended Complaint. The second qui tam action was filed in the United States District Court for the Southern District of Florida in December 1994 and disclosed to the Company on April 16, 1999. It alleges, among other things, that NMC violated the False Claims Act in connection with certain billing practices regarding IDPN and the cost relating thereto. The second qui tam was filed by the same relator which filed the first qui tam and covers the same services covered by the first qui tam complaint. The third qui tam action was filed in the United States District Court for the Middle District of Florida in 1995 and disclosed to the Company on or before November 7, 1996. It alleges, among other things, that NMC and certain NMC subsidiaries violated the False Claims Act in connection with the alleged retention of over-payments made under the Medicare program, the alleged submission of claims in violation of applicable cost caps and the payment of supplemental Medicare insurance premiums as an alleged inducement to patients to obtain dialysis products and services from NMC. The complaint alleges that as a result of this allegedly wrongful conduct, the United States suffered damages in excess of $10 million including applicable fines. The fourth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in February 1996 and was disclosed to the Company in November 1996. It alleges, among other things, that a pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for a nonsterile intravenous drug and for intravenous drugs which were allegedly billed in excess of permissible Medicare reimbursement rates. The complaint also asserts that the defendants violated the Medicare and Medicaid anti-kickback statutes in connection with the receipt of discounts and other in kind payments as alleged inducements to purchase intravenous drugs. The complaint is focused on the business relationship between the pharmaceutical manufacturer and several providers, one of which is NMC. The complaint asserts that as a result of this allegedly wrongful conduct, the United States suffered damages. On June 28, 1997, in response to relator's motion to dismiss and the United States' declination to intervene, the District Court ordered the 18 19 complaint dismissed without prejudice. The fifth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in May 1995 and was disclosed to the Company in August 1997. It alleges, among other things, that Biotrax violated the False Claims Act in connection with its submission of claims to the Medicare program for diagnostic tests and induced overutilization of such tests in the medical community through improper marketing practices also in violation of the False Claims Act. The sixth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in August 1996 and was disclosed to the Company in August 1997. It alleges, among other things, that Biotrax and NMC Diagnostic Services induced overutilization of diagnostic tests by several named and unnamed physician defendants in the local medical community, through improper marketing practices and fee arrangements, in violation of the False Claims Act. The seventh qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in November 1996 and was disclosed to the Company in August 1997. It alleges, among other things, that NMC, DSI and Biotrax violated the False Claims Act in connection with the submission of claims to the Medicare program by improperly upcoding and otherwise billing for various diagnostic tests. The eighth qui tam action was filed in the United States District Court for the District of Delaware in January 1997 and was disclosed to the Company in September 1997. It alleges, among other things, that NMC and Biotrax violated the False Claims Act in connection with the submission of claims to the Medicare program for diagnostic tests, and induced overutilization of such tests through improper marketing practices which provided impermissible incentives to health care providers to order these tests. The ninth qui tam action was filed in the United States District Court for the District of New Jersey in February 1997 and was disclosed to the Company in September 1997. It alleges, among other things, that DSI and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for reimbursement for diagnostic tests, by causing unnamed physicians to overutilize these tests though a variety of fee arrangements and other impermissible inducements. The tenth qui tam was filed in the United States District Court for the District of Massachusetts in 1994 and was disclosed to the Company in February 1999. It alleges among other things that NMC violated the False Claims Act and the Anti-Kickback Statute in connection with certain billing and documentation practices regarding IDPN therapy, home oxygen therapy and certain medical billings in NMC's Chicago office. Each of the qui tam complaints asserts that as a result of the allegedly wrongful conduct, the United States suffered damages and that the defendants are liable to the United States for three times the amount of the alleged damages plus civil penalties of up to $10,000 per false claim. An adverse result in any of the qui tam actions could have a material adverse affect on the Company's business, financial condition or results of operations. OIG AGREEMENTS As a result of discussions with representatives of the United States in connection with the OIG Investigation, certain agreements (the "OIG Agreements") have been entered into to guarantee the payment of any obligations of NMC to the United States (an "Obligation") relating to or arising out of the OIG Investigation and the qui tam action filed in the Southern District of Florida (the "Government Claims"). For the purposes of the OIG Agreements, an Obligation is (a) a liability or obligation of NMC to the United States in respect of a Government Claim pursuant to a court order (i) which is final and nonappealable or (ii) the enforcement of which has not been stayed pending appeal or (b) a liability or obligation agreed to be an Obligation in a settlement agreement executed by Fresenius Medical Care, the Company or NMC, on the one hand, and the United States, on the other hand. As stated elsewhere herein, the outcome of the OIG Investigation cannot be predicted. Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius Medical Care, the Company and NMC provided the United States with a joint and several unconditional guarantee of payment when due of all Obligations (the "Primary Guarantee"). As credit support for this guarantee, NMC delivered an irrevocable standby letter of credit in the amount of $150 million. The United States will return such letter of credit (or any renewal or replacement) for cancellation when all Obligations have been paid in full or it is determined that NMC has no liability in respect of the Government Claims. Under the terms of the Merger, any potential resulting monetary liability has been retained by NMC, and the Company has indemnified Grace Chemicals against all potential liability arising 19 20 from or relating to the OIG Investigation. Fresenius Medical Care and the United States state in the OIG Agreements that they will negotiate in good faith to attempt to arrive at a consensual resolution of the Government Claims and, in the context of such negotiations, will negotiate in good faith as to the need for any restructuring of the payment of any Obligations arising under such resolution, taking into account the ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements state that the foregoing statements shall not be construed to obligate any person to enter into any settlement of the Government Claims or to agree to a structured settlement. Moreover, the OIG Agreements state that the statements described in the first sentence of this paragraph are precatory and statements of intent only and that (a) compliance by the United States with such provisions is not a condition or defense to the obligations of Fresenius Medical Care under the OIG Agreements and (b) breach of such provisions by the United States cannot and will not be raised by Fresenius Medical Care to excuse performance under the OIG Agreements. Neither the entering into of the OIG Agreements nor the providing of the Primary Guarantee and the $150 million letter of credit is an admission of liability by any party with respect to the OIG Investigation, nor does it indicate the liability, if any, which may result therefrom. The foregoing describes the material terms of the OIG Agreements, copies of which were previously filed with the Commission and copies of which may be examined without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the Regional Offices of the Commission located at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World Trade Center, New York, New York 10048. Copies of such material will also be made available by mail from the Public Reference Branch of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The foregoing description does not purport to be complete and is qualified in its entirety by reference to such agreements. An adverse determination with respect to any of the issues addressed by the subpoenas, or any of the other issues that have been or may be identified by the government, could result in the payment of substantial fines, penalties and forfeitures, the suspension of payments or exclusion of the Company or one or more of its subsidiaries from the Medicare program and other federal programs, and changes in billing and other practices that could adversely affect the Company's revenues. Any such result could have a material adverse effect on the Company's business, financial condition and results of operations. OMNIBUS BUDGET RECONCILIATION ACT OF 1993 OBRA 93 affected the payment of benefits under Medicare and employer health plans for certain eligible ESRD patients. In July 1994, HCFA issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by OBRA 93 would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than that provided under Medicare. In April 1995, HCFA issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. HCFA further proposed that its new instruction be effective retroactive to August 1993, the effective date of OBRA 93. NMC ceased to recognize the incremental revenue realized under the original Program Memorandum as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by OBRA 93 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by OBRA 93, and then began to rebill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No. 95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April 24, 1995 implementation of the OBRA 93 provisions relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude HCFA from enforcing its new policy retroactively, that is, to billings for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction and in December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that HCFA's retroactive application of the April 1995 rule was legally invalid. HCFA cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In 20 21 January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding HCFA's retroactive application of the April 1995 rule legally invalid, and based on its finding, the Court also permanently enjoined HCFA from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on HCFA's motion for summary judgment pending completion of outstanding discovery. On October 5, 1998 NMC filed it's own motion for summary judgment requesting that the Court declare HCFA's prospective application of the April 1995 rule invalid and permanently enjoin HCFA from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. HCFA elected not to appeal from the Court's June 1995 and January 1998 orders. HCFA may, however, appeal all rulings at the conclusion of the litigation. If HCFA should successfully appeal so that the revised interpretation would be applied retroactively, Dialysis Services may be required to refund the payments received from employer health plans for services provided after August 10, 1993 under HCFA's original implementation, and to re-bill Medicare for the same services, which would result in a net loss to Dialysis Services of approximately $120 million attributable to all periods prior to December 31, 1995. Also, in such event, the Company's business, financial position and results of operations would be materially adversely affected. INTRADIALYTIC PARENTERAL NUTRITION COVERAGE ISSUES SRM administers IDPN therapy to chronic dialysis patients who suffer from severe gastrointestinal malfunctions. IDPN therapy was provided by Homecare prior to its divestiture. After 1993, Medicare claims processors sharply reduced the number of IDPN claims approved for payment as compared to prior periods. NMC believes that the reduction in IDPN claims represented an unauthorized policy coverage change. Accordingly, NMC and other IDPN providers pursued various administrative and legal remedies, including administrative appeals, to address this reduction. In November 1995, NMC filed a complaint in the U.S. District Court for the Middle District of Pennsylvania seeking a declaratory judgment and injunctive relief to prevent the implementation of this policy coverage change. (National Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). Subsequently, the District Court affirmed a prior report of the magistrate judge dismissing NMC's complaint, without considering any substantive claims, on the grounds that the underlying cause of action should be submitted fully to the administrative review processes available under the Medicare Act. NMC decided not to appeal the Court's decision, but rather, to pursue the claims through the available administrative processes. NMC was successful in pursuing these claims through the administrative process, receiving favorable decisions from Administrative Law Judges in more than 80% of its cases. In early 1998, a group of claims which had been ruled on favorably were remanded by the Medicare Appeals Council to a single Administrative Law Judge (the "ALJ") with extensive instructions concerning the review of these decisions. A hearing was scheduled on the remanded claims to take place in July, but later postponed until October 1998. Prior to the July hearing date, the United States Attorney for the District of Massachusetts requested that the hearing be stayed pending resolution of the OIG Investigation, on the basis that proceeding could adversely effect the government's investigation as well as the government's efforts to confirm its belief that these claims are false. Prior to the ALJ issuing a decision on the stay request, the U.S. Attorney's Office requested that NMC agree to a stay in the proceedings in order to achieve a potential resolution of the IDPN claims subject to the OIG Investigation as well as those which are subject to the administrative appeals process. NMC agreed to this request, and together with the U.S. Attorney's Office requested a stay. The ALJ agreed to this request in order to allow the parties the opportunity to resolve both the IDPN claims which are the subject of the OIG Investigation and the IDPN claims which are the subject of the administrative proceedings. In March 1999 negotiations between NMC and the U.S. Attorney's Office failed to progress and NMC requested that the stay be lifted. The ALJ agreed to NMC's request and on April 19, 1999 the ALJ hearing began. The hearing process is expected to proceed for several months. At the same time, NMC and the U.S. Attorney's Office are continuing to discuss potential settlement of both the claims relating to the OIG Investigation and the claims which are subject to administrative appeals. At this time, it is not possible to determine whether NMC and the government will be able to resolve issues surrounding the IDPN claims. Further proceedings on other administrative appeals related to unpaid claims remain stayed. Although NMC management believes that those unpaid IDPN claims were consistent with published Medicare coverage guidelines and ultimately will be approved for payment, there can be no assurance that the claims on appeal will be approved for payment or, to the extent approved, collected in full. Such claims represent substantial accounts receivable of NMC, amounting to approximately $150 million as of March 31, 1999. If NMC is unable to collect its IDPN receivable, either through the administrative appeal process or through negotiation, or if 21 22 IDPN coverage is reduced or eliminated, depending on the amount of the receivable that is not collected and/or the nature of the coverage change, the Company's business, financial condition and results of operations could be materially adversely affected. NMC's IDPN receivables are included in the net assets of the Company's discontinued operations. However, these receivables have not been sold and will remain classified as discontinued operations until they have been settled. See Notes to Consolidated Financial Statements Note 4 - -"Discontinued Operations." OTHER LEGAL PROCEEDINGS DISTRICT OF NEW JERSEY INVESTIGATION NMC has received multiple subpoenas from a federal grand jury in the District of New Jersey investigating, among other things, whether NMC sold defective products, the manner in which NMC handled customer complaints and certain matters relating to the development of a new dialyzer product line. NMC is cooperating with this investigation and has provided the grand jury with extensive documents. In February, 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that it is the target of a federal grand jury investigation into possible violations of criminal law in connection with its efforts to persuade the FDA to lift a January 1991 import hold issued with respect to NMC's Dublin, Ireland manufacturing facility. In June 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that the U.S. Attorney had declined to prosecute NMC with respect to a submission related to NMC's effort to lift the import hold. The letter added that NMC remains a subject of a federal grand jury's investigation into other matters. NMC has produced documents in response to a June 1996 subpoena from the federal grand jury requesting certain documents in connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to November 1995. The government investigators and the Company have narrowed the issues with respect to which the government has previously expressed concerns and recently have conducted discussions in order to resolve this investigation. However, the outcome and impact, if any, of these discussions and potential resolution on the Company's business, financial condition or results of operations cannot be predicted at this time. COMMERCIAL INSURER LITIGATION In 1997, the Company, NMC and certain named NMC subsidiaries, were served with a civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York (Aetna Life Insurance Company v. National Medical Care, Inc. et al, 97-Civ-9310). In April 1999, Aetna amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff, and to make certain other limited changes in its pleading. Based in large part on information contained in prior securities filings, the lawsuit alleges inappropriate billing practices for nutritional therapy, diagnostic and clinical laboratory tests and misrepresentations. The amended complaint seeks unspecified damages and costs. This matter is at a relatively early stage in the litigation process, with substantial discovery just beginning and its outcome and impact on the Company cannot be predicted at this time. However, the Company, NMC and its subsidiaries believe that they have substantial defenses to the claims asserted, and intend to continue to vigorously defend the lawsuit. It is also possible that one or more other private payors may assert that NMC received excess payments and similarly, may seek reimbursement and other damages from NMC. An adverse result could have a material adverse effect on the Company's business, financial condition or results of operations. ADMINISTRATIVE APPEALS The Company regularly pursues various administrative appeals relating to reimbursement issues in connection with its dialysis facilities. One such appeal consists of a challenge to the Medicare regulation which capped reimbursement for the bad debts incurred by dialysis facilities. In 1998, the United States Court of Appeals for the District of Columbia ruled in favor of the Company in connection with the bad debt issue, holding that the Secretary of Health & Human Services had not adequately justified the bad debt regulation, and ruling that the government's order adopting the rule was arbitrary and capricious. The Court of Appeals remanded the matter to the Secretary to provide a more adequate explanation of the bad debt cap or to abandon it. Subsequently, the Court modified its holding to continue the bad debt regulation in effect pending remand. The Company is continuing settlement discussions with the government in an attempt to recover reimbursement for disallowed bad debt expenses. The Company cannot predict the outcome of these discussions. 22 23 NOTE 6. INDUSTRY SEGMENTS INFORMATION The Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information during the fourth quarter of 1998. SFAS No. 131 established the standards for reporting information about operating statements in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. The Company's reportable segments are Dialysis Services and Dialysis Products. For purposes of segment reporting, the Dialysis Services Division and Spectra Renal Management are combined and reported as Dialysis Services. These divisions are aggregated because of their similar economic classifications. These include the fact that they are both health care service providers whose services are provided to a common patient population, and both receive a significant portion of their net revenue from Medicare and other government and non-government third party payors. The Dialysis Products segment reflects the activity of the Dialysis Products Division only. The table below provides information for the three months ended March 31, 1999 and 1998 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT TOTAL SERVICES PRODUCTS SALES ---------- ---------- ------------ ---------- NET REVENUES Three Months Ended 3/31/99 $ 562,358 $ 168,307 $ 58,525 $ 672,140 Three Months Ended 3/31/98 498,230 164,749 52,933 610,046 OPERATING EARNINGS Three Months Ended 3/31/99 86,378 30,480 -- 116,858 Three Months Ended 3/31/98 71,831 22,180 -- 94,011 Assets 1999 1,835,996 638,043 -- 2,474,039 1998 1,817,751 644,112 -- 2,461,863
The table below provides the reconciliations of reportable segment operating earnings to the Company's consolidated totals.
THREE MONTHS ENDED SEGMENT RECONCILIATION MARCH 31, -------------------------- 1999 1998 --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS: Total operating earnings for reportable segments $ 116,858 $ 94,011 Corporate G&A (including foreign exchange) (28,129) (26,031) Research and development expense (1,024) (989) Net interest expense (50,126) (47,099) --------- --------- Income Before Income Taxes and and Cumulative effect of change in accounting for Start Up Costs $ 37,579 $ 19,892 ========= =========
23 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company. The discussion should be read in conjunction with the financial statements included elsewhere in this document. This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of the Company, government reimbursement, future plans and management's expectations regarding future performance. Actual results could differ materially from those contained in these forward-looking statements due to certain factors including, without limitation, changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this Item 2 and in the Company's reports filed from time to time with the Commission, could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. OVERVIEW The Company is primarily engaged in (a) providing kidney dialysis services, clinical laboratory testing and renal diagnostic services and (b) manufacturing and distributing products and equipment for dialysis treatment. Throughout the Company's history, a significant portion of the Company's growth has resulted from the development of new dialysis centers and the acquisition of existing dialysis centers, as well as from the acquisition and development of complementary businesses in the health care field. The Company derives a significant portion of its health care services net revenues from Medicare, Medicaid and other government health care programs (approximately 60% in 1998). The reimbursement rates under these programs, including the Composite Rate, the reimbursement rate for EPO, and the reimbursement rate for other dialysis and non-dialysis related services and products, as well as other material aspects of these programs, have in the past and may in the future be changed as a result of deficit reduction and health care reform measures. The Company's business, financial position and results of operations also could be materially adversely effected by an adverse outcome in the OIG investigations, any whistleblower action, the pending challenge by the Company of changes effected by Medicare in approving reimbursement claims relating to the administration of IDPN or the adoption in 1996 of a new coverage policy that has changed IDPN coverage prospectively. The Company's business, financial position and results of operations would also be materially adversely affected by an adverse outcome in the pending litigation concerning the implementation of certain provisions of OBRA 93 relating to the coordination of benefits between Medicare and employer health plans in the case of certain dual eligible ESRD patients. The Company also derives a significant portion of its net revenues from reimbursement by non-government payors. Historically, reimbursement rates paid by these payors generally have been higher than Medicare and other government program rates. However, non-government payors are imposing cost containment measures that are creating significant downward pressure on reimbursement levels that the Company receives for its services and products. 24 25 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. 1998 information has been reorganized to distinguish between continued and discontinued operations.
THREE MONTHS ENDED MARCH 31, ------------------ (DOLLARS IN MILLIONS) 1999 1998 ----- ----- NET REVENUES Dialysis Services $ 562 $ 498 Dialysis Products 168 165 Intercompany Eliminations (58) (53) ----- ----- Total Net Revenues $ 672 $ 610 ===== ===== Operating Earnings: Dialysis Services $ 86 $ 72 Dialysis Products 31 22 ----- ----- Total Operating Earnings 117 94 ----- ----- Other Expenses: General Corporate $ 28 $ 26 Research & Development 1 1 Interest Expense, Net 50 47 ----- ----- Total Other Expenses 79 74 ----- ----- Earnings Before Income Taxes and cumulative effect of change in accounting for start up costs 38 20 Provision for income taxes 20 10 ----- ----- Net Earnings from Continuing Operations before cumulative effect of change in accounting for start up costs $ 18 $ 10 ----- ----- Discontinued Operations: Net Revenues $ -- $ 62 ===== ===== Loss Before Income Taxes -- (7) Benefit for Income Taxes -- (3) ----- ----- Loss from Operations -- (4) ----- ----- Total Loss on Discontinued Operations $ -- $ (4) ===== ===== Cumulative effect of change in accounting for start up costs, net of tax benefit -- (5) ----- ----- Net Income $ 18 $ 1 ===== =====
25 26 THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Net revenues from continuing operations for the first three months of 1999 increased by 10% ($62 million) over the comparable period in 1998. Net earnings from continuing operations for the first three months of 1999 increased by 80% ($8 million) over the comparable period in 1998 as a result of increased operating earnings, partially offset by higher interest expenses and increased general corporate expenses. DIALYSIS SERVICES Dialysis Services net revenues for the first three months of 1999 increased by 13% ($64 million) over the comparable period in 1998, primarily as a result of a 9% increase in the number of treatments provided, the beneficial impact of the extension of the Medicare Secondary Payor (MSP) provision, and higher EPO utilization relative to the comparable 1998 period, partially offset by decreased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 1998 acquisitions. The laboratory testing revenue decrease was primarily due to the decreased number of patients of other dialysis providers serviced by the Company, during the first quarter of 1999, as competitors consolidate lab activity. Dialysis Services operating earnings for the first three months of 1999 increased by 19% ($14 million) over the comparable period of 1998 primarily due to the increase in treatment volume, the beneficial impact of the extension of the MSP provision and higher EPO utilization relative to the comparable 1998 period, partially offset by decreased operating earnings in laboratory testing. DIALYSIS PRODUCTS Dialysis Products net revenues for the first three months of 1999 increased by 2% ($3 million) over the comparable period of 1998. This is due to increased sales of dialyzers ($8 million), and machines ($5 million), partially offset by decreased sales of bloodlines ($2 million) and peritoneal products ($8 million). Dialysis Products operating earnings for the first three months of 1999 increased by 41% ($9 million) over the comparable period of 1998. This is primarily due to revenue growth and improvements in gross margin resulting from manufacturing efficiencies from increased production volume and a reduction in freight and distribution expenses. OTHER EXPENSES The Company's other expenses for the first three months of 1999 increased by 7% ($5 million) over the comparable period of 1998. General corporate expenses increased by $2 million and interest expense increased by $3 million primarily due to the change in the mix of debt instruments at March 31, 1999 versus March 31, 1998. INCOME TAX RATE The effective tax rate from continuing operations for the first three months of 1999 (53.1%) is higher than the rate for the comparable period of 1998 (50.6%), due primarily to a rate reduction in the comparable period of 1998 related to the permanent tax benefit from the transfer of international operations to Fresenius Medical Care AG. DISCONTINUED OPERATIONS On June 1, 1998, the Company classified its Non-Renal Diagnostic Services and Homecare businesses as discontinued operations. The Company sold both its Non-Renal Diagnostic Services business and its Homecare business on, June 26, 1998 and July 29, 1998, respectively. In connection with the sale of Homecare, the Company retained the assets and the operations associated with the delivery of IDPN and records, for accounting purposes, its activities as part of discontinued operations. A net after tax loss of $97 million was recorded in 1998 on the sale of these businesses. The discontinued operations revenues for its Non- Renal Diagnostic Services and Homecare divisions for the first three months of 1998 was $62 million with a net after tax loss of $4 million. 26 27 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements have historically been funded by cash generated from operations. Cash generated from continued operations was $69 million and $7 million for the first three months of 1999 and 1998, respectively. This increase is primarily due to the Company's improved profit levels as well as working capital improvements. The Company made acquisitions totaling $5 million and $138 million for the first three months of 1999 and 1998, respectively. The Company made capital expenditures for internal expansion, improvements, new furnishings and equipment of $17 million and $20 million for the first three months of 1999 and 1998, respectively. The Company intends to enhance its presence in the U.S. by focusing its expansion on the acquisition of individual or small groups of clinics, expansion of existing clinics, and opening of new clinics. During the first three months of 1999 and 1998, the Company funded its acquisitions and capital expenditures primarily through proceeds from external short and long-term debt and the proceeds from the receivable financing facility and proceeds from the sale of the Non-Renal Diagnostics and Homecare divisions. In the first quarter of 1998, acquisitions were also funded through the issuance of investment securities by Fresenius Medical Care Finance, S.A., a Luxembourg subsidiary of FMC ("FMC Finance"). In exchange for such financing, an intercompany account was established between FMC Finance and the Company with payables due to FMC Finance of $42 million at March 31, 1998. Effective July 1, 1995, the Company ceased to recognize the incremental revenue provided under HCFA's initial instruction under OBRA 93, although it continued to bill private third-party payors for these amounts through December 31, 1995. The Company began billing Medicare as the primary payor for the dual eligible ESRD patients affected by OBRA 93 effective January 1, 1996. If HCFA's revised instruction under OBRA 93 is permanently enjoined on a prospective basis, or if such revised instruction is sustained but given an effective date of later than June 30, 1995, the Company may be able to rebill such services to third-party payors and, as a result, the Company's future results of operations and financial position would be favorably affected by the incremental revenue that the Company would recognize. For further discussion see Notes to Consolidated Financial Statements Note 5, "Commitments and Contingencies - Omnibus Budget Reconciliation Act of 1993". CONTINGENCIES The Company is the subject of investigations by several federal agencies and authorities, is a plaintiff in litigation against the federal government with respect to the implementation of OBRA 93 and coverage for IDPN therapy, and is seeking to change a proposed revision to IDPN coverage policies and is a defendant in significant commercial insurance litigation. An adverse outcome in any of these matters, could have a material adverse effect on the Company's business, financial condition and results of operations. Because of the significant complexities and uncertainties associated with the above referenced governmental investigations and proceedings, neither an estimate of the possible loss or range of loss the Company may incur in respect of such matters nor a reserve based on any such estimate can be reasonably made. See Part II, Item 1 - Legal Proceedings and Notes to Consolidated Financial Statements - Note 5 "Commitments and Contingencies". The Company believes that its existing credit facilities, cash generated from operations and other current sources of financing are sufficient to meet its foreseeable needs. If existing sources of funds are not sufficient to provide liquidity, the Company may need to sell assets or obtain debt or equity financing from external sources. There can be no assurance that the Company will be able to do so on satisfactory terms, if at all. 27 28 IMPACT OF INFLATION A substantial portion of the Company's net revenue is subject to reimbursement rates which are regulated by the federal government and do not automatically adjust for inflation. Non-governmental payors also are exerting downward pressure on reimbursement levels. Increased operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, may adversely affect the Company's business and results of operations. YEAR 2000 ISSUES The "Year 2000 problem" is the result of computer programs using two digits rather than four to define the applicable years. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. These programs are present in software applications running on desktop computers and network servers. These programs are also present in microchips and microcontrollers incorporated into equipment. Certain of the Company's computer hardware and software, building infrastructure components (e.g., alarm systems, HVAC systems, etc.) and medical devices that are date sensitive may contain programs with the Year 2000 problem. If uncorrected, the problem could result in computer system and program failures or equipment and medical device malfunctions or miscalculations that could result in a disruption of business operations or affect patient treatment. If the Company, its significant customers, reimbursement sources or suppliers fail to make necessary modifications and conversions on a timely basis, the Year 2000 problem could have a material adverse effect on the Company's operations and financial results. The Company believes that its competitors face a similar risk. The Company has been working on identifying and addressing potential Year 2000 risks since March 1997. In an effort to more comprehensively monitor and assess its progress in addressing Year 2000 issues, the Company established a Year 2000 Steering Committee in August 1998. The committee is comprised of senior company executives who meet regularly and provide status updates to the Company's management committee on a regular basis. Regarding information technology ("IT") systems, the Company has inventoried substantially all IT systems (e.g., clinical, supply chain management, financial, etc.) and has assessed Year 2000 compliance for those systems. The Company has developed specific plans and timetables to remediate or replace critical non-compliant systems and is in the process of completing these changes. Based on continued progress in addressing Year 2000 compliance issues, the Company is on the course to resolve such issues for all critical systems by September 30, 1999. Regarding non-IT equipment that may be dependent upon embedded software (e.g., medical, manufacturing/distribution, etc.), the Company has inventoried and assessed Year 2000 compliance for substantially all of this equipment. The Company has developed specific plans to remediate or replace substantially all non-compliant non-IT equipment and is in the process of completing these changes. Based on continued progress addressing Year 2000 compliance issues, the Company is on course to resolve such issues for substantially all non-IT equipment by September 30, 1999. Although there can be no assurance that the Company will successfully complete implementation of its remediation efforts for IT systems and non-IT equipment by the dates critical for Year 2000 compliance, the Company's Year 2000 program is currently progressing in accordance with the Company's completion timetables. The Company relies heavily on third parties in operating its business. In addition to its reliance on systems and non-IT equipment vendors to verify Year 2000 compliance of their products, the Company also depends on 1) fiscal intermediaries which process claims and make payments for their Medicare and Medicaid programs, 2) insurance companies, HMOs, and other private payors, 3) utilities which provide electricity, water, natural gas, and telephone services, and 4) vendors of medical supplies and pharmaceuticals used in patient care. In conjunction with the fiscal intermediaries which process many of the claims submitted to Medicare and Medicaid, the Company has successfully tested its systemic interfaces to ensure that it will be able to bill these intermediaries before and after 28 29 January 1, 2000. The Company is also working with these intermediaries and significant private payors to ensure that these payors will be able to process and make remittances for billed services. The Company has contacted substantially all significant vendors and service providers to seek assurances from these third parties that the services and products they provide will not be interrupted or malfunction due to the Year 2000 problem. Although no method exists for achieving certainty that any third party's organization will be Year 2000 compliant, the Company's goal is to obtain as much detailed information as possible about its significant vendors and service providers and to identify those companies which appear to pose a significant risk of failure to perform their obligations to the Company as a result of the Year 2000 problem. Failure of significant third parties to resolve their Year 2000 issues could have a material adverse effect on the Company's results of operations and ability to provide health care services and manufacture products. Costs related to the Year 2000 issue are funded through operating cash flows. The Company expects to spend a total of approximately $5 million in remediation and replacement efforts, including new software and hardware, costs to modify existing software, and consultant fees. The Company does not separately track internal costs incurred for the Year 2000 remediation effort; such costs are principally related to compensation costs for certain members of the Company's IT Department. The Company estimates remaining costs to be approximately $3 million. IT expenditures for Year 2000 are covered as part of the normal IT budget (the Year 2000 efforts are taking priority over other discretionary IT projects). Non-IT expenditures for Year 2000 are similarly being covered as part of the normal non-IT budget. The Company presently believes that the incremental cost of achieving Year 2000 compliant systems and equipment will not be material to the Company's financial condition, liquidity, or results of operation. Time and cost estimates are based on currently available information. Developments that could affect estimates include, but are not limited to: 1) the availability and cost of trained personnel, 2) the ability to locate and correct all relevant computer code and systems, and 3) remediation success of the Company's customers and suppliers. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 issues in its internally manufactured medical devices, its internal manufacturing and distribution processes, and its internal information processing. However, if certain critical third party vendors or service providers, such as those supplying electricity or water, experience difficulties resulting in disruption of service to the Company, a shutdown of the Company's operations at individual facilities could occur for the duration of the disruption. The Year 2000 Steering Committee is completing its review of the various risk areas which might require a contingency plan. The committee is considering the need to develop contingency plans for certain key risk areas. At this point in time, the committee has not identified any risk areas which appear to have a reasonable likelihood to cause a material disruption to the Company's operations. Contingency plans will be developed on a case-by-case basis if new risks are identified or the Company's remediation/replacement efforts do not progress satisfactorily. Despite these efforts, judgements regarding contingency plans such as to what extent they should be developed are themselves subject to many variables and uncertainties. There can be no assurance that the Company will correctly anticipate the level, impact or duration of noncompliance by third party vendors or suppliers that provide inadequate information in respect to their Year 2000 status. As a result, there can be no assurance that any contingency plan developed by the Company will be sufficient to mitigate the impact of non-compliance by third-party vendors and service providers, and some material adverse effect to the Company could result regardless of such contingency plans. Nonetheless, the Company will continue to track its progress and will develop additional contingency plans if new risks are identified or the Company's remediation/replacement efforts do not progress satisfactorily. 29 30 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 firmly committed purchases. Also, since the Company carries a substantial amount of floating rate debt, the Company uses interest rate swaps to synthetically change certain variable-rate debt obligations to fixed-rate obligations, as well as options to mitigate the impact of interest rate fluctuations. Gains and losses on foreign exchange contracts accounted for as hedges are deferred as other current assets or liabilities. The deferred gains and losses are recognized as adjustments to the underlying hedged transaction when the future sales or purchases are recognized. Interest rate swap payments and receipts are recorded as part of interest expense. The fair value of the swap contracts is not recognized in the financial statements. Cash flows from derivatives are recognized in the consolidated statement of cash flows in the same category as the item being hedged. If a derivative instrument ceases to meet the criteria for deferral, any subsequent gains or losses are recognized in operations. If a firm commitment does not occur, the foreign exchange contract is terminated and any gain or loss is recognized in operations. If a hedging instrument is sold or terminated prior to maturity, gains or losses continue to be deferred until the hedged item is recognized. Should a swap be terminated while the underlying obligation remains outstanding, the gain or loss is capitalized as part of the underlying obligation and amortized into interest expense over the remaining term of the obligation. The Company's hedging strategy vis-a-vis the above-mentioned market risks has not changed significantly from 1998 to 1999. For additional information, see also the Company's 1998 Annual Report on Form 10-K "Notes to Consolidated Financial Statements - Note 2. Summary of Significant Accounting Policies - Derivative Financial Instruments and Notes to Consolidated Financial Statements - - Note 15. Financial Instruments." 30 31 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As discussed in greater detail below, most aspects of NMC's U.S. businesses are the subject of criminal or civil investigations by several federal agencies and authorities, the outcome of which cannot be predicted. If the government were successfully to pursue claims arising from any of these investigations, NMC and one or more of its subsidiaries could be subject to civil or criminal penalties, including substantial fines, suspension of payments or exclusion from the Medicare and Medicaid programs as well as other federal health care benefit programs, which provide over 60% of NMC's revenues. In addition, NMC could be required to change billing or other practices which could adversely affect NMC's revenues. In addition, as discussed below, NMC has become aware that it is the subject of qui tam or "whistleblower" actions with respect to some or all of the issues raised by the government investigations, which whistleblower actions are filed under seal as a matter of law in the first instance, thereby preventing disclosure to the Company and to the public except by court order. In the process of unsealing federal whistleblower complaints, it is not unusual for courts to allow the government to inform the Company and its counsel of a complaint prior to the time the Company may be legally permitted to disclose it to the public. NMC may be the subject of other "whistleblower" actions not known to the Company. Fresenius Medical Care and the Company have guaranteed NMC's obligations relating to or arising out of the OIG Investigation and the qui tam proceedings, and indemnified Grace Chemicals for any such liabilities. An adverse determination with respect to any of the issues addressed by the subpoenas, or any of the other issues that have been or may be identified by the government, could result in the payment of substantial fines, penalties and forfeitures, the suspension of payments or exclusion of the Company or one or more of its subsidiaries from the Medicare program and other federal programs, and changes in billing and other practices that could adversely affect the Company's revenues. Any such result could have a material adverse effect on the Company's business, financial condition and results of operations. 31 32 OIG INVESTIGATION In October 1995, NMC received five investigative subpoenas from the OIG. The subpoenas were issued in connection with an investigation being conducted by the OIG, the U.S. Attorney for the District of Massachusetts and others concerning possible violations of federal laws, including the anti-kickback statutes and the False Claims Act. The subpoenas call for extensive document production relating to various aspects of NMC's business. In connection with the OIG Investigation, the Company continues to receive additional subpoenas directed to NMC or the Company to obtain supplemental information and documents regarding the above-noted issues, or to clarify the scope of the original subpoenas. The Company is cooperating with the OIG Investigation. The Company believes that the government continues to review and evaluate the voluminous information the Company has provided. As indicated above, the government continues, from time to time, to seek supplementing and/or clarifying information from the Company. The Company understands that the government has utilized a grand jury to investigate these matters. The Company expects that this process will continue while the government completes its evaluation of the issues. The OIG Investigation covers the following areas: (a) NMC's dialysis services business ("Dialysis Services"), principally relating to its Medical Director contracts and compensation; (b) NMC's treatment of credit balances resulting from overpayments received under the Medicare, Medicaid, CHAMPUS and other government and commercial payors, its billing for home dialysis services, and its payment of supplemental medical insurance premiums on behalf of indigent patients; (c) LifeChem's laboratory business, including testing procedures, marketing, customer relationships, competition, overpayments totaling approximately $4.9 million that were received by LifeChem from the Medicare program with respect to laboratory services rendered between 1989 and 1993, a 1997 review of dialysis facilities' standing orders, and the provision of discounts on products from NMC's products division, grants, equipment and entertainment to customers; and (d) Homecare and, in particular, information concerning IDPN utilization, documentation of claims and billing practices including various services, equipment and supplies and payments made to third parties as compensation for administering IDPN therapy. The government has indicated that the areas identified above are not exclusive, and that it may pursue additional areas. As noted, the penalties applicable under the anti-kickback statutes, the False Claims Act and other federal and state statutes and regulations applicable to NMC's business can be substantial. While NMC asserts that it is able to offer legal and/or factual defenses with respect to many of the areas the government has identified, it is expected that the government will assert that NMC has violated multiple statutory and regulatory provisions. Additionally, ten and possibly other qui tam actions alleging that NMC submitted false claims to the government have been filed under seal by former or current NMC employees or other individuals who may have familiarity with one or more of the issues under investigation. As noted, under the False Claims Act, any such private plaintiff could pursue an action against NMC in the name of the U.S. at his or her own expense if the government declines to do so. During the approximately three and one-half years since the initial subpoenas were served NMC and the government have met periodically to discuss issues in connection with the OIG Investigation, including theories of liability. Recently, NMC and the government have begun to explore the possibility of settling the matters which are encompassed by the OIG Investigation and, as referenced below, have reached an agreement in principle in connection with the diagnostics investigation matter. There can be no assurance that any of the other matters subject to the OIG Investigation will be settled. If, however, one or more of the matters encompassed by the OIG Investigation is settled, it may result in NMC acknowledging that its past practices violated federal statutes, as well as NMC incurring substantial civil and criminal financial penalties which could have a material adverse effect on the Company. If one or more of these matters is not settled, the government may be expected to initiate litigation in which it would seek substantial civil and criminal financial penalties and other sanctions that could result in the exclusion of NMC and its subsidiaries from the Medicare program, Medicaid program and other federal health care programs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies." An adverse determination with respect to any of the issues addressed by the subpoenas, or any of the other issues that have been or may be identified by the government, could result in the payment of substantial fines, penalties and forfeitures, the suspension of payments or exclusion of the Company or one or more of its subsidiaries from the Medicare program and other federal programs, and changes in billing and other practices that could adversely affect the Company's revenues. Any such result could have a material adverse effect on the Company's business, financial condition and results of operations. Under the terms of the Merger, any potential 32 33 resulting monetary liability has been retained by NMC, and the Company has indemnified Grace Chemicals against all potential liability arising from or relating to the OIG Investigation. The Company has provided the U.S. government with a guarantee of payment of the obligations, if any, arising from the OIG Investigation. In support of this guarantee, the Company has delivered to the U.S. government a standby letter of credit in the amount of $150 million. MEDICAL DIRECTOR COMPENSATION The government is investigating whether Dialysis Services' compensation arrangements with its Medical Directors constitute payments to induce referrals, which would be illegal under the anti-kickback statutes, rather than payment for services rendered. Dialysis Services compensated the substantial majority of its Medical Directors on the basis of a percentage of the earnings of the dialysis center for which the Medical Director was responsible from the inception of NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II. Under the arrangements in effect prior to January 1, 1995, the compensation paid to Medical Directors was adjusted to include "add backs," which represented a portion of the profit earned by MPG on products purchased by the Medical Director's facility from MPG and (until January 1, 1992) a portion of the profit earned by LifeChem on laboratory services provided to patients at the Medical Director's facility. These adjustments were designed to allocate a profit factor to each dialysis center relating to the profits that could have been realized by the center if it had provided the items and services directly rather than through a subsidiary of NMC. The percentage of profits paid to any specific Medical Director was reached through negotiation, and was typically a provision of a multi-year consulting agreement. To comply with Stark II if Designated Health Services are involved, Medical Director compensation must not exceed fair market value and may not take into account the volume or value of referrals or other business generated between the parties. Since January 1, 1995, Dialysis Services has compensated its Medical Directors on a fixed compensation arrangement intended to comply with the requirements of Stark II. In renegotiating its Medical Director compensation arrangements in connection with Stark II, Dialysis Services took and continues to take account of the compensation levels paid to its Medical Directors in prior years. Certain government representatives have expressed the view in meetings with counsel for NMC that arrangements where the Medical Director was or is paid amounts in excess of the "fair market value" of the services rendered may evidence illegal payments to induce referrals, and that hourly compensation is a relevant measure for evaluating the "fair market value" of the services. Dialysis Services does not compensate its Medical Directors on an hourly basis and has asserted to the government that hourly compensation is not a determinative measure of fair market value. Although the Company believes that the compensation paid to its Medical Directors is generally reflective of fair market value, there can be no assurances that the government will agree with this position or that the Company ultimately will be able to defend its position successfully. Because of the wide variation in local market factors and in the profit percentage contractually negotiated between Dialysis Services and its Medical Directors prior to January 1, 1995, there is a wide variation in the amounts that have been paid to Medical Directors. As a result, the compensation that Dialysis Services has paid and is continuing to pay to a material number of its Medical Directors could be viewed by the government as being in excess of "fair market value," both in absolute terms and in terms of hourly compensation. NMC has asserted to the government that its compensation arrangements do not constitute illegal payments to induce referrals. NMC has also asserted to the government that OIG auditors repeatedly reviewed Dialysis Services' compensation arrangements with its Medical Directors in connection with their audits of the costs claimed by Dialysis Services; that the OIG stated in its audit reports that, with the exception of certain technical issues, Dialysis Services had complied with applicable Medicare laws and regulations pertaining to the ESRD program; and that Dialysis Services reasonably relied on these audit reports in concluding that its program for compensating Medical Directors was lawful. There has been no indication that the government will accept NMC's assertions concerning the legality of its arrangements generally or NMC's assertion that it reasonably relied on OIG audits, or that the government will not focus on specific arrangements that DSD has made with one or more Medical Directors and assert that those specific arrangements were or are unlawful. The government is also investigating whether Dialysis Services' profit sharing arrangements with its Medical Directors influenced them to order unnecessary ancillary services and items. NMC has asserted to the government that the rate of utilization of ancillary services and items by its Medical Directors is reasonable and that it did not provide illegal inducements to Medical Directors to order ancillary services and items. 33 34 CREDIT BALANCES In the ordinary course of business, medical service providers like Dialysis Services receive overpayments from Medicare intermediaries and other payors for services that they provide to patients. Medicare intermediaries commonly direct such providers to notify them of the overpayment and not remit such amounts to the intermediary by check or otherwise unless specifically requested to do so. In 1992, HCFA adopted a regulation requiring certain Medicare providers, including dialysis centers, to file a quarterly form listing unrecouped overpayments with the Medicare intermediary responsible for reimbursing the provider. The first such filing was required to be made as of June 30, 1992 for the period beginning with the initial date that the provider participated in the Medicare program and ending on June 30, 1992. The government is investigating whether DSD intentionally understated the Medicare credit balance reflected on its books and records for the period ending June 30, 1992 by reversing entries out of its credit balance account and taking overpayments into income in anticipation of the institution of the new filing requirement. Dialysis Services policy was to notify Medicare intermediaries in writing of overpayments upon receipt and to maintain unrecouped Medicare overpayments as credit balances on the books and records of Dialysis Services for four years; overpayments not recouped by Medicare within four years would be reversed from the credit balance account and would be available to be taken into income. NMC asserts that Medicare overpayments that have not been recouped by Medicare within four years are not subject to recovery under applicable regulations and that its initial filing with the intermediaries disclosed the credit balance on the books and records of Dialysis Services as shown in accordance with its policy, but there can be no assurance that the government will accept NMC's views. The government has inquired whether other divisions including Homecare, LifeChem and DSI have appropriately treated Medicare credit balances as well as credit balances of other payors. The government is also investigating whether Dialysis Services failed to disclose Medicare overpayments that resulted from Dialysis Services' obligation to rebill commercial payors for amounts originally billed to Medicare under HCFA's initial implementation of the OBRA 93 amendments to the secondary payor provisions of the Medicare Act. Dialysis Services experienced delays in reporting a material amount of overpayments after the implementation of the OBRA 93 amendments. NMC asserts that most of these delays were the result of the substantial administrative burdens placed on Dialysis Services as a consequence of the changing and inconsistent instructions issued by HCFA with respect to the OBRA 93 amendments and were not intentional. Substantially all overpayments resulting from the rebilling effort associated with the OBRA 93 amendments have now been reported. Procedures are in place that are designed to ensure that subsequent overpayments resulting from the OBRA 93 amendments will be reported on a timely basis. SUPPLEMENTAL MEDICAL INSURANCE Dialysis Services provided grants or loans for the payment of premiums for supplemental medical insurance (under which Medicare Part B coverage is provided) on behalf of a small percentage of its patients who are financially needy. The practice of providing loans or grants for the payment of supplemental medical insurance premiums by NMC was one of the subjects of review by the government as part of the OIG Investigation. The Government, however, advised the Company orally that it is no longer pursuing this issue. Furthermore, as a result of the passage of HIPAA, the Company terminated making such payments on behalf of its patients. Instead, the Company, together with other representatives of the industry, obtained an advisory opinion from the OIG, whereby, consistent with specified conditions, the Company and other similarly situated providers may make contributions to a non-profit organization that has volunteered to make these payments on behalf of indigent ESRD patients, including patients of the Company. In addition, the government has indicated that it is investigating the method by which NMC made Medigap payments on behalf of its indigent patients. OVERPAYMENTS FOR HOME DIALYSIS SERVICES NMC acquired HIC, an in-center and home dialysis service provider, in 1993. At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC had received payments for home dialysis services in excess of the Medicare reasonable charge for services rendered prior to February 1, 1990. NMC settled the HCFA claim against HIC in 1994. The government is investigating whether the settlement concerning the alleged overpayments made to HIC resolved all issues relating to such alleged overpayments. The government is also investigating whether HDS received payments similar to the payments that HIC received, and whether HDS 34 35 improperly billed for home dialysis services in excess of the monthly cost cap for services rendered on or after February 1, 1990. The government is investigating whether NMC was overpaid for services rendered. NMC asserts that the billings by HDS were proper, but there can be no assurance that the government will accept NMC's view. LIFECHEM Overpayments. On September 22, 1995, LifeChem voluntarily disclosed certain billing problems to the government that had resulted in LifeChem's receipt of approximately $4.9 million in overpayments from the Medicare program for laboratory services rendered between 1989 and 1993. LifeChem asserts that most of these overpayments relate to errors caused by a change in LifeChem's computer systems and that the remainder of the overpayments were the result of the incorrect practice of billing for a complete blood count with differential when only a complete blood count was ordered and performed, and of the incorrect practice of billing for a complete blood count when only a hemoglobin or hematocrit test was ordered. LifeChem asserts that the overpayments it received were not caused by fraudulent activity, but there can be no assurance that the government will accept LifeChem's view. LifeChem made these disclosures to the government as part of an application to be admitted to a voluntary disclosure program begun by the government in mid-1995. At the time of the disclosures, LifeChem tendered repayment to the government of the $4.9 million in overpayments. After the OIG Investigation was announced, the government indicated that LifeChem had not been accepted into its voluntary disclosure program. The government has deposited the $4.9 million check with NMC's approval. The matters disclosed in LifeChem's September 22, 1995 voluntary disclosure are a subject of the OIG Investigation. On June 7, 1996, LifeChem voluntarily disclosed an additional billing problem to the government that had resulted in LifeChem's receipt of between $40,000 and $160,000 in overpayments for laboratory services rendered in 1991. LifeChem advised the government that this overpayment resulted from the submission for payment of a computer billing tape that had not been subjected to a "billing rules" program designed to eliminate requests for payments for laboratory tests that are included in the Composite Rate and that were not eligible for separate reimbursement. LifeChem also advised the government that there may have been additional instances during the period from 1990 to 1992 when other overpayments were received as a result of the submission of computer billing tapes containing similar errors and that it was in the process of determining whether such additional overpayments were received. On June 21, 1996, LifeChem advised the government that the 1991 billing problem disclosed on June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also advised the government that certain records suggested instances in July 1990 and August 31 through September 11, 1990, when billing tapes may have been processed without rules processing. LifeChem continued its effort to determine whether any other overpayments occurred relating to the "billing rules" problem and, in March 1997, advised the government that an additional overpayment of approximately $260,000 was made by Medicare. On April 6, 1999, LifeChem voluntarily disclosed an additional billing problem to the government that resulted in LifeChem's receipt of overpayments for laboratory services rendered between 1994 and 1999. In 1994, as a result of the advice of a billing consultant, LifeChem began to bill for platelet testing performed in connection with complete blood counts. This advice was confirmed by the consultant in 1997 as part of a review performed by the consultant under the auspices of LifeChem's then outside counsel. In 1999, however, an internal inquiry resulted in a reexamination of this advice and LifeChem determined that the prior advice was incorrect. As a result LifeChem voluntarily disclosed the overpayment to the Medicare carrier. LifeChem also has notified the government of the disclosure. The Company is still reviewing its records to determine an estimated aggregate amount of the overpayments. There can be no assurances that the government will agree that LifeChem's disclosure should not result in a sanction beyond repayment of the overpayment amount. Capitation for routine tests and panel design. In October 1994, the OIG issued a special fraud alert in which it stated its view that the industry practice of offering to perform or performing the routine tests covered by the Composite Rate at a price below fair market value, coupled with an agreement by a dialysis center to refer all or most of its non-Composite Rate tests to the laboratory, violates the anti-kickback statutes. In response to this alert, LifeChem changed its practices with respect to testing covered by the Composite Rate to increase the amount charged to both Dialysis Services and third-party dialysis centers and reduce the number of tests provided for the fixed rate. The government is investigating LifeChem's practices with respect to these tests. Benefits provided to dialysis centers and persons associated with dialysis centers. The government is investigating whether Dialysis Services or any third-party dialysis center or any person associated with any such center was provided with benefits in order to induce them to use LifeChem services. Such benefits could include, for example, discounts on products or supplies, the provision of computer equipment, the provision of money for the purchase of computer equipment, the provision of research grants and the provision of entertainment to customers. NMC has identified certain instances in which benefits were provided to customers who purchased medical products from NMC Medical Products, Inc., NMC's products company, and used LifeChem's laboratory services. The government asserts that the provision of such benefits violates, among other things, the anti-kickback statutes. In December 1998, the former Vice President of Sales responsible for NMC's laboratory and products divisions plead guilty to the payment of illegal kickbacks to obtain laboratory business for NMC. In February 1999, the former President of NMC Medical Products, Inc., was indicted by the government for the payment of these same and/or similar kickbacks. Business and testing practices. As noted above, the government has identified a number of specific categories of documents that it is requiring NMC to produce in connection with LifeChem business and testing practices. In addition to documents relating to 35 36 the areas discussed above, the government has also required LifeChem to produce documents relating to the equipment and systems used by LifeChem in performing and billing for clinical laboratory blood tests, the design of the test panels offered and requisition forms used by LifeChem, the utilization rate for certain tests performed by LifeChem, recommendations concerning diagnostic codes to be used in ordering tests for patients with given illnesses or conditions, internal and external audits and investigations relating to LifeChem's billing and testing. Subsequently, the government served an investigative subpoena for documents concerning the Company's 1997 review of dialysis facilities' standing orders, and responsive documents were provided. Recently the government served investigative subpoenas requiring NMC to update its production on the above issues and to produce contract files for twenty-three identified dialysis clinic customers. The government is investigating each of these areas, and asserts that LifeChem and/or NMC have violated the False Claims Act and/or the Anti-Kickback Statute through the test ordering, paneling, requisitioning, utilization, coding, billing and auditing practices described above. IDPN Administration kits. As discussed above, one of the activities of SRM is to provide IDPN therapy to dialysis patients at both NMC-owned facilities and at facilities owned by other providers. IDPN therapy was provided by Homecare prior to its divestiture. IDPN therapy is typically provided to the patient 12-13 times per month during dialysis treatment. Bills are submitted to Medicare on a monthly basis and include separate claims for reimbursement for supplies, including, among other things, nutritional solutions, administration kits and infusion pumps. In February 1991, the Medicare carrier responsible for processing Homecare's IDPN claims issued a Medicare advisory to all parenteral and enteral nutrition suppliers announcing a coding change for reimbursement of administration kits provided in connection with IDPN therapy for claims filed for items provided on or after April 1, 1991. The Medicare allowance for administration kits during this period was approximately $625 per month per patient. The advisory stated that IDPN providers were to indicate the "total number of actual days" when administration kits were "used," instead of indicating that a one-month supply of administration kits had been provided. In response, Homecare billed for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period, which typically represented the entire month, as opposed to the number of days the treatment was actually administered. During the period from April 1991 to June 1992, Homecare had an average of approximately 1,200 IDPN patients on service. In May 1992, the carrier issued another Medicare advisory to all PEN suppliers in which it stated that it had come to the carrier's attention that some IDPN suppliers had not been prorating their billing for administration kits used by IDPN patients and that providers should not bill for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period. The advisory stated further that the carrier would be conducting "a special study to determine whether or not overpayments have occurred as a result of incorrect billing" and that "if overpayments have resulted, providers that have incorrectly billed" would "be contacted so that refunds can be recovered." Homecare revised its billing practices in response to this advisory for claims filed for items provided on or after July 1, 1992. Homecare was not asked to refund any amounts relating to its billings for administration kits following the issuance of the second advisory. The government asserts that NMC submitted false claims for administration kits during the period from 1988 to June 30, 1996, and that Homecare's billing for administration kits during this period violated, among other things, the False Claims Act. Infusion Pumps and IV Poles. During the time period covered by the subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for the infusion pumps and, until 1992, for IV poles provided to IDPN patients in connection with the administration of IDPN treatments. These regulations do not expressly specify that a particular pump and IV pole be dedicated to a specific patient, and NMC asserts that these regulations permitted Homecare to bill Medicare for an infusion pump and IV pole so long as the patient was infused using a pump and IV pole. Despite the absence of an express regulatory specification, Homecare developed a policy to deliver to a dialysis center a dedicated infusion pump and IV pole for each patient, although the Company cannot represent that Homecare followed this policy in every instance. The government is investigating the propriety of Homecare's billings for infusion pumps and IV poles and asserts that Homecare's billings violate the False Claims Act. As noted above, under the new policies published by HCFA with respect to IDPN therapy, the Company has not been able to bill for infusion pumps after July 1, 1996. The government discontinued reimbursement for IV poles in 1992. "Hang fees" and other payments. IDPN therapy is typically provided to the patient during dialysis by personnel employed by the dialysis center treating the patient with supplies provided and billed to Medicare by Homecare in accordance with the Medicare 36 37 parenteral nutrition supplier rules. In order to compensate dialysis centers for the costs incurred in administering IDPN therapy and monitoring the patient during therapy, Homecare followed the practice common in the industry of paying a "hang fee" to the center. Dialysis centers are responsible for reporting such fees to HCFA on their cost reports. For Dialysis Services dialysis centers, the fee was $30 per administration, based upon internal Dialysis Services cost calculations. For third-party dialysis centers, the fee was negotiated with each center, typically pursuant to a written contract, and ranged from $15 to $65 per administration. The Company has identified instances in which other payments and amounts beyond that reflected in a contract were paid to these third-party centers. The Company has stopped paying "hang fees" to both Dialysis Services and third-party facilities. In July 1993, the OIG issued a management advisory alert to HCFA in which it stated that "hang fees" and other payments made by suppliers of IDPN to dialysis centers "appear to be illegal as well as unreasonably high." The government is investigating the nature and extent of the "hang fees" and other payments made by Homecare as well as payments by Homecare to physicians whose patients have received IDPN therapy. The government asserts that the payments by Homecare to dialysis centers violate, among other things, the anti-kickback statutes. Utilization of IDPN. Since 1984, when HCFA determined that Medicare should cover IDPN and other parenteral nutrition therapies, the Company has been an industry leader in identifying situations in which IDPN therapy is beneficial to ESRD patients. It is the policy of the Company to seek Medicare reimbursement for IDPN therapy only when it is prescribed by a patient's treating physician and when it believes that the circumstances satisfy the requirements published by HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for payment more than 90% of the IDPN claims submitted by Homecare. After 1993, the rate of approval for Medicare reimbursement for IDPN claims submitted by Homecare for new patients, and by the infusion industry in general, fell to approximately 9%. The Company contends that the reduction in rates of approval occurred because HCFA and its carriers implemented an unauthorized change in coverage policy without giving notice to providers. While NMC continued to offer IDPN to patients pursuant to the prescription of the patients' treating physicians and to submit claims for Medicare reimbursement when it believed the requirements stated in HCFA's published regulations were satisfied, other providers responded to the drop in the approval rate for new Medicare IDPN patients by abandoning the Medicare IDPN business, cutting back on the number of Medicare patients to whom they provide IDPN, or declining to add new Medicare patients. Beginning in 1994 the number of patients to whom NMC provided IDPN increased as a result. The government is investigating the utilization rate of IDPN therapy among the NMC patients, whether the NMC submitted IDPN claims to Medicare for patients who were not eligible for coverage, and whether documentation of eligibility was adequate. NMC asserts that the utilization rate of IDPN therapy among its dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the factors discussed above and that it is the policy of Homecare to seek Medicare reimbursement for IDPN therapy prescribed by the patients' treating physician in accordance with the requirements published by HCFA and its carrier agents. There can be no assurance that the government will accept the NMC's view. The government asserts that Homecare submitted IDPN claims for individuals who were not eligible for coverage and/or with inadequate documentation of eligibility. The Company believes that it has presented to the government substantial defenses which support NMC's interpretation of coverage rules of IDPN as HCFA and its carriers published and explained them, and which demonstrated that HCFA and its carriers improperly implemented unpublished, more restrictive criteria after 1993. Nevertheless, the government is expected to assert in the OIG Investigation that, on a widespread basis, NMC submitted and received payments on claims for IDPN to Medicare for patients who were not eligible for coverage, and for whom the documentation of eligibility was inadequate. In addition, the government asserts that, in a substantial number of cases, documentation of eligibility was false or inaccurate. With respect to some claims, the Company has determined that false or inaccurate documentation was submitted, deliberately or otherwise. The government continues to investigate the IDPN claims. QUI TAM ACTIONS The Company and NMC have become aware that ten qui tam actions have been filed in various jurisdictions. Each of these actions is under seal and in each action, pursuant to court order the seal has been modified to permit the Company, NMC and other affiliated defendants to disclose the complaint to any relevant investors, financial institutions and/or underwriters, their successors and assigns and their respective counsel and to disclose the allegations in the complaints in their respective SEC and NYSE periodically required filings. 37 38 The first qui tam action was filed in the United States District Court for the Southern District of Florida in June 1994, amended on July 8, 1996 and disclosed to the Company on July 10, 1996. It alleges, among other things, that Grace Chemicals and NMC violated the False Claims Act in connection with certain billing practices regarding IDPN and the administration of EPO and that as a result of this allegedly wrongful conduct, the United States suffered actual damages in excess of $200 million. The Amended Complaint also seeks the imposition of a constructive trust on the proceeds of The NMC dividend to Grace Chemicals for the benefit of the United States on the ground that the Merger constitutes a fraudulent conveyance that will render the NMC unable to satisfy the claims asserted in the Amended Complaint. The second qui tam action was filed in the United States District Court for the Southern District of Florida in December 1994 and disclosed to the Company on April 16, 1999. It alleges, among other things, that NMC violated the False Claims Act in connection with certain billing practices regarding IDPN and the cost relating thereto. The second qui tam was filed by the same relator which filed the first qui tam and covers the same services covered by the first qui tam complaint. The third qui tam action was filed in the United States District Court for the Middle District of Florida in 1995 and disclosed to the Company on or before November 7, 1996. It alleges, among other things, that NMC and certain NMC subsidiaries violated the False Claims Act in connection with the alleged retention of over-payments made under the Medicare program, the alleged submission of claims in violation of applicable cost caps and the payment of supplemental Medicare insurance premiums as an alleged inducement to patients to obtain dialysis products and services from NMC. The complaint alleges that as a result of this allegedly wrongful conduct, the United States suffered damages in excess of $10 million including applicable fines. The fourth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in February 1996 and was disclosed to the Company in November 1996. It alleges, among other things, that a pharmaceutical manufacturer, an unaffiliated dialysis provider and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for a nonsterile intravenous drug and for intravenous drugs which were allegedly billed in excess of permissible Medicare reimbursement rates. The complaint also asserts that the defendants violated the Medicare and Medicaid anti-kickback statutes in connection with the receipt of discounts and other in kind payments as alleged inducements to purchase intravenous drugs. The complaint is focused on the business relationship between the pharmaceutical manufacturer and several providers, one of which is NMC. The complaint asserts that as a result of this allegedly wrongful conduct, the United States suffered damages. On June 28, 1997, in response to relator's motion to dismiss and the United States' declination to intervene, the District Court ordered the complaint dismissed without prejudice. The fifth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in May 1995 and was disclosed to the Company in August 1997. It alleges, among other things, that Biotrax violated the False Claims Act in connection with its submission of claims to the Medicare program for diagnostic tests and induced overutilization of such tests in the medical community through improper marketing practices also in violation of the False Claims Act. The sixth qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in August 1996 and was disclosed to the Company in August 1997. It alleges, among other things, that Biotrax and NMC Diagnostic Services induced overutilization of diagnostic tests by several named and unnamed physician defendants in the local medical community, through improper marketing practices and fee arrangements, in violation of the False Claims Act. The seventh qui tam action was filed in the United States District Court for the Eastern District of Pennsylvania in November 1996 and was disclosed to the Company in August 1997. It alleges, among other things, that NMC, DSI and Biotrax violated the False Claims Act in connection with the submission of claims to the Medicare program by improperly upcoding and otherwise billing for various diagnostic tests. The eighth qui tam action was filed in the United States District Court for the District of Delaware in January 1997 and was disclosed to the Company in September 1997. It alleges, among other things, that NMC and Biotrax violated the False Claims Act in connection with the submission of claims to the Medicare program for diagnostic tests, and induced overutilization of such tests through improper marketing practices which provided impermissible incentives to health care providers to order these tests. The ninth qui tam action was filed in the United States District Court for the District of New Jersey in February 1997 and was disclosed to the Company in September 1997. It alleges, among other things, that DSI and NMC violated the False Claims Act in connection with the submission of claims to the Medicare program for reimbursement for diagnostic tests, by causing unnamed physicians to overutilize these tests though a variety of fee arrangements and other impermissible inducements. The tenth qui tam was filed in the United States District Court for the District of Massachusetts in 1994 and was disclosed to the Company in February 1999. It alleges among other things that NMC violated the False Claims Act and the Anti-Kickback Statute in connection with certain billing and documentation practices regarding IDPN therapy, home oxygen therapy and certain medical 38 39 billings in NMC's Chicago office. Each of the qui tam complaints asserts that as a result of the allegedly wrongful conduct, the United States suffered damages and that the defendants are liable to the United States for three times the amount of the alleged damages plus civil penalties of up to $10,000 per false claim. An adverse result in any of the qui tam actions could have a material adverse affect on the Company's business, financial condition or results of operations. OIG AGREEMENTS As a result of discussions with representatives of the United States in connection with the OIG Investigation, certain agreements (the "OIG Agreements") have been entered into to guarantee the payment of any obligations of NMC to the United States (an "Obligation") relating to or arising out of the OIG Investigation and the qui tam action filed in the Southern District of Florida (the "Government Claims"). For the purposes of the OIG Agreements, an Obligation is (a) a liability or obligation of NMC to the United States in respect of a Government Claim pursuant to a court order (i) which is final and nonappealable or (ii) the enforcement of which has not been stayed pending appeal or (b) a liability or obligation agreed to be an Obligation in a settlement agreement executed by Fresenius Medical Care, the Company or NMC, on the one hand, and the United States, on the other hand. As stated elsewhere herein, the outcome of the OIG Investigation cannot be predicted. Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius Medical Care, the Company and NMC provided the United States with a joint and several unconditional guarantee of payment when due of all Obligations (the "Primary Guarantee"). As credit support for this guarantee, NMC delivered an irrevocable standby letter of credit in the amount of $150 million. The United States will return such letter of credit (or any renewal or replacement) for cancellation when all Obligations have been paid in full or it is determined that NMC has no liability in respect of the Government Claims. Under the terms of the Merger, any potential resulting monetary liability has been retained by NMC, and the Company has indemnified Grace Chemicals against all potential liability arising from or relating to the OIG Investigation. Fresenius Medical Care and the United States state in the OIG Agreements that they will negotiate in good faith to attempt to arrive at a consensual resolution of the Government Claims and, in the context of such negotiations, will negotiate in good faith as to the need for any restructuring of the payment of any Obligations arising under such resolution, taking into account the ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements state that the foregoing statements shall not be construed to obligate any person to enter into any settlement of the Government Claims or to agree to a structured settlement. Moreover, the OIG Agreements state that the statements described in the first sentence of this paragraph are precatory and statements of intent only and that (a) compliance by the United States with such provisions is not a condition or defense to the obligations of Fresenius Medical Care under the OIG Agreements and (b) breach of such provisions by the United States cannot and will not be raised by Fresenius Medical Care to excuse performance under the OIG Agreements. Neither the entering into of the OIG Agreements nor the providing of the Primary Guarantee and the $150 million letter of credit is an admission of liability by any party with respect to the OIG Investigation, nor does it indicate the liability which may result therefrom. The foregoing describes the material terms of the OIG Agreements, copies of which were previously filed with the Commission and copies of which may be examined without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the Regional Offices of the Commission located at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World Trade Center, New York, New York 10048. Copies of such material will also be made available by mail from the Public Reference Branch of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The foregoing description does not purport to be complete and is qualified in its entirety by reference to such agreements. DIAGNOSTICS SUBPOENA In October 1996, Biotrax International, Inc., ("Biotrax") and NMC Diagnostics, Inc., ("DSI") both of which are subsidiaries of NMC, received an investigative subpoena from the OIG. The subpoena calls for the production of extensive documents and was issued in connection with an investigation being conducted by the OIG in conjunction with the U.S. Attorney for the Eastern District of Pennsylvania concerning the possible submission of false or improper claims to, and their payment by, the Medicare program. The subpoena calls for the production of documents on corporate organization, business plans, document retention, personnel files, sales and marketing and Medicare billing issues relating to certain procedures offered by the prior owner of the Biotrax business before its 39 40 assets were acquired by NMC in March 1994 and by DSI following the acquisition. The Company has reviewed the subpoena with its legal counsel and has made extensive document production in response to the subpoena. The Company and the government have been negotiating a resolution to this matter, and negotiations have progressed to the point of a possible settlement. The Company and the government have reached an agreement in principle in which, among other things, the government has agreed to release the Company from liability in this matter in exchange for a payment of approximately $16.5 million from the Company. The Company and the government are currently negotiating the terms of a settlement agreement. The agreement is not final. For this reason, the eventual outcome of this matter, its duration, and its effect, if any, on NMC or the Company cannot be predicted at this time. The Company divested Non Renal Diagnostic Services on June 26, 1998. See "Management Discussion and Analysis of Financial Condition and Results of Operations - Divestitures." DISTRICT OF NEW JERSEY INVESTIGATION NMC has received multiple subpoenas from a federal grand jury in the District of New Jersey investigating, among other things, whether NMC sold defective products, the manner in which NMC handled customer complaints and certain matters relating to the development of a new dialyzer product line NMC is cooperating with this investigation and has provided the grand jury with extensive documents. In February, 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that it is the target of a federal grand jury investigation into possible violations of criminal law in connection with its efforts to persuade the FDA to lift a January 1991 import hold issued with respect to NMC's Dublin, Ireland manufacturing facility. In June 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that the U.S. Attorney had declined to prosecute NMC with respect to a submission related to NMC's effort to lift the import hold. The letter added that NMC remains a subject of a federal grand jury's investigation into other matters. NMC has produced documents in response to a June 1996 subpoena from the federal grand jury requesting certain documents in connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to November 1995. The government investigators and the Company have narrowed the issues with respect to which the government has previously expressed concerns and have recently conducted discussions in order to resolve this investigation. However, the outcome and impact, if any, of these discussions and potential resolution on the Company's business, financial condition or results of operations cannot be predicted at this time. FDA MATTERS Since 1993, NMC has engaged in a number of voluntary recalls of products that it manufactured or that were manufactured by third parties and distributed by NMC. None of these product recalls has resulted in fines or penalties for NMC. In 1995, Fresenius USA completed a voluntary action with respect to the Optum(R) exchange device that Fresenius USA acquired from Abbott, which was classified by the FDA as a recall. The FDA reviewed Fresenius USA's actions with respect to this device and determined that they were adequate. During the period from 1991 through 1993, the FDA issued warning letters concerning four of the six Dialysis Product's facilities in the U.S., as well as import alerts concerning hemodialysis bloodlines manufactured at NMC's Reynosa, Mexico facility and Focus(R) brand hemodialyzers manufactured at NMC's Dublin, Ireland facility. As a result of the import alerts, NMC was prohibited from importing the products covered by the alerts into the U.S. until the FDA confirmed compliance with GMP requirements at the facilities where such products were manufactured. In January 1994, NMC and certain members of its senior management entered into the Consent Decree providing that the importation of bloodlines and hemodialyzers could resume upon certification by NMC that the relevant manufacturing facility complied with GMP requirements and successful completion of an FDA inspection at the relevant facility to confirm compliance. The Consent Decree also required NMC to certify, and be inspected for, GMP compliance at all of Dialysis Product's manufacturing facilities in the U.S. Under the Consent Decree, Dialysis Product's committed to maintaining ongoing compliance with GMP and 40 41 related requirements at both U.S. and non-U.S. manufacturing facilities. As a result of the Consent Decree, NMC's U.S. facilities were required to undertake significant GMP improvements. NMC submitted all required certifications for its U.S. and non-U.S. facilities in accordance with timetables specified in the Consent Decree, and the bloodline import alert was lifted in March 1994. During the course of 1994 and 1995, NMC also worked with the FDA and demonstrated that its other manufacturing facilities in the U.S. were in compliance with GMP requirements. The hemodialyzer manufacturing facility in Dublin, Ireland was inspected by the FDA in April and December 1994 but did not pass inspection. NMC completed all remaining corrective actions, and in December 1995 the FDA determined that the Dublin facility was in compliance with GMP requirements and lifted the import alert. No fines or penalties have been imposed on NMC as a result of the FDA's actions or in connection with the Consent Decree. By policy, however, the FDA generally will undertake more frequent and more rigorous inspections of facilities that have been subject to consent decrees. The Consent Decree was lifted in January 1997. In February 1997, the Company closed its Dublin, Ireland facility. On January 24, 1995, the FDA issued a warning letter and import alert relating to NMC's manufacture of Diafilter(R) products at its Limerick, Ireland facility. That facility was not expressly named in the Consent Decree described above. Because NMC voluntarily ceased importing Diafilters(R) into the U.S. in December 1994, and, for business reasons, decided to shut down the Diafilter(R) business at the Limerick facility on January 23, 1995, no subsequent compliance review was deemed necessary by the FDA. NMC was not restricted from importing into the U.S. the other products manufactured at the Limerick facility. In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each location, violations of certain GMPs were found. At the Walnut Creek facility, violations of pre-market notification filing requirements were also found, although these findings were subsequently reversed when the devices in question were determined to be covered by appropriate filings. The FDA issued warning letters with respect to each facility, as a result of which the issuance of new 510(k) notices and new export clearances was placed on administrative hold. Fresenius USA responded to the inspection findings at Maumee in a manner it believes addresses the FDA's findings. Fresenius USA subsequently closed the Maumee facility in connection with the relocation of production from that facility to a facility in Lewisberry, Pennsylvania. Fresenius USA undertook an exhaustive review of the FDA's findings relating to Walnut Creek and submitted a detailed response to those findings. The Ogden plant was reinspected in 1995 and the administrative holds have been lifted from both Ogden and Walnut Creek. The Walnut Creek facility was inspected again in January and February of 1996 and Fresenius USA was advised that all GMP issues raised by the FDA have been resolved. Fresenius USA believes that its facilities are currently in compliance in all material respects with applicable state, local and federal requirements. In August 1996, Fresenius USA undertook a voluntary North American recall of certain lots of its peritoneal dialysis solutions which were associated with aseptic peritonitis. This condition is an inflammation of the abdominal cavity not caused by infection. The patients affected in the episode recovered quickly after using non-suspect product lots. In the recall, Fresenius USA notified hospitals and dialysis centers that received the recalled lots as well as individual patients. Patients with recalled lots were provided with replacement solution, and a toll free telephone number for patient inquiries was established. Fresenius USA cooperated with the FDA and other government agencies in resolving the matter. In addition, the FDA may inspect facilities in the ordinary course of business to ensure compliance with GMP and other applicable regulations. The Company intends to address expeditiously any FDA findings resulting from such inspections. COMMERCIAL INSURER LITIGATION In 1997, the Company, NMC, and certain named NMC subsidiaries, were served with a civil complaint filed by Aetna Life Insurance Company in the U.S. District Court for the Southern District of New York (Aetna Life Insurance Company v. National Medical Care, Inc. et al, 97-Civ-9310). In April 1999, Aetna amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an additional plaintiff, and to make certain other limited changes in its pleading. Based in large part on information contained in prior securities filings, the lawsuit alleges inappropriate billing practices for nutritional therapy, diagnostic and clinical laboratory tests and misrepresentations. The amended complaint seeks unspecified damages and costs This matter is at a relatively early stage in the litigation process, with substantial discovery just beginning, and its outcome and impact on the Company cannot be predicted at this time. However, the Company, NMC and its subsidiaries believe that they have substantial defenses to the claims asserted, and intend to continue to vigorously defend the lawsuit. 41 42 It is also possible that one or more other private payors may assert that NMC received excess payments and similarly, may seek reimbursement and other damages from NMC. An adverse result could have a material adverse effect on the Company's business, financial condition or results of operations. OBRA 93 OBRA 93 affected the payment of benefits under Medicare and employer health plans for certain eligible ESRD patients. In July 1994, HCFA issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by OBRA 93 would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than that provided under Medicare. In April 1995, HCFA issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. HCFA further proposed that its new instruction be effective retroactive to August 1993, the effective date of OBRA 93. NMC ceased to recognize the incremental revenue realized under the original Program Memorandum as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by OBRA 93 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by OBRA 93, and then began to rebill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No. 95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April 24, 1995 implementation of the OBRA 93 provisions relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude HCFA from enforcing its new policy retroactively, that is, to billings for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction and in December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that HCFA's retroactive application of the April 1995 rule was legally invalid. HCFA cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding HCFA's retroactive application of the April 1995 rule legally invalid, and based on its finding, the Court also permanently enjoined HCFA from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on HCFA's motion for summary judgment pending completion of the outstanding discovery. On October 5, 1998 NMC filed it's own motion for summary judgment requesting that the Court declare HCFA's prospective application of the April 1995 rule invalid and permanently enjoin HCFA from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. HCFA elected not to appeal from the Court's June 1995 and January 1998 orders. HCFA may, however, appeal all rulings at the conclusion of the litigation. If HCFA should successfully appeal so that the revised interpretation would be applied retroactively NMC may be required to refund the payments received from employer health plans for services provided after August 10, 1993 under HCFA's original implementation, and to re-bill Medicare for the same services, which would result in a net loss to NMC of approximately $120 million attributable to all periods prior to December 31, 1995. Also, in such event, the Company's business, financial position and results of operations would be materially adversely affected. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In 1996, the Company (then called W.R. Grace & Co.) received a formal order of investigation issued by the Commission directing an investigation into, among other things, whether Grace violated the federal securities laws by filing periodic reports with the Commission that contained false and misleading financial information. Pursuant to this formal order of investigation, the Company has produced documents pursuant to subpoenas from the Southeast Regional Office of the Commission relating to reserves (net of applicable taxes) established by the Company and NMC during the period from January 1, 1990 to the date of the subpoena and certain corporate records and personnel material. On December 22, 1998, the Commission, in respect of the above-mentioned investigation, (a) filed a civil complaint against Grace in the United States District Court in Miami, Florida, alleging that from 1991 through 1995, Grace inappropriately used certain accounting reserves to report inaccurate results for Grace and its Health Care Group, 42 43 the bulk of which was comprised of Grace's then wholly owned subsidiary NMC, and (b) instituted in respect of substantially similar allegations public administrative and cease-and-desist proceedings against seven former personnel of Grace and NMC. NMC and the Company are neither defendants (or otherwise parties) in the Commission's above-mentioned civil action nor respondents (or otherwise parties) in the Commission's above-mentioned administrative proceedings. While there can be no assurance, the Company believes that the outcome of this investigation will have no material adverse effect on the business, financial condition and results of operations of the Company. IDPN COVERAGE ISSUES SRM administers IDPN therapy to chronic dialysis patients who suffer from severe gastrointestinal malfunctions. IDPN therapy was provided by Homecare prior to its divestiture. After 1993, Medicare claims processors sharply reduced the number of IDPN claims approved for payment as compared to prior periods. NMC believes that the reduction in IDPN claims represented an unauthorized policy coverage change. Accordingly, NMC and other IDPN providers pursued various administrative and legal remedies, including administrative appeals, to address this reduction. In November 1995, NMC filed a complaint in the U.S. District Court for the Middle District of Pennsylvania seeking a declaratory judgment and injunctive relief to prevent the implementation of this policy coverage change. (National Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). Subsequently, the District Court affirmed a prior report of the magistrate judge dismissing NMC's complaint, without considering any substantive claims, on the grounds that the underlying cause of action should be submitted fully to the administrative review processes available under the Medicare Act. NMC decided not to appeal the Court's decision, but rather, to pursue the claims through the available administrative processes. NMC was successful in pursuing these claims through the administrative process, receiving favorable decisions from Administrative Law Judges in more than 80% of its cases. In early 1998, a group of claims which had been ruled on favorably were remanded by the Medicare Appeals Council to a single Administrative Law Judge (the "ALJ") with extensive instructions concerning the review of these decisions. A hearing was scheduled on the remanded claims to take place in July, but later postponed until October 1998. Prior to the July hearing date, the United States Attorney for the District of Massachusetts requested that the hearing be stayed pending resolution of the OIG Investigation, on the basis that proceeding could adversely effect the government's investigation as well as the government's efforts to confirm it belief that these claims are false. Prior to the ALJ issuing a decision on the stay request, the U.S. Attorney's Office requested that NMC agree to a stay in the proceedings in order to achieve a potential resolution of the IDPN claims subject to the OIG Investigation as well as those which are subject to the administrative appeals process. NMC agreed to this request, and together with the U.S. Attorney's Office requested a stay. The ALJ agreed to this request in order to allow the parties the opportunity to resolve both the IDPN claims which are the subject of the OIG Investigation and the IDPN claims which are the subject of the administrative proceedings. In March 1999 negotiations between NMC and the U.S. Attorney's Office failed to progress and NMC requested that the stay be lifted. The ALJ agreed to NMC's request and on April 19, 1999 the ALJ hearing began. The hearing process is expected to proceed for several months. At the same time, NMC and the U.S. Attorney's Office are continuing to discuss potential settlement of both the claims relating to the OIG Investigation and the claims which are subject to administrative appeals. At this time, it is not possible to determine whether NMC and the government will be able to resolve issues surrounding the IDPN claims. Further proceedings on other administrative appeals related to unpaid claims remain stayed. Although NMC management believes that those unpaid IDPN claims were consistent with published Medicare coverage guidelines and ultimately will be approved for payment, there can be no assurance that the claims on appeal will be approved for payment or, to the extent approved, collected in full. Such claims represent substantial accounts receivable of NMC, amounting to approximately $150 million as of March 31, 1999. If NMC is unable to collect its IDPN receivable, either through the administrative appeal process or through negotiation, or if IDPN coverage is reduced or eliminated, depending on the amount of the receivable that is not collected and/or the nature of the coverage change, NMC's business, financial condition and results of operations could be materially adversely affected. NMC's IDPN receivables are included in the net assets of the Company's discontinued operations. However, these receivables have not been sold and will remain classified as discontinued operations until they have been settled. See Notes to Consolidated Financial Statements, Note 4 "Discontinued Operations." 43 44 ADMINISTRATIVE APPEALS The Company regularly pursues various administrative appeals relating to reimbursement issues in connection with its dialysis facilities. One such appeal consists of a challenge to the Medicare regulation which capped reimbursement for the bad debts incurred by dialysis facilities. In 1998, the United States Court of Appeals for the District of Columbia ruled in favor of the Company in connection with the bad debt issue, holding that the Secretary of Health & Human Services had not adequately justified the bad debt regulation, and ruling that the government's order adopting the rule was arbitrary and capricious. The Court of Appeals remanded the matter to the Secretary to provide a more adequate explanation of the bad debt cap or to abandon it. Subsequently, the Court modified its holding to continue the bad debt regulation in effect pending remand. The Company is continuing settlement discussions with the government in an attempt to recover reimbursement for disallowed bad debt expenses. The Company cannot predict the outcome of these discussions. SPECTRA CORPORATE INTEGRITY AGREEMENT Spectra was acquired by the Company in June 1997. Prior to Spectra's acquisition by the Company, Spectra settled an investigation by the government and entered into a Corporate Integrity Agreement (the "Agreement"). In February 1999 the government advised Spectra that it may be in breach of the Agreement and on March 15, 1999 issued a subpoena to Spectra requesting certain documents related to the Agreement. Spectra has complied with the subpoena and is currently working with the government to determine if any corrective action is necessary. While there can be no assurances, the Company does not believe the outcome of this matter will have a material adverse effect on the Company. OTHER LITIGATION AND POTENTIAL EXPOSURES In recent years, physicians, hospitals and other participants in the health care industry have become subject to an increasing number of lawsuits alleging professional negligence, malpractice, product liability, workers' compensation or related claims, many of which involve large claims and significant defense costs. The Company and NMC and their subsidiaries have been, and the Company can be expected to continue from time to time to be, subject to such suits due to the nature of the Company's business. Although the 44 45 Company maintains insurance at a level which it believes to be prudent, there can be no assurance that the coverage limits will be adequate or that all asserted claims will be covered by insurance. In addition, there can be no assurance that liability insurance will continue to be available at acceptable costs. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the reputation and business of the Company. The Company, NMC and their subsidiaries operate a large number and wide variety of facilities throughout the U.S. In such a decentralized system it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliate companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. However, on occasion, the Company, NMC and their subsidiaries have identified instances where employees, deliberately or inadvertently, have submitted inadequate or false billings while employed by an affiliated company. The illegal actions of such persons may subject NMC to liability under the False Claims Act, among other laws, and the Company cannot predict whether such law enforcement authorities may use such information to initiate further investigations of the business practices disclosed or any other business activities of the Company. In addition, the Company asserts claims and suits arising in the ordinary course of business, the ultimate resolution of which would not, in the opinion of the Company, have a material adverse effect on its financial condition. ITEM 5: OTHER INFORMATION CERTAIN CHANGES IN THE BOARD OF DIRECTORS AND MANAGEMENT Hans-Ulrich Sutter resigned from his position as a director of the Company effective April 30, 1999. 45 46 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and Fresenius AG (incorporated herein by reference to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Nationsbank, N.A., as paying agent and the Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Nationsbank, N.A., as Managing Agents (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996). 46 47 Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996 , among National Medical Care, Inc. and Certain Subsidiaries and Affiliates , as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 1997). Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.8 Amendment No. 6 dated effective June 30, 1998 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as previously amended (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 Lendors named therein, Nations Bank, N.A. as paying agent and the Bank of Nova Scotia, the Chase Manhattan Bank, Dresdner Bank A. G. and Nations Bank, N.A. as Managing Agents incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 9, 1999. Exhibit 4.10 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended effective as of August 3, 1998 (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 4.11 Senior Subordinated Indenture dated November 27, 1996, among Fresenius Medical Care AG, State Street Bank and Trust Company, as successor to Fleet National Bank, as Trustee and the Subsidiary Guarantors named therein (incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). 47 48 Exhibit 4.12 Senior Subordinated Indenture dated as of February 19, 1998, among Fresenius Medical Care AG, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.13 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 3/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 10.1 Employee Benefits and Compensation Agreement dated September 27, 1996 by and among W. R. Grace & Co., National Medical Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated herein by reference to the Registration Statement on Form F-1 of Fresenius Medical Care AG, as amended (Registration No. 333-05922), dated November 22, 1996 and the exhibits thereto). Exhibit 10.2 Purchase Agreement, effective January 1, 1995, between Baxter Health Care Corporation and National Medical Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.3 Agreement, dated November 25, 1992 between Bergen Brunswig Drug Company and National Medical Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.4* Product Purchase Agreement, effective January 1, 1999, between Amgen, Inc. and National Medical Care, Inc., including addendum thereto. Exhibit 10.5 Primary Guarantee dated July 31, 1996 (incorporated by reference to the Registrant's Registration Statement on Form S-4 (Registration No. 333-09497) dated August 2, 1996 and the exhibits thereto). Exhibit 10.6 Secondary Guarantee dated July 31, 1996 (incorporated by reference to the Registrant's Registration Statement on Form S-4 (Registration No. 333-09497) dated August 2, 1996 and the exhibits thereto). Exhibit 10.7 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.8 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.9 Transfer and Administration Agreement dated August 28, 1997 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein and NationsBank, N.A., as agent (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.10 Amendment No. 1 dated as of February 27, 1998 to Transfer and Administration Agreement dated as of August 28, 1997 among NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed herein and NationsBank, N.A., as agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 10.11 Amendment No. 2 dated as of August 25, 1998 to Transfer and Administration Agreement dated us of August 28, 1997 among NMC Funding Corporation as Transferor, National Medical Care, Inc., as Collection Agent, Enterprise Funding Corporation, and Nations Bank, N.A. as agent for Enterprise Funding Corporation and the Bank Investors (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). 48 49 Exhibit 10.12 Amendment No. 3 dated as of September 28, 1998 to Transfer and Administration Agreement dated as of August 28, 1997 among NMC Funding Corporation as Transferor, National Medical Care, Inc., as Collection Agent, Enterprise Funding Corporation, and Nations Bank, N.A. as agent for Enterprise Funding Corporation and the Bank Investors (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.13 Employment agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992). Exhibit 10.14 Modification to FUSA Employment Agreement effective as of January 1, 1998 by and between Ben J. Lipps and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.15 Employment Agreement dated July 1, 1997 by and between Jerry A. Schneider and the Company (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.16 Addendum to Employment Agreement dated as of September 18, 1997 by and between Jerry A. Schneider and the Company (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.17 Separation Agreement dated as of July 21, 1998 by and between Geoffrey W. Swett and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.18 Employment Agreement dated October 23, 1998 by and between Roger G. Stoll and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 9, 1999). Exhibit 10.19 Employment Agreement dated November 11, 1998 by and between William F. Grieco and National Medical Care, Inc., (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 9, 1999). Exhibit 11 Statement re: Computation of Per Share Earnings. Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K have been filed with the Commission during the three months ended March 31, 1999. * Confidential treatment has been requested as to certain portions of this Exhibit. 49 50 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 14, 1999 /s/ Ben J. Lipps ----------------------------------------- NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: May 14, 1999 /s/ Jerry A. Schneider ----------------------------------------- NAME: Jerry Schneider TITLE: Chief Financial Officer 50 EX-10.4 2 PRODUCT PURCHASE AGREEMENT 1 The deleted portions of this Exhibit contain confidential information and have been filed separately with the Securities and Exchange Commission Exhibit 10.4 AMGEN(R) PRODUCT PURCHASE AGREEMENT NATIONAL MEDICAL CARE, INC. - -------------------------------------------------------------------------------- This Agreement ("Agreement"), between Amgen Inc. ("Amgen") and National Medical Care, Inc., including its subsidiaries and affiliates that are at least fifty and one-tenth percent (50.10%) owned by National Medical CARE, Inc. listed on Appendix C, (collectively, "NMC"), sets forth the terms and conditions for the purchase of EPOGEN(R) (Epoetin alfa) by NMC. 1. TERM OF AGREEMENT. The "Term" of this Agreement shall be defined as January 1, 1999 ("Commencement Date") through December 31, 1999 ("Termination Date"). 2. QUALIFYING PURCHASES. All terms contained herein apply only to purchases made hereunder, at the prices set forth herein, as confirmed by Amgen ("Qualified Purchases"), by NMC and, subject to the terms of Section 13, to all affiliates 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. ("Affiliates"), through wholesalers authorized by Amgen to participate in the program ("Authorized Wholesalers"). In addition, and also subject to the terms of Section 13, Affiliates of Renaissance Health Care, Clinic, Inc., Optimal Renal Care, L.L.C., 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. Amgen agrees to approve Authorized Wholesalers adequate to meet NMC's needs. 3. PRICING. See Appendix A. 4. PAYMENT TERMS. During the Term, Amgen grants NMC and Affiliates payment terms of **DELETED** for EPOGEN(R) purchased through any Authorized Wholesaler. 5. PRODUCT ACQUISITION COSTS. As long as NMC and Affiliates are the **DELETED**, non-governmental, freestanding dialysis center (including home dialysis affiliates) purchaser of EPOGEN(R) in the United States and Puerto Rico during the Term, on an annual, calendar year basis, Amgen commits that this Agreement provides NMC and Affiliates with the **DELETED** for EPOGEN(R) available to any freestanding dialysis center purchaser in the United States and Puerto Rico with comparable growth and percentage of patients with hematocrit levels greater than or equal to **DELETED**. If NMC and Affiliates are not the **DELETED**, non-governmental, freestanding dialysis center purchaser of EPOGEN(R) in the United States and Puerto Rico during the Term, on a calendar year basis, Amgen may provide **DELETED** for EPOGEN(R) to **DELETED**, non-governmental, freestanding dialysis center purchaser(s). Qualification as a freestanding dialysis center shall be determined by Amgen in its reasonable discretion, in accordance with Amgen's customer classification policies, which generally classify freestanding dialysis centers as independent, exclusive providers of dialysis services, which (a) may not obtain EPOGEN(R) from or through a hospital, or (b) are not otherwise affiliated with a hospital, nursing home, or integrated health care system. This commitment excludes **DELETED** available to any governmental entities, or prices/costs mandated by Title 38 (Veterans' Benefits) or Title 42 (The Public Health and Welfare) of the United States Code, or any other federal or state health care program. Amgen's agreement to make this commitment is contingent upon its ability to comply with all federal, state, local and military laws, statutes and regulations. 6. MINIMUM PRODUCT PURCHASE AGREEMENT. NMC and Affiliates agrees to purchase a minimum of **DELETED** of EPOGEN(R) from Amgen hereunder during each consecutive calendar quarter during the Term. 7. DISCOUNT. Amgen will pay discounts and incentives in accordance with the schedule and terms set forth in Appendix A and Appendix B attached hereto. 8. PAYMENT OF DISCOUNT. Any discount earned hereunder shall be calculated in accordance with this Agreement, based on Qualified Purchases, using **DELETED** as the calculation price, and shall be paid in the form of 1 2 a wire transfer to NMC's corporate headquarters, except as otherwise provided. Amgen will base its calculations of any discounts on **DELETED**, adjusted for any differences and subject to Amgen's verification of all figures submitted by NMC and Affiliates. 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. Amgen shall make available to NMC any records concerning NMC's and Affiliates' purchase amounts that NMC or its auditors may reasonably request. Upon vesting, Amgen will use its best efforts to make such discount available within **DELETED** business days following receipt by Amgen of data, in a format indicated on Appendix B, detailing NMC's and Affiliates' EPOGEN(R) purchases for the relevant period, along with any other data required by the terms of Appendix A, contingent upon Amgen's verification and reconciliation of such data as set forth in Appendix B attached hereto. In no event shall Amgen pay any discount on EPOGEN(R) distributed by NMC or Affiliates to non-Affiliates of NMC (see Section 2 for definition of Affiliates). Subject to the section entitled "Breach of Agreement", 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 which may have been earned hereunder prior to the effective date of the acquisition shall vest, and shall be paid in the form of a wire transfer to NMC's corporate headquarters subject to the conditions described herein. 9. TREATMENT OF DISCOUNT. The parties agree that they will account for any discount 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 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 NMC'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. 10. COMMITMENT TO PURCHASE. NMC and Affiliates agrees to purchase EPOGEN(R) for all of its dialysis use requirements in the United States and Puerto Rico for recombinant human erythropoietin. Amgen agrees to make such EPOGEN(R) available to NMC and Affiliates through its Authorized Wholesalers. 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 and Puerto Rico if, and only if, NMC and 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 shall 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 shall 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. 11. OWN USE. NMC hereby certifies that EPOGEN(R) purchased hereunder shall be for the "own use" by NMC and the Affiliates of NMC. 12. AUTHORIZED WHOLESALERS. A complete list of NMC's and Affiliates' current Authorized Wholesalers, through whom NMC and Affiliates may purchase EPOGEN(R) hereunder is attached as Appendix D. NMC and Affiliates agrees to promptly provide Amgen with any additions, deletions, or changes to the initial list of Authorized Wholesalers. Amgen requires no less than thirty (30) days notice before the effective date of change for any addition 2 3 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. 13. 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. Such listing shall be incorporated into this Agreement as Appendix C. Only those entities listed on Appendix C shall be eligible to participate in 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 C, 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 C shall 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. 14. BREACH OF AGREEMENT. Either party may terminate this Agreement for a material breach upon thirty (30) days advance written notice provided such breach remains uncured at the end of the thirty (30) day period. 15. CONFIDENTIALITY. Both Amgen and NMC agree that this Agreement represents and contains confidential information which shall 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. 16. 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 C 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. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware and the parties submit to the jurisdiction of Delaware courts, both state and federal. 18. NOTICES. Any notice or other communication required or permitted hereunder shall 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. 19. COMPLIANCE WITH HEALTH CARE PRICING LEGISLATION AND STATUTES. 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 EPOGEN(R), either party may initiate good faith negotiations to modify this Agreement. If after forty-five (45) days the parties are unable to in good faith mutually agree to modifications to this Agreement, (a) either party may terminate this Agreement immediately, or (b) 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 3 4 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 and shall be amended by the parties as a result of good faith negotiations as necessary to bring the Agreement into compliance with such statute and regulation. 20. 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, the Terminated Agreement. Neither party shall have the right to assign this Agreement to a third party without the prior written consent of the other party. 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, 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 EPOGEN(R) to meet NMC's and Affiliates' reasonable dialysis use requirements, **DELETED** for such nonperformance **DELETED** and NMC and Affiliates may purchase EPOGEN(R) 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. PLEASE RETAIN ONE FULLY EXECUTED ORIGINAL FOR YOUR RECORDS AND RETURN THE OTHER FULLY EXECUTED ORIGINAL TO AMGEN. The parties executed this Agreement as of the dates set forth below. 4 5 AMGEN INC. a Delaware corporation One Amgen Center Drive Thousand Oaks, CA 91320-1799 Signature: /s/ D.Z. Mallon Dorothea Z. Mallon National Account Manager Date: 3/11/99 NATIONAL MEDICAL CARE, INC. a Delaware corporation Two Ledgemont Center-95 Hayden Avenue Lexington, MA 02173 Signature: /s/ James V. Luther James V. Luther Assistant Treasurer Date: 3/11/99 5 6 APPENDIX A: DISCOUNT PRICING, SCHEDULE, AND TERMS 1. PRICING. NMC and Affiliates may purchase EPOGEN(R) through Authorized Wholesalers at a guaranteed **DELETED**. Resulting prices do not include any wholesaler markup, service fees, or other charges. The following table is illustrative of prices in effect at the time this Agreement is presented.
GUARANTEED CURRENT DISCOUNT % Off EPOGEN(R) ITEM NUMBER **DELETED** PREVAILING RESULTING (NDC) DESCRIPTION (PACK) **DELETED** PRICE (PACK) A B A - (A x B) S2 55513-126-10 2,000 Unit Single Dose vial **DELETED** **DELETED** **DELETED** 2,000 Units/mL,1 mL vial, 10 vials/pack, 10 packs/case S3 55513-267-10 3,000 Unit Single Dose vial **DELETED** **DELETED** **DELETED** 3,000 Units/mL,1 mL vial,10 vials/pack, 10 packs/case S4 55513-148-10 4,000 Unit Single Dose vial **DELETED** **DELETED** **DELETED** 4,000 Units/mL,1 mL vial,10 vials/pack, 10 packs/case S10 55513-144-10 10,000 Unit Single Dose vial **DELETED** **DELETED** **DELETED** 10,000 Units/mL,1 mL vial,10 vials/pack, 10 packs/case M10 55513-283-10 20,000 Unit Multidose vial **DELETED** **DELETED** **DELETED** 10,000 Units/mL, 2 mL vial,10 vials/pack, 4 packs/case M20 55513-478-10 20,000 Unit Multidose vial **DELETED** **DELETED** **DELETED** 20,000 Units/mL,1 mL vial,10 vials/pack, 4 packs/case
2. **DELETED**. NMC and Affiliates agrees to provide **DELETED** for the purposes of calculating the **DELETED**. Amgen will accept the **DELETED**, multiply each **DELETED** by **DELETED**, and apply the converted results to **DELETED**. Notwithstanding the foregoing, **DELETED**. Amgen will accept electronic data from the lab systems that service each owned or managed Affiliate. For NMC to qualify for the **DELETED** the following requirements must be met: A. REQUIREMENTS: In order to participate in the **DELETED**, NMC and Affiliates must provide the following information for each dialysis patient to Amgen or to a data collection vendor specified by Amgen, on a **DELETED** basis, no later than **DELETED** days after the end of **DELETED**: 6 7 i) all **DELETED** for each dialysis patient, the date of each test, and a consistent, unique, alpha-numeric identifier (sufficient to consistently track an individual patient without in any way disclosing the identity of the patient), along with the name, address and phone number of the particular owned or managed Affiliate at which each patient received treatment (collectively the "Data"). Amgen may utilize the Data for any purpose, and reserves the right to audit all Data. Under no circumstances should the Data include any patient identifiable information including, without limitation, name, complete social security number, address or birth date. The identity of the account submitting the Data and any association with the Data will remain confidential. The **DELETED** results must be derived from **DELETED** taken immediately before dialysis treatment using any automated **DELETED** testing method **DELETED**, must be reported to the **DELETED**, and must be submitted in a format acceptable to Amgen. Hand written reports are not acceptable; electronic submission of the Data is preferred, and ii) a properly executed "Certification Letter", a sample of which is attached hereto as Exhibit #1, that will be provided to NMC's corporate headquarters, unless otherwise requested, before each payment period. b. CALCULATION: Assuming NMC and Affiliates have fulfilled all requirements as described in Section 2(a) above, NMC's **DELETED** payment will be calculated as follows: The "Average Patient **DELETED**" for each dialysis patient will be based upon the average of all **DELETED** test results gathered for each patient during each **DELETED** of the Term. The **DELETED** of all dialysis patients with Average Patient **DELETED** greater than or equal to **DELETED**, will be determined by dividing the total number of dialysis patients with Average Patient **DELETED** greater than or equal to **DELETED** by the total number of dialysis patients treated by NMC and Affiliates. The **DELETED** will be calculated based on NMC's and Affiliates' overall performance in accordance with Amgen's discount calculation policies. **DELETED**. c. PAYMENT: NMC's **DELETED** will be calculated on a **DELETED** basis and paid to NMC's corporate headquarters, except as otherwise provided hereunder. Payment is contingent upon receipt by Amgen of the Certification Letters and all required Data for the corresponding **DELETED**. Data shall be submitted to Amgen **DELETED**. If Data is received **DELETED**, NMC will not qualify for the **DELETED** for that **DELETED**. **DELETED** payments will be based upon the Data received for the **DELETED**, and will equal a percentage of NMC's and Affiliates' total EPOGEN(R) purchases during that **DELETED** as governed by the **DELETED** schedule listed below. Notwithstanding the foregoing, payment for any period during the Term that is not equivalent to a complete **DELETED**, will be based on an average of the Data that is available for that period. Amgen reserves the right to modify the **DELETED** if the EPOGEN(R) package insert language changes.
**DELETED** OF ALL DIALYSIS PATIENTS **DELETED** WITH AVERAGE PATIENT **DELETED** GREATER THAN OR EQUAL TO **DELETED** **DELETED** PERCENTAGE PLEASE DIRECT YOUR ATTENTION TO THE EPOGEN(R) PACKAGE INSERT - ----------------------------------------------------------- ---------------------- **DELETED** - Over **DELETED** **DELETED** - **DELETED** **DELETED** **DELETED** - **DELETED** **DELETED** **DELETED** - **DELETED** **DELETED** **DELETED** - **DELETED** **DELETED** **DELETED** - **DELETED** **DELETED**
d. VESTING: The **DELETED** will vest on the **DELETED** of the corresponding **DELETED**. 3. **DELETED**. NMC may qualify for the **DELETED** as described below. a. CALCULATION: NMC's **DELETED** will be calculated in accordance with the following formula. 7 8 **DELETED** where A = **DELETED** during the Term by NMC and all Affiliates. B = A percent in accordance with the table listed below. C = **DELETED** during the Term by NMC and all Affiliates as listed on Appendix C on the Commencement Date of this Agreement. D = **DELETED** by NMC and those same Affiliates as listed on Appendix C on the Commencement Date of this Agreement for the same time period during the previous year. **DELETED** **DELETED** **DELETED** -------------------------------------- **DELETED** -Over **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED**
For the purposes of calculating **DELETED** increases, Amgen will incorporate purchases of **DELETED**. b. VESTING: NMC's **DELETED** shall vest **DELETED** based upon **DELETED** and shall be paid in accordance with the time frames set forth in Appendix B. 4. **DELETED**. 8 9 APPENDIX B: PURCHASE DATA VERIFICATION PROCEDURE 1. VERIFICATION OF PURCHASE DATA. NMC and Amgen agree to follow the verification and reconciliation procedure as set forth below so that the parties can use accurate EPOGEN(R) purchase data and can meet the payment obligations defined herein. (a) Each organization will designate a data analyst/coordinator as well as a backup coordinator. (b) Each **DELETED** during the calendar year, **DELETED** diskettes of year-to-date EPOGEN(R) purchase data to **DELETED** via express mail. The diskettes for the periods listed below should be received by **DELETED** as follows:
Data Period Due Date ----------- -------- January 1 - March 31 April 30 January 1 - June 30 July 31 January 1 - September 30 October 31 January 1 - November 30 December 11 January 1 - December 31 (Verified) January 17
(c) Once Amgen receives the data diskette as described above, the following verification and reconciliation schedule will be implemented by both organizations: Day 1: **DELETED**. Day 3: **DELETED**. Day 5: **DELETED**. Day 6: **DELETED**. Day 8: **DELETED**. Day 9: **DELETED**. Day 10: **DELETED**. (d) **DELETED**. 9 10 APPENDIX C: LIST OF NMC SUBSIDIARIES AND AFFILIATES SUBSIDIARIES: ------------- Bio-Medical Applications Management Co., Inc. and its subsidiaries Erika, Inc. Infusion Care, Inc. LifeChem, Inc. National Medical Care HomeCare Division, Inc. Renal Research Institute, Inc. Spectra Renal Management AFFILIATES: ----------- See Contract List Attached 10 11 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 11 12 EXHIBIT #1 SAMPLE CERTIFICATION LETTER Month X, 199X FSDC Legal Name Street Address City, ST Zip RE: Amgen Agreement No. XXXXXX Dear ____________: Thank you for your participation in the **DELETED** 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 (805) **DELETED**. Thank you for your assistance in returning this certification. Sincerely, **DELETED** FSDC Market Segment Manager CERTIFICATION: On behalf of FSDC Legal Name and all eligible Affiliates participating in the **DELETED** under Agreement No. XXXXXX, the undersigned hereby certifies that the **DELETED** data submitted for each eligible Affiliate during this **DELETED** includes the required **DELETED** results from all dialysis patients of such Affiliate, and does not include **DELETED** results from non-patients. The party executing this document also represents and warrants that it (i) has no reason to believe that the submitted **DELETED** data is incorrect, and (ii) is authorized to make this certification on behalf of all eligible Affiliates submitting **DELETED** data. FSDC LEGAL NAME Signature: _____________________________ Print Name: _____________________________ Print Title: _____________________________ Date: _____________________________ 12 13 AMGEN(R) AMENDMENT #1 DATED APRIL 23, 1999 TO AGREEMENT NO. 19984813 - -------------------------------------------------------------------------------- Effective April 1, 1999 the undersigned hereby agree to amend the Product Purchase Agreement referenced above ("Agreement") between Amgen and NMC as follows: SECTION 4 OF THE AGREEMENT, ENTITLED "PAYMENT TERMS", SHALL BE AMENDED AND RESTATED IN ITS ENTIRETY AS FOLLOWS: 4. PAYMENT TERMS. The terms and conditions of this Agreement shall apply whether NMC and/or Affiliates purchase EPOGEN(R) through an Authorized Wholesaler or from Amgen directly. THE FOLLOWING SECTIONS UNDER APPENDIX A OF THE AGREEMENT SHALL BE AMENDED AND RESTATED IN THEIR ENTIRETY AS FOLLOWS: APPENDIX A: DISCOUNT PRICING, SCHEDULE, AND TERMS 2. **DELETED**. NMC and Affiliates agree to provide **DELETED** for the purposes of calculating the **DELETED**. Amgen will accept the **DELETED**, multiply each **DELETED** by **DELETED**, and apply the converted results to **DELETED**. Notwithstanding the foregoing, **DELETED**. Amgen will accept electronic data from the lab systems that service each owned or managed Affiliate. For NMC to qualify for the **DELETED** the following requirements must be met: a. REQUIREMENTS: In order to participate in the **DELETED**, NMC and Affiliates must provide the following information for each dialysis patient to Amgen or to a data collection vendor specified by Amgen, on a **DELETED** basis, no later than **DELETED** days after the end of **DELETED**: i) facility ID, patient ID (sufficient to consistently track an individual patient without in any way disclosing the identity of the patient), **DELETED** EPOGEN(R), **DELETED** flag, treatment date, **DELETED** reading, **DELETED** flag, **DELETED** reading, **DELETED** flag, calculated **DELETED** value, and **DELETED** (collectively the "Data"). Amgen may utilize the Data for any purpose, and reserves the right to audit all Data. Under no circumstances should the Data include any patient identifiable information including, without limitation, name, complete social security number, address or birth date. The identity of the account submitting the Data and any association with the Data will remain confidential. The **DELETED** must be derived from **DELETED** taken immediately before dialysis treatment using any automated **DELETED** testing method **DELETED**, must be reported to the **DELETED**, and must be submitted in a format acceptable to Amgen. Hand written reports are not acceptable; electronic submission of the Data is preferred, and ii) a properly executed "Certification Letter", a sample of which is attached hereto as Exhibit #1, that will be provided to NMC's corporate headquarters, unless otherwise requested, before each payment period. b. CALCULATION: Assuming NMC and Affiliates have fulfilled all requirements as described in Section 2(a) above, NMC's **DELETED** payment will be calculated as follows: The "Average Patient **DELETED**" for each dialysis patient will be based upon the average of all **DELETED** test results gathered for each patient during each **DELETED** of the Term. The **DELETED** of all dialysis patients with Average Patient **DELETED** greater than or equal to **DELETED**, will be determined by dividing the total number of dialysis patients with Average Patient **DELETED** greater than or equal **DELETED**, by the total number of dialysis patients treated by NMC and Affiliates. The **DELETED** will be calculated based on NMC's and Affiliates' overall performance in accordance with Amgen's discount calculation policies. **DELETED**. 13 14 c. PAYMENT: The **DELETED** will be calculated on a **DELETED** basis and paid to NMC's corporate headquarters, except as otherwise provided hereunder. Payment is contingent upon receipt by Amgen of the Certification Letters and all required Data for the corresponding **DELETED**. Data shall be submitted to Amgen **DELETED**. If Data is received **DELETED**, NMC will not qualify for the OHI for that **DELETED**. **DELETED** payments will be based upon the Data received from the previous **DELETED**, and will equal a percentage of NMC's and Affiliates' total EPOGEN(R) Qualified Purchases during that **DELETED** (exclusive of any Qualified Purchases of EPOGEN(R) made by NMC or any Affiliate not meeting the Data submission requirements described above) as governed by the **DELETED** schedule listed below. Notwithstanding the foregoing, payment for any period during the Term that is not equivalent to a complete **DELETED**, will be based on an average of the Data that is available for that period. Amgen reserves the right to modify the **DELETED** if the EPOGEN(R) package insert language changes.
**DELETED** OF ALL DIALYSIS PATIENTS **DELETED** WITH AVERAGE PATIENT **DELETED** GREATER THAN OR EQUAL **DELETED** PERCENTAGE TO **DELETED** PLEASE DIRECT YOUR ATTENTION TO THE EPOGEN(R) PACKAGE INSERT - ------------------------------------------------------------ **DELETED** - Over **DELETED** **DELETED** - **DELETED** **DELETED** **DELETED** - **DELETED** **DELETED** **DELETED** - **DELETED** **DELETED** **DELETED** - **DELETED** **DELETED** **DELETED** - **DELETED** **DELETED**
VESTING: The **DELETED** will vest on the **DELETED** of the corresponding **DELETED**. THE FOLLOWING NEW SECTION SHALL BE ADDED TO APPENDIX A: 3. **DELETED**: NMC shall be eligible to receive an **DELETED** if certain **DELETED** are transmitted to Amgen **DELETED**. The **DELETED** will be calculated as a percentage of **DELETED** attributable to NMC and all Affiliates during that **DELETED**. In order to qualify for the **DELETED** the following **DELETED** must be submitted by NMC and all Affiliates in an **DELETED** acceptable to Amgen: Facility ID, patient ID (sufficient to consistently track an individual patient without in any way disclosing the identity of the patient), **DELETED**, **DELETED** flag, treatment date, **DELETED** reading, **DELETED** flag, **DELETED** reading, **DELETED** flag, calculated **DELETED** value, **DELETED**, and **DELETED**. Such **DELETED** Data must be submitted on a **DELETED** basis, and no later than **DELETED** after the end of each **DELETED**. If such **DELETED** Data is not submitted by NMC, any Affiliate or managed Affiliate, for any given **DELETED** of the Term, the **DELETED** attributable to those entities (NMC and /or Affiliates) **DELETED** The **DELETED** will vest on the **DELETED** of the corresponding **DELETED**, and will be paid **DELETED** thereafter. ALL SECTIONS FOLLOWING THE ADDITION OF NEW SECTION 3(ABOVE) SHALL BE RENUMBERED SEQUENTIALLY TO ALLOW FOR THE ADDITION OF THIS NEW SECTION. 4. **DELETED**. NMC may qualify for the **DELETED** as described below. a. CALCULATION: NMC's **DELETED** will be calculated in accordance with the following formula. **DELETED** where A = **DELETED** during the Term by NMC and all Affiliates. 14 15 B = A percent in accordance with the table listed below. C = **DELETED** during the Term by NMC and all Affiliates as listed on Appendix C on the Commencement Date of this Agreement. D = **DELETED** by NMC and those same Affiliates as listed on Appendix C on the Commencement Date of this Agreement for the same time period during the previous year. **DELETED** **DELETED** **DELETED** -------------------------------------- **DELETED**-Over **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** **DELETED** For the purposes of calculating **DELETED** increases, Amgen will incorporate purchases of **DELETED**. b. VESTING: NMC's **DELETED** shall vest **DELETED** based upon **DELETED** and shall be paid in accordance with the time frames set forth in Appendix B. Amgen reserves the right to rescind this offer if the parties fail to execute this Amendment within 30 days from the date of its offering. This will allow Amgen time to notify designated wholesalers, who also require lead time to implement the change(s). 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. 15 16 AMGEN INC. Signature: /s/ Lauren Hirsch Lauren Hirsch Assoc. Director, National Accounts Date: 5/3/99 NATIONAL MEDICAL CARE, INC. Signature: /s/ James V. Luther James V. Luther Assistant Treasurer Date: 4/28/99 16 EX-11 3 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION (DOLLARS AND SHARES IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, --------------------- 1999 1998 --------- ------- 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, --------------------- CONTINUED OPERATIONS 1999 1998 --------- ------- Net Earnings ........................................ $ 17,627 $ 9,846 Dividends paid on preferred stocks .................. (130) (130) --------- ------- --------- ------- Income used in per share computation of earnings .... $ 17,497 $ 9,716 ========= ======= Basic and fully dilutive earnings per share ......... $ 0.19 $ 0.11 ========= =======
THREE MONTHS ENDED MARCH 31, --------------------- DISCONTINUED OPERATIONS 1999 1998 --------- ------- Net Earnings ........................................ $ -- $(4,429) Dividends paid on preferred stocks .................. -- -- --------- ------- --------- ------- Loss used in per share computation of earnings ...... $ -- $(4,429) ========= ======= Basic and fully dilutive earnings per share ......... $ -- $ (0.05) ========= =======
THREE MONTHS ENDED MARCH 31, -------------------- 1999 1998 -------- ------- Cumulative effect of accounting change .............. $ -- $(4,890) Dividends paid on preferred stocks .................. -- -- -------- ------- -------- ------- Loss used in per share computation of earnings ...... $ -- $(4,890) ======== ======= Basic and fully dilutive earnings per share ......... $ -- $ (0.05) ======== =======
THREE MONTHS ENDED MARCH 31, --------------------- CONSOLIDATED 1999 1998 --------- ------- Net Earnings ........................................ $ 17,627 $ 527 Dividends paid on preferred stocks .................. (130) (130) --------- ------- --------- ------- Income used in per share computation of earnings .... $ 17,497 $ 397 ========= ======= Basic and fully dilutive earnings per share ......... $ 0.19 $ 0.01 ========= =======
EX-27 4 FINANCIAL DATA SCHEDULE
5 0000042872 FRESENIUS MEDICAL CARE HOLDINGS INC 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 14,459 0 311,906 54,814 176,196 833,568 613,836 189,849 4,602,669 514,517 0 0 16,318 90,000 1,860,127 4,602,669 118,683 672,140 81,624 450,432 118,945 15,058 50,126 37,579 19,952 17,627 0 0 0 17,627 0.19 0.19
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