-----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, ODlCUEBVlqDvDtv9V6sRm+3TufY35bTrINilXnNcSGtb19tmip7SWcgUh/g7+quI vxd1WIzIqnNQtqT+J0/vnA== 0000950135-99-003755.txt : 19990811 0000950135-99-003755.hdr.sgml : 19990811 ACCESSION NUMBER: 0000950135-99-003755 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990803 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: 99676533 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 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 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 Unaudited Consolidated Statements of Operations ................ 4 Unaudited Consolidated Statements of Comprehensive Income....... 5 Unaudited Consolidated Balance Sheets........................... 6 Unaudited Consolidated Statements of Cash Flows................. 7 Notes to Unaudited Consolidated Financial Statements............ 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 25 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................................... 32 PART II: OTHER INFORMATION ITEM 1: Legal Proceedings............................................... 33 ITEM 5: Other Information.............................................. 44 ITEM 6: Exhibits and Reports on Form 8-K................................ 45 3 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ------------------------- 1999 1998 1999 1998 -------- --------- ---------- ---------- NET REVENUES Health care services ................................................. $573,280 $ 521,209 $1,126,737 $1,009,637 Medical supplies ..................................................... 125,186 117,073 243,869 238,691 -------- --------- ---------- ---------- 698,466 638,282 1,370,606 1,248,328 -------- --------- ---------- ---------- EXPENSES Cost of health care services ......................................... 384,372 342,785 753,180 665,840 Cost of medical supplies ............................................. 87,176 81,118 168,800 164,905 General and administrative expenses .................................. 69,565 60,864 133,552 124,316 Provision for doubtful accounts ...................................... 4,671 15,291 19,729 33,879 Depreciation and amortization ........................................ 54,154 54,012 108,088 107,196 Research and development ............................................. 1,013 819 2,037 1,808 Interest expense, net and related financing cost including $20,967 and $21,525 for the three months and $41,545 and $37,584 for the six months ended, respectively of interest with affiliates.. 52,504 53,080 102,630 100,179 -------- --------- ---------- ---------- 653,455 607,969 1,288,016 1,198,123 -------- --------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS ....................................... 45,011 30,313 82,590 50,205 PROVISION FOR INCOME TAXES ............................................ 23,607 17,543 43,559 27,589 -------- --------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START UP COSTS ...................................................... $ 21,404 $ 12,770 $ 39,031 $ 22,616 -------- --------- ---------- ---------- DISCONTINUED OPERATIONS (NOTE 4) Loss from discontinued operations, net of income taxes ............... -- (4,240) -- (8,669) Loss on disposal of discontinued operations, net of income tax benefit -- (97,228) -- (97,228) -------- --------- ---------- ---------- Loss from discontinued operations .................................... $ -- $(101,468) $ -- $ (105,897) -------- --------- ---------- ---------- CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING FOR START UP COSTS, NET OF TAX BENEFIT ............................... -- -- -- (4,890) NET INCOME (LOSS) ..................................................... $ 21,404 $ (88,698) $ 39,031 $ (88,171) ======== ========= ========== =========== Basic and fully dilutive earnings per share Continuing operations ............................................... $ 0.24 $ 0.14 $ 0.43 $ 0.25 Discontinued operations ............................................. -- (1.13) -- (1.18) Cumulative effect of accounting change .............................. -- -- -- (0.05) Net Income (loss) ................................................... $ 0.24 $ (0.99) $ 0.43 $ (0.98)
See accompanying Notes to Unaudited, Consolidated Financial Statements. 4 5 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- --------------------- 1999 1998 1999 1998 -------- -------- -------- -------- NET INCOME .......................................... $ 21,404 $(88,698) $ 39,031 $(88,171) Other comprehensive income Foreign currency translation adjustments ......... (81) 669 (473) 1,695 -------- -------- -------- -------- Total other comprehensive income ................. (81) 669 (473) 1,695 -------- -------- -------- -------- COMPREHENSIVE INCOME (LOSS)......................... $ 21,323 $(88,029) $ 38,558 $(86,476) -------- -------- -------- --------
5 6 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, 1999 1998 ----------- ----------- (UNAUDITED) ASSETS - ------ Current Assets: Cash and cash equivalents ............................. $ 17,695 $ 6,579 Accounts receivable, less allowances of $52,060 and $49,209 ............................................... 281,440 254,783 Inventories ........................................... 166,406 169,789 Deferred income taxes ................................. 122,803 139,653 Other current assets .................................. 105,870 93,912 Net assets of discontinued operations (Note 4) ....... 151,652 149,949 ----------- ----------- Total Current Assets ............................... 845,866 814,665 ----------- ----------- Properties and equipment, net ............................ 420,626 429,639 ----------- ----------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $355,882 and $289,167 .. 3,294,603 3,317,424 Other assets and deferred charges ..................... 50,298 51,675 ----------- ----------- Total Other Assets ................................. 3,344,901 3,369,099 ----------- ----------- Total Assets ............................................. $ 4,611,393 $ 4,613,403 =========== =========== LIABILITIES AND EQUITY - ---------------------- Current Liabilities: Current portion of long-term debt and capitalized lease obligations ........................................ $ 106,707 $ 43,348 Current portion of borrowing from affiliates .......... 18,288 32,716 Short-term borrowings from affiliates ................. 270,899 154,471 Accounts payable ...................................... 110,034 107,482 Accrued liabilities ................................... 277,170 306,333 Net accounts payable to affiliates .................... 17,612 17,966 Accrued income taxes .................................. 33,927 12,411 ----------- ----------- Total Current Liabilities .......................... 834,637 674,727 Long-term debt ........................................... 797,883 1,010,880 Non-current borrowings from affiliates ................... 805,264 801,813 Capitalized lease obligations ............................ 1,464 2,666 Deferred income taxes .................................... 143,637 144,605 Other liabilities ........................................ 40,870 29,278 ----------- ----------- Total Liabilities ..................................... 2,623,755 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 ......................................... (61,385) (100,156) Accumulated comprehensive income ......................... 564 1,037 ----------- ----------- Total Equity .......................................... 1,987,638 1,949,434 ----------- ----------- Total Liabilities and Equity ............................. $ 4,611,393 $ 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)
SIX MONTHS ENDED JUNE 30, ----------------------- 1999 1998 --------- --------- Cash Flows from Operating Activities: Net Income ..................................................................... $ 39,031 $ (88,171) Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization ................................................ 108,088 107,196 Loss from discontinued operations ............................................ -- 8,669 Loss on disposition of businesses ............................................ -- 97,228 Cumulative effect of change in accounting .................................... -- 4,890 Provision for doubtful accounts .............................................. 19,729 33,879 Deferred income taxes ........................................................ 15,882 (23,256) Loss on disposal of properties and equipment ................................. 189 12 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable ................................................ (65,786) (85,957) Decrease (increase) in inventories ............................................. 3,902 (26,377) (Increase) decrease in other current assets .................................... (11,958) 13,652 Decrease (increase) in other assets and deferred charges ....................... 1,351 (10,615) Increase (decrease) in accounts payable ........................................ 2,552 (18,557) Increase in accrued income taxes ............................................... 21,516 61,976 Decrease in accrued liabilities ................................................ (29,163) (41,295) Increase in other long-term liabilities ........................................ 11,592 3,637 Net changes due to/from affiliates ............................................. (354) (4,129) Other, net ..................................................................... (7,422) 23,000 --------- --------- Net cash provided by operating activities of continued operations ................. 109,149 55,782 --------- --------- Net cash (used in) provided by operating activities of discontinued operations .... (1,703) 1,486 --------- --------- Net cash provided by operating activities ......................................... 107,446 57,268 Cash Flows from Investing Activities: Capital expenditures ........................................................... (30,856) (39,712) Payments for acquisitions, net of cash acquired ................................ (38,701) (152,483) --------- --------- Net cash used in investing activities of continued operations ..................... (69,557) (192,195) --------- --------- Net cash used in investing activities of discontinued operations .................. -- (419) --------- --------- Net cash used in investing activities ............................................. (69,557) (192,614) --------- --------- Cash flows from Financing Activities: Increase in borrowings from affiliates ......................................... 105,451 498,438 Cash dividends paid ............................................................ (260) (260) Proceeds on issuance of debt ................................................... 37 17,091 Proceeds from receivable financing facility .................................... 19,400 125,000 Payments on debt and capitalized leases ........................................ (150,898) (505,937) Other net ...................................................................... (94) (616) --------- --------- Net cash (used in) provided by financing activities of continued operations ...... (26,364) 133,716 --------- --------- Net cash used in financing activities of discontinued operations ................. -- (2,515) --------- --------- Net cash (used in) provided by financing activities .............................. (26,364) 131,201 --------- --------- Effects of changes in foreign exchange rates ...................................... (409) 1,774 --------- --------- Change in cash and cash equivalents ............................................... 11,116 (2,371) --------- --------- Cash and cash equivalents at beginning of period .................................. 6,579 12,437 --------- --------- Cash and cash equivalents at end of period ........................................ $ 17,695 $ 10,066 ========= =========
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) SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 ----------- ------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ........................................... $60,241 $ 69,300 Income taxes paid/(received), net .................. 7,128 (12,141) Details for Acquisitions: Assets acquired .................................... 38,722 154,858 Liabilities assumed ................................ 21 2,375 ------- --------- Net cash paid for acquisitions ..................... $38,701 $ 152,483 ======= ========= See accompanying Notes to Unaudited Consolidated Financial Statements 8 9 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY, AND BASIS OF PRESENTATION THE COMPANY Fresenius Medical Care Holdings, Inc., a New York corporation ( the "Company"), formerly known as W.R. Grace & Co. ("Grace New York"), 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 Company's healthcare operations were acquired by FMC, effective September 30, 1996, as a result of 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 June 30, 1999 and 1998 and for the three and six 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 and six month periods ended June 30, 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 9 10 specifically designated as a hedge of a particular exposure with the intent of measuring the effectiveness of that hedge in the statement of operations. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities, which amended the effective date of SFAS No. 133. The amended SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. NOTE 2. INVENTORIES
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ Inventories: Raw materials ..................................................... $ 37,043 $ 35,199 Manufactured goods in process ..................................... 15,785 18,802 Manufactured and purchased inventory available for sale ........... 82,011 86,615 ---------- ---------- 134,839 140,616 Health care supplies ............................................. 31,567 29,173 ---------- ---------- Total ............................................................... $ 166,406 $ 169,789 ========== ========== NOTE 3. DEBT Long-term debt to outside parties consists of: JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ NMC Credit Facility ................................................. $ 890,500 $1,032,700 Third-party debt, primarily bank borrowings at variable interest rates (3% - 9%) with various maturities ......... 10,559 16,215 ---------- ---------- 901,059 1,048,915 Less amounts classified as current .................................. 103,176 38,035 ---------- ---------- $ 797,883 $1,010,880 ========== ========== Non-current borrowings from affiliates consists of: JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ Fresenius Medical Care Finance SA borrowings at interest rates approximating 6 - 6.5% ............................. $ 33,236 $ 47,665 Fresenius Medical Care Trust Finance S.a.r.l. at interest rates of 8.43% and 9.25% ............................................. 786,524 786,524 Other ................................................................... 3,792 340 ---------- ---------- 823,552 834,529 Less amounts classified as current ...................................... 18,288 32,716 ---------- ---------- Total ................................................................... $ 805,264 $ 801,813 ========== ========== Short-term borrowings from affiliates: JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ Fresenius Medical Care AG borrowings at interest rates approximating 6 - 7% .......................................... $ 65,596 $ 94,471 Fresenius AG borrowing at interest rates approximating 6 - 7% ................................................ 205,303 60,000 ---------- ---------- Total ................................................................... $ 207,899 $ 154,471 ========== ==========
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 June 26, 1998 and July 29, 1998, respectively. In connection with the sale of Homecare, the Company retained the assets and the operations associated with the delivery of IDPN and records, for accounting purposes, its activity as part of discontinued operations. 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------- 1999 1998 1999 1998 --------- --------- ------------ -------- NET REVENUES .......................................... $ -- $ 59,022 $ -- $120,940 --------- --------- ------------ -------- Loss from operations before income tax benefit ........ (7,221) (14,212) Income tax benefit .................................... (2,981) (5,543) --------- --------- ------------ -------- Loss from operations .................................. -- (4,240) -- (8,669) ========= ========= ============ ======== Loss on disposal before income tax benefit ........... (140,000) (140,000) Income tax benefit .................................... (42,772) (42,772) --------- --------- ------------ -------- Loss on disposal operations ........................... -- (97,228) -- (97,228) ========= ========= ============ ======== Total loss on discontinued operations ................. $ -- (101,468) $ -- (105,897) ========= ========= ============ ========
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 June 30, 1999 are as follows: TOTAL Current assets ............ $166,588 Properties & equipment, net 201 Other assets .............. 593 -------- Total Assets ........... $167,382 ======== Current liabilities ....... 15,483 Other liabilities ......... 247 -------- Total Liabilities ...... 15,730 ======== Net assets ............. $151,652 ======== 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 in providing supplemental information and documents. 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, 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. Since October 1995 when 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. NMC and the government have been exploring the possibility of settling the matters which are encompassed by the OIG Investigation and, as referenced below, have settled 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 seek substantial civil and criminal financial penalties and other sanctions including the suspension of payments by, and 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 a civil investigative subpoena from the OIG concerning the possible submission of false or improper claims to, and their payment by, the Medicare program. In May, 1999 the Company and the government entered into a settlement agreement pursuant to which, among other things, the government has agreed to release the Company with respect to this matter in exchange for a payment of approximately $16.8 million from the Company. 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 hereinafter defined) known as "Stark II" if Designated Health Services (as defined in Stark II) are involved, Medical Director compensation must not exceed fair market value and may not take into account the volume or value of referrals or other business generated between the parties. Since January 1, 1995, Dialysis Services has compensated its Medical Directors on a fixed compensation arrangement intended to comply with the requirements of Stark II. In renegotiating its Medical Director compensation arrangements in connection with Stark II, Dialysis Services took and continues to take account of the compensation levels paid to its Medical Directors in prior years. Certain government representatives have expressed the view in meetings with counsel for NMC that arrangements where the Medical Director was or is paid amounts in excess of the "fair market value" of the services rendered may evidence illegal payments to induce referrals, and that hourly compensation is a relevant measure for evaluating the "fair market value" of the services. Dialysis Services does not compensate its Medical Directors on an hourly basis and has asserted to the government that hourly compensation is not a determinative measure of fair market value. Although the Company believes that the compensation paid to its Medical Directors is generally reflective of fair market value, there can be no assurances that the government will agree with this position or that the Company ultimately will be able to defend its position successfully. Because of the wide variation in local market factors and in the 13 14 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 NMC's arrangements generally or NMC's assertion that NMC 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 Dialysis Services obligation to rebill commercial payors for amounts originally billed to Medicare under HCFA's initial implementation of the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") amendments to the secondary payor provisions of the Medicare Act. Dialysis Services experienced delays in reporting a material amount of overpayments after the implementation of the OBRA 93 amendments. NMC asserts that most of these delays were the result of the substantial administrative burdens placed on Dialysis Services as a consequence of the changing and inconsistent instructions issued by HCFA with respect to the OBRA 93 amendments and were not intentional. Substantially all overpayments resulting from the rebilling effort associated with the OBRA 93 amendments have now been reported. Procedures are in place that are designed to ensure that subsequent overpayments resulting from the OBRA 93 amendments will be reported on a timely basis. 14 15 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 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. 15 16 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 and repaid the overpayment to the government in the amount of $8.6 million. LifeChem also has notified the government of the disclosure. 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 LifeChem. 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. The government has 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. In June 1999, a former Vice President of Marketing of NMC Medical Products, Inc. plead guilty to a charge of conspiracy to defraud Medicare in connection with the marketing of certain hepatitis tests. 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 16 17 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 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 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 17 18 for Medicare reimbursement when it believed the requirements stated in HCFA's published regulations were satisfied, other providers responded to the drop in the approval rate for new Medicare IDPN patients by abandoning the Medicare IDPN business, cutting back on the number of Medicare patients to whom they provide IDPN, or declining to add new Medicare patients. Beginning in 1994 the number of patients to whom NMC provided IDPN increased as a result. The government is investigating the utilization rate of IDPN therapy among NMC patients, whether NMC submitted IDPN claims to Medicare for patients who were not eligible for coverage, and whether documentation of eligibility was adequate. NMC asserts that the utilization rate of IDPN therapy among its dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the factors discussed above and that it is the policy of Homecare to seek Medicare reimbursement for IDPN therapy prescribed by the patients' treating physician in accordance with the requirements published by HCFA and its carrier agents. There can be no assurance that the government will accept NMC's view. The government asserts that Homecare submitted IDPN claims for individuals who were not eligible for coverage and/or with inadequate documentation of eligibility. The Company believes that it has presented to the government substantial defenses which support NMC's interpretation of coverage rules of IDPN as HCFA and its carriers published and explained them, and which demonstrated that HCFA and its carriers improperly implemented unpublished, more restrictive criteria after 1993. Nevertheless, the government is expected to assert in the OIG Investigation that, on a widespread basis, NMC submitted and received payments on claims for IDPN to Medicare for patients who were not eligible for coverage, and for whom the documentation of eligibility was inadequate. In addition, the government asserts that, in a substantial number of cases, documentation of eligibility was false or inaccurate. With respect to some claims, the Company has determined that false or inaccurate documentation was submitted, deliberately or otherwise. The government continues to investigate the IDPN claims. QUI TAM ACTIONS The Company and NMC is aware that certain 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. A 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. A 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. A 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. A 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 18 19 community through improper marketing practices also in violation of the False Claims Act. This qui tam action was dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Note 5 - Commitments and Contingencies - Diagnostics Subpoena." A 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. This qui tam action was dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Note 5 - Commitments and Contingencies - Diagnostics Subpoena." A 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. This qui tam action was dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Note 5 - Commitments and Contingencies - Diagnostics Subpoena." A 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. This qui tam action was dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Note 5 - Commitments and Contingencies - Diagnostics Subpoena." A 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. This qui tam action was dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Note 5 - Commitments and Contingencies - Diagnostics Subpoena." A 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 effect 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, FMC, 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"). 19 20 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. FMC and the Company 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 FMC and the Company 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 FMC and the Company under the OIG Agreements and (b) breach of such provisions by the United States cannot and will not be raised by FMC and the Company 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 20 21 HCFA from enforcing its new policy retroactively, that is, to billings for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction and in December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that HCFA's retroactive application of the April 1995 rule was legally invalid. HCFA cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding HCFA's retroactive application of the April 1995 rule legally invalid, and based on its finding, the Court also permanently enjoined HCFA from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on HCFA's motion for summary judgment pending completion of outstanding discovery. On October 5, 1998 NMC filed it's own motion for summary judgment requesting that the Court declare HCFA's prospective application of the April 1995 rule invalid and permanently enjoin HCFA from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. 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. 21 22 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 June 30, 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, 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 are continuing 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. Other private payors have contacted the Company and may assert that NMC received excess payments and similarly, may join the lawsuit and 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. In May 1999, the Company filed counter-claims against Aetna Life Insurance Company and Aetna U.S. Healthcare, Inc. based on inappropriate claim denials and delays in claim payments. The Company is also investigating similar counter-claims against the other private payors which have contacted the Company. 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 22 23 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. 23 24 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 June 30, 1999 and 1998 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT SERVICES PRODUCTS SALES TOTAL ----------- ---------- ---------- ----------- NET REVENUES Three Months Ended 6/30/99 $ 583,077 $ 175,687 $ 60,298 $ 698,466 Three Months Ended 6/30/98 528,636 163,440 53,794 638,282 Six Months Ended 6/30/99 $ 1,145,435 $ 343,994 $ 118,823 $ 1,370,606 Six Months Ended 6/30/98 1,026,866 328,189 106,727 1,248,328 OPERATING EARNINGS Three Months Ended 6/30/99 $ 94,184 $ 32,097 $ 126,281 Three Months Ended 6/30/98 85,023 25,262 -- 110,285 Six Months Ended 6/30/99 $ 180,562 $ 62,577 -- $ 243,139 Six Months Ended 6/30/98 156,854 47,442 -- 204,296 TOTAL ASSETS 6/30/99 $ 1,893,753 634,603 -- $ 2,528,356 12/31/98 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 SIX MONTHS ENDED SEGMENT RECONCILIATION JUNE 30, JUNE 30, ---------------------- ----------------------- ----------------------- 1999 1998 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 ........ $ 126,281 $ 110,285 $ 243,139 $ 204,296 Corporate G&A (including foreign exchange) .............. (27,753) (26,073) (55,882) (52,104) Research and development expense ........................ (1,013) (819) (2,037) (1,808) Net interest expense .................................... (52,504) (53,080) (102,630) (100,179) --------- --------- --------- --------- Income Before Income Taxes and Cumulative effect of change in accounting for Start Up Costs ........ $ 45,011 $ 30,313 $ 82,590 $ 50,205 ========= ========= ========= =========
24 25 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 affected 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. 25 26 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 (dollars in millions).
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ --------------------- 1999 1998 1999 1998 -------- --------- ---------- ---------- NET REVENUES Dialysis Services ........................................ $583 $ 529 $1,145 $1,027 Dialysis Products ........................................ 176 163 344 328 Intercompany Eliminations ................................ (61) (54) (118) (107) ---- ----- ------ ------ Total Net Revenues .......................................... $698 $ 638 $1,371 $1,248 ==== ===== ====== ====== Operating Earnings: Dialysis Services ........................................ $ 94 $ 85 $ 181 $ 157 Dialysis Products ........................................ 32 25 63 47 ---- ----- ------ ------ Total Operating Earnings .................................... 26 110 244 204 ---- ----- ------ ------ Other Expenses: General Corporate ........................................ $ 27 $ 26 $ 56 $ 52 Research & Development ................................... 1 1 2 2 Interest Expense, Net .................................... 53 53 103 100 ---- ----- ------ ------ Total Other Expenses ........................................ 81 80 161 154 ---- ----- ------ ------ Earnings Before Income Taxes and cumulative effect of change in accounting for start up costs .................. 45 30 83 50 Provision for Income Taxes .................................. 24 17 44 27 ---- ----- ------ ------ Net earnings from continuing operations before cumulative effect of change in accounting for start up costs ........ $ 21 $ 13 $ 39 $ 23 ---- ----- ------ ------ Discontinued Operations: Net Revenues ............................................. $ -- $ 59 $ -- $ 121 ==== ===== ====== ====== Loss on Discontinued Operations Loss before income taxes .............................. -- (7) -- (14) Benefit for income taxes ............................. -- (3) -- (5) ---- ----- ------ ------ Loss from operations .................................. -- (4) -- (9) ---- ----- ------ ------ Loss on Disposal of Discontinued Operations Loss before income taxes .............................. -- (140) -- (140) Benefit for income taxes ............................. -- (43) -- (43) ---- ----- ------ ------ Loss from operations .................................. -- (97) -- (97) ---- ----- ------ ------ Total Loss on Discontinued Operations ................... $ -- $(101) $ -- $ (106) Cumulative effect of change in accounting for start up costs, net of tax benefit ....................................... -- -- -- (5) ---- ----- ------ ------ Net Income .................................................. $ 21 $ (88) $ 39 $ (88) ==== ===== ====== ======
26 27 THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 Net revenues from continuing operations for the second quarter of 1999 increased by 9% ($60 million) over the comparable period in 1998. Net earnings from continuing operations for the second quarter of 1999 increased by 68% ($8 million) over the comparable period in 1998 as a result of increased operating earnings, partially offset by increased general corporate expenses. DIALYSIS SERVICES Dialysis Services net revenues for the second quarter of 1999 increased by 10% ($54 million) over the comparable period in 1998, primarily as a result of a 7% 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 and 1999 acquisitions. The laboratory testing revenue decrease was primarily due to lower testing volume during the second quarter of 1999, as competitors consolidate lab activity. Dialysis Services operating earnings for the second quarter of 1999 increased by 11% ($9 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 second quarter of 1999 increased by 8% ($13 million) over the comparable period of 1998. This is due to increased sales of dialyzers ($7 million), machines ($8 million), concentrates ($1 million) and other products ($3 million), partially offset by decreased sales of bloodlines ($1 million) and peritoneal products ($5 million). Dialysis Products operating earnings for the second quarter of 1999 increased by 28% ($7 million) over the comparable period of 1998. This is primarily due to revenue growth and improvements in gross margin resulting from changes in product mix and improvements in manufacturing efficiencies from increased production volume. OTHER EXPENSES The Company's other expenses for the second quarter of 1999 increased by 1% ($1 million) over the comparable period of 1998. INCOME TAX RATE The effective tax rate from continuing operations for the second quarter of 1999 (52.4%) is lower than the rate for the comparable period of 1998 (57.9%) due to higher earnings in relation to the constant amount of non-deductible merger goodwill. 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, for accounting purposes, records 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 second quarter of 1998 was $59 million with a net after tax loss of $101 million. 27 28 SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Net revenues from continuing operations for the first six months of 1999 increased by 10% ($123 million) over the comparable period in 1998. Net earnings from continuing operations for the first six months of 1999 increased by 73% ($16 million) over the comparable period in 1998 as a result of increased operating earnings, partially offset by increases to general corporate expenses and interest expense. DIALYSIS SERVICES Dialysis Services net revenues for the first six months of 1999 increased by 12% ($118 million) over the comparable period in 1998, primarily as a result of a 8% increase in the number of treatments provided, the beneficial impact of the extension of the Medicare Secondary Payor (MSP) provision, 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 and 1999 acquisitions. The laboratory testing revenue decrease was primarily due to lower testing volume during the first six months of 1999, as competitors consolidate lab activity. Dialysis Services operating earnings for the first six months of 1999 increased by 15% ($24 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 six months of 1999 increased by 5% ($16 million) over the comparable period of 1998. This is due to increased sales of dialyzers ($15 million), machines ($13 million), concentrates ($1 million) and other products ($3 million), partially offset by decreased sales of bloodlines ($3 million) and peritoneal products ($13 million). Dialysis Products operating earnings for the first six months of 1999 increased by 34% ($16 million) over the comparable period of 1998. This is primarily due to revenue growth and improvements in gross margin resulting from changes in product mix and improvements in manufacturing efficiencies from increased production volume and a reduction in freight and distribution expenses. OTHER EXPENSES The Company's other expenses for the first six months of 1999 increased by 5% ($7 million) over the comparable period of 1998. General corporate expenses increased by $4 million due to increases in casualty and insurance expenses. Interest expense increased by $3 million primarily due to the change in the mix of debt instruments at June 30, 1999 versus June 30, 1998. INCOME TAX RATE The effective tax rate from continuing operations for the first six months of 1999 (52.7%) is lower than the rate for the comparable period of 1998 (55.0%) due to higher earnings in relation to the constant amount of non-deductible merger goodwill. 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, for accounting purposes, records 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 six months of 1998 was $121 million with a net after tax loss of $105 million. 28 29 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 $109 million and $56 million for the first six 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 $39 million and $152 million for the first six months of 1999 and 1998, respectively. The Company made capital expenditures for internal expansion, improvements, new furnishings and equipment of $31 million and $40 million for the first six months of 1999 and 1998, respectively. The Company intends to continue to enhance its presence in the U.S. by focusing its expansion on the acquisition of individual or small groups of clinics, expansion of existing clinics, and opening of new clinics. During the first six 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 a receivable financing facility and proceeds from the sale of the Non-Renal Diagnostics and Homecare divisions. In the first six months 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 June 30, 1998. Effective July 1, 1995, the Company ceased to recognize the incremental revenue provided under HCFA's initial instruction under OBRA 93, although the Company 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, 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, however, 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. 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. 29 30 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 IT Year 2000 compliance issues, the Company is on course to resolve such issues for substantially all IT systems by September 30, 1999. We are expecting that systemic changes for a small number of systems will be tested and implemented during the early part of the 4th quarter of 1999. The Company has inventoried and assessed Year 2000 compliance for substantially all non-IT equipment that may be dependent upon embedded software (e.g., medical, manufacturing/distribution, etc.). 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 in 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. The Company has successfully tested and placed into production Year 2000 formats for its systemic interfaces with the Medicare fiscal intermediaries. The Company continues to work with Medicare, Medicaid, and significant private payors to ensure that these payors will be able to process and make any 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. 30 31 Costs related to the Year 2000 issue are funded through operating cash flows. The Company expects to spend a total of approximately $6 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 the internal costs incurred for the Year 2000 remediation effort; such costs are principally related to the compensation costs for certain members of the Company's IT Department. The Company estimates remaining costs to be approximately $3.5 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 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 arranging that the existing, standard contingency plans are reviewed and updated with the potential Year 2000 issues in mind. Also, 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 that 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, judgments 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 non-compliance 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. 31 32 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." 32 33 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. 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 in providing supplemental information and documents. 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. 33 34 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, 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. Since October 1995 when 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. NMC and the government have been exploring the possibility of settling the matters which are encompassed by the OIG Investigation and, as referenced below, have settled 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 seek substantial civil and criminal financial penalties and other sanctions including the suspension of payments by, and 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 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 34 35 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. 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. 35 36 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 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. 36 37 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 and repaid the overpayment to the government in the amount of $8.6 million. LifeChem also has notified the government of the disclosure. 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 LifeChem. 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. The government has 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. In June 1999, a former Vice President of Marketing of NMC Medical Products, Inc. plead guilty to a charge of conspiracy to defraud Medicare in connection with the marketing of certain hepatitis tests. 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 37 38 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 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 38 39 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 is aware that certain 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. A 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. A 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. A 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. A 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. This qui tam action was dismissed as part 39 40 of the diagnostics civil investigation settlement reached in May 1999. See "Part II, Item 1, Legal Proceedings - Commitments and Contingencies - Diagnostics Subpoena." A 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. This qui tam action was dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Part II, Item 1, Legal Proceedings - Commitments and Contingencies - Diagnostics Subpoena." A 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. This qui tam action was dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Part II, Item 1, Legal Proceedings Commitments and Contingencies - Diagnostics Subpoena." A 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. This qui tam action was dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Part II, Item 1, Legal Proceedings Commitments and Contingencies - Diagnostics Subpoena." A 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. This qui tam action dismissed as part of the diagnostics civil investigation settlement reached in May 1999. See "Part II, Item 1, Legal Proceedings - Commitments and Contingencies - Diagnostics Subpoena." A 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 effect 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 40 41 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. FMC and the Company 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 FMC and the Company 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 FMC and the Company under the OIG Agreements and (b) breach of such provisions by the United States cannot and will not be raised by FMC and the Company 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 a civil investigative subpoena from the OIG concerning the possible submission of false or improper claims to, and their payment by, the Medicare program. In May, 1999 the Company and the government entered into a settlement agreement pursuant to which, among other things, the government has agreed to release the Company with respect to this matter in exchange for a payment of approximately $16.8 million from the Company. 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 are continuing 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. 41 42 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. Other private payors have contacted the Company and may assert that NMC received excess payments and similarly, may join the lawsuit and 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. In May 1999 the Company filed counter-claims against Aetna Life Insurance Company and Aetna U.S. Healthcare, Inc. based on inappropriate claim denials and delays in claim payments. The Company is also investigating similar counter- claims against the other private payors which have contacted the Company. 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 42 43 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. 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 in full or, to the extent approved, collected in full. Such claims represent substantial accounts receivable of NMC, amounting to approximately $150 million as of June 30, 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." 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 43 44 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 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 Mr. Udo Werle resigned from his position as a director of the Company effective May 11, 1999. William F. Grieco resigned from his position as a director, general counsel, senior vice president and secretary of the Company effective July 2, 1999. 44 45 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 ofIncorporation 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). 45 46 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). 46 47 Exhibit 4.12 Senior Subordinated Indenture dated as of February 19, 1998, among Fresenius Medical Care AG, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.13 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxembourg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 3/8% Senior Subordinated Notes 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 (incorporated by reference to the Form 10-Q of the Registrant filed with the Commission on May 14, 1999). 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 47 48 (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.12 Amendment No. 3 dated as of September 28, 1998 to Transfer and Administration Agreement dated as of August 28, 1997 among NMC Funding Corporation as Transferor, National Medical Care, Inc., as Collection Agent, Enterprise Funding Corporation, and Nations Bank, N.A. as agent for Enterprise Funding Corporation and the Bank Investors (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.13 Employment agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992). 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 10.20 Separation Agreement dated as of June 30, 1999 by and among William F. Grieco and Fresenius Medical Care Holdings, Inc. and Fresenius Medical Care AG. 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 June 30, 1999. *Confidential treatment has been requested as to certain portions of this Exhibit. 48 49 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fresenius Medical Care Holdings, Inc. DATE: August 3, 1999 /s/ Ben J. Lipps -------------- ------------------------------------------ NAME: Ben J. Lipps TITLE: President (Chief Executive Officer) DATE: August 3, 1999 /s/ Jerry A. Schneider -------------- ----------------------------------------- NAME: Jerry Schneider TITLE: Chief Financial Officer 49 EX-10.20 2 SEPARATION AGREEMENT 1 Exhibit 10.20 SEPARATION AGREEMENT This Agreement is entered into as of this 30th day of June, 1999 (the "Effective Date") between William F. Grieco ("Mr. Grieco"), who currently resides at 115 Marlborough Street, Boston, Massachusetts, 02116, and Fresenius Medical Care Holdings, Inc., d/b/a Fresenius Medical Care North America, with its principal offices located at 95 Hayden Avenue, Lexington, Massachusetts 02420 ("FMC" or the "Company"); and Fresenius Medical Care AG, with its principal offices located at Else-Kroner-Strasse 1, 61352 Bad Homburg v.d.H., Germany ("FMCAG"). W I T N E S S E T H : WHEREAS, on November 11, 1998, Mr. Grieco entered into an Employment Agreement with National Medical Care, Inc. ("NMC"), a subsidiary of FMC (the "Employment Agreement"), a copy of which is attached hereto as Exhibit A; and WHEREAS, Mr. Grieco, FMC, and FMCAG now desire to enter into an agreement concerning the separation of Mr. Grieco from FMC. NOW, THEREFORE, in consideration of the mutual promises contained in this Agreement, Mr. Grieco, FMC and FMCAG (the "Parties") agree as follows: 1. SEPARATION: The Parties agree that Mr. Grieco shall continue to work for and be an employee of the Company through and including July 1, 1999 (the "Separation Date"), and that until he ceases to be an employee of the Company, Mr. Grieco shall continue to hold the position of Senior Vice President and General Counsel. FMC represents and Mr. Grieco agrees that the termination of Mr. Grieco's employment is not a termination for cause, as set forth in Section 5(a) of the Employment Agreement. Instead, the parties have mutually agreed to end their current relationship in accordance with Section 5(d) of the Employment Agreement on the terms and conditions set forth herein. 2. CONSIDERATION TO MR. GRIECO: The Company shall make the following payments and provide the following additional consideration to Mr. Grieco: a. SALARY AND BENEFITS CONTINUATION: Upon the separation of Mr. Grieco's employment with the Company, the Company agrees to pay Mr. Grieco all accrued but unpaid base salary through July 1, 1999. In addition, the Company agrees to the following: i. SALARY. The Company agrees that, beginning on July 2, 1999, Mr. Grieco shall receive continuation of his salary, at an annual rate of $450,000, from which all applicable withholdings shall be made, for a period of two (2) years following the Separation Date (the "Salary Continuation"). At Mr. Grieco's option, he may elect to receive the 2 Salary Continuation referenced in this Section 2(a)(i) in a lump sum (the "Lump Sum Election"), in which event Mr. Grieco shall forego the continuation of his life insurance and medical benefits provided in Section 2(a)(ii). ii. MEDICAL AND DENTAL COVERAGE, AND LIFE INSURANCE; NO LUMP SUM ELECTION. For as long as Mr. Grieco is receiving the Salary Continuation, and provided that Mr. Grieco has not made the Lump Sum Election, the Company agrees that Mr. Grieco shall receive continuation at the Company's expense of any coverage under FMC's medical and dental plans, such coverage to be provided to Mr. Grieco on the same basis and to the same extent as the coverage provided Mr. Grieco during his employment. Mr. Grieco's life insurance benefits will similarly continue at the Company's expense during the Salary Continuation. Any conversion of life insurance at the end of that period (or upon a Lump Sum Election) may be arranged through the Corporate Human Resources Department. iii. MEDICAL AND DENTAL COVERAGE, AND LIFE INSURANCE; LUMP SUM ELECTION. In the event that Mr. Grieco makes the Lump Sum Election as provided in Section 2(a)(i), he shall forego continuation of the coverage specified in Section 2(a)(ii); it being understood, however, that Mr. Grieco shall have the right to elect to pay for coverage himself under COBRA. FMC will send Mr. Grieco the documents necessary for such COBRA election. iv. LONG AND SHORT TERM DISABILITY BENEFITS. Mr. Grieco's long and short term disability benefits shall cease as of July 1, 1999, per company policy. v. 401(K) PLAN. Contributions to FMC's 401(k) Plan may be withdrawn from the plan by Mr. Grieco following Mr. Grieco's termination of employment. Mr. Grieco may not make contributions to the Plan during the Salary Continuation period. vi. PENSION PLAN. Mr. Grieco will stop accruing benefit service under the Pension Plan effective July 1, 1999. vii. DEFERRED COMPENSATION PLAN. Mr. Grieco's account balance, if any, under the Deferred Compensation Plan will be paid to him within thirty (30) days of the Separation Date. viii. CONTROLLING PLAN DOCUMENTS. It is understood and acknowledged that -2- 3 the provision of continued benefits to Mr. Grieco will be governed by the terms of the Plan Documents applicable to such benefits. The Company will not be under any obligation to amend or modify such benefit plans. If Mr. Grieco's benefits cannot be continued under the terms of the current group plans, the Company will provide equivalent coverage under another plan or plans at Company expense. ix. FORM 1099. Mr. Grieco will be provided with a Form 1099 in connection with the salary and benefits continuation he receives. b. CONTRACTUAL INCENTIVE COMPENSATION. The parties agree that incentive compensation provided under the Employment Agreement shall be treated as follows: i. 1999 FMC MANAGEMENT BONUS PLAN. Mr. Grieco will participate in the 1999 Management Bonus Plan referenced in Section 4(b) of the Employment Agreement, on a pro rata basis for six (6) month's service in 1999. Mr. Grieco shall be at the 1999 senior executive eligibility level, wherein the target level bonus is forty percent (40%) and the maximum bonus is eighty percent (80%) per plan of base salary. Mr. Grieco will be treated similarly with other senior executives of FMC. Mr. Grieco's entitlement to a bonus under the Plan will be governed by the terms of the Plan. Payment will be made on the same day as payment to FMC senior executives. ii. SPECIAL BONUS. The parties acknowledge that the second paragraph of Section 4(b) of the Employment Agreement provides for a "Special Bonus." With respect to this Special Bonus the parties have agreed that all issues if any, with respect to such bonus are reserved and will be decided as per Section 4(b) of the Employment Agreement upon the successful resolution of the Investigation. By entering into this Agreement now, Mr. Grieco is not waiving his right to any possible claim regarding this Special Bonus, and is not limiting in any way the amount of the bonus he can claim. The Company similarly is not conceding that any entitlement to a Special Bonus exists, and is not agreeing that a Special Bonus should be awarded at any particular level. The parties agree that June 4, 1999 shall be the closing date for the evaluation period for the Special Bonus. The parties will enter into a tolling agreement with respect to any claims, counterclaims and defenses that could be brought in connection with the Special Bonus. c. STOCK OPTIONS: Mr. Grieco shall also on the Separation Date become vested in any Existing Options, consisting of 43,467 Fresenius Medical Care AG Preference Shares, which are unvested on the Separation Date and in any Future Options (together with -3- 4 any previously vested options, the "Vested Options"). The Company and FMCAG agree that Mr. Grieco is granted up to three (3) years from the Separation Date in which to exercise the Vested Options, provided that Ben Lipps, or his successor, will use his best efforts to recommend to the Management Board of FMCAG (the "Management Board"), including but not limited to recommending to the Management Board through an oral and written presentation in accordance with the normal operating procedures of the Management Board, that Mr. Grieco be granted up to ten (10) years from the date of the grant of his options to exercise them. If, despite such aforementioned best efforts, the Management Board in its reasonable discretion wishes to approve a period less than a ten (10) year exercise period, Mr. Lipps shall use his "best efforts" to obtain such alternative approval which would be in one year increments above three years. If, within three years of July 1, 1999, any other senior executive is granted more than three years by the Management Board to exercise his or her options, that same amount of time will be given to Mr. Grieco unless the Management Board has already granted Mr. Grieco five (5) or more years from the Separation Date within which to exercise his options, in which case this provision relating to the exercise period for other executives will become inapplicable, and Mr. Grieco's exercise period will be that set by the Management Board. d. VACATION/PTO TIME: Mr. Grieco will receive on or before the Separation Date a payout of all accrued but unpaid vacation/PTO time to which he is entitled under Company policy, which the Parties agree is 556 hours of time. e. EXPENSE REIMBURSEMENT: The Company acknowledges that Mr. Grieco has incurred expenses on behalf of the Company which have not yet been reimbursed, and, in accordance with the Company's policies, the Company will reimburse Mr. Grieco within ten (10) business days of the submission of documented proof of such expenses to Brian O'Connell, Vice President of Human Resources. f. CAR ALLOWANCE: The Company further acknowledges that it has not yet compensated Mr. Grieco for the automobile allowance provided in Section 4(f) of the Employment Agreement. The Company agrees to pay Mr. Grieco the amount of $4,500.00 for such allowance on or before the Separation Date. g. OTHER PAYMENTS: In addition to the foregoing, and as further consideration for the other terms and conditions set forth in this Agreement, including a release of all claims to date by Mr. Grieco (with the exception of the Special Bonus), on or before the tenth day following the execution of this Agreement by the parties the Company will pay to Mr. Grieco, in a lump sum, $50,000 from which all applicable withholdings shall be made. On or before January 1, 2000 the Company will pay to Mr. Grieco, in a lump sum, $50,000 from which all applicable withholdings shall be made. The Company shall issue to Mr. Grieco a Form-1099 in connection with these payments. h. CONSULTING AGREEMENT: The Company and Mr. Grieco will enter into an -4- 5 agreement through which Mr. Grieco will agree to provide consulting services to the Company, at such reasonable times and upon reasonable notice, as the Company may request as provided below (the "Consulting Agreement"). Mr. Grieco will be paid a base of $150,000 per year for three years (the "Consulting Fee") following August 1, 1999 (the "Term") which may increase as set forth under Section 2(h)(i), unless the consulting arrangement is terminated earlier. The Consulting Fee shall paid in equal installments on a quarterly basis, in advance. (i.) The Company acknowledges that Mr. Grieco may assume other commitments, and intends to seek other employment and undertake other endeavors during the Term. Accordingly, Mr. Grieco's consulting obligations shall require not more than 25 hours per month (the "Maximum Commitment"). Reasonable travel time above and beyond reasonable commuting time (i.e., outside a radius of 15 miles) shall be counted toward the Maximum Commitment. The amount of the Maximum Commitment shall not change during the Term of this Agreement, unless the parties mutually agree in writing, in which event Mr. Grieco shall be compensated for any increased time over the Maximum Commitment at a rate of $500.00 per hour. The Company also agrees that if a conflict of interest or potential conflict of interest arises in connection with any other employment obtained by Mr. Grieco, the Company shall waive such conflict or potential conflict as permitted under relevant ethical rules governing the practice of law in the Commonwealth of Massachusetts. (ii.) The scope of Mr. Grieco's consulting shall be limited to the OIG Investigation defense and any related litigation matters, unless the parties mutually agree in writing to the contrary. (iii.) Mr. Grieco's role shall be that of a legal consultant, with the status of outside counsel to the Company. (iv.) Mr. Grieco shall be directed by Dr. Runte or his successor, the General Counsel of FMCAG, it being understood that Mr. Grieco expects to work with the Company's management team, including any new general counsel. (v.) Mr. Grieco's consulting obligations shall begin on August 2, 1999. (vi.) The Company shall provide Mr. Grieco with reasonable notice and a written Request for Assistance, to initiate a consulting project. The Company shall provide reasonable lead-time on all such projects. -5- 6 (vii.) The Consulting Agreement shall be terminable as follows [a] BY THE COMPANY FOR GOOD CAUSE. The Company shall have the right to terminate the Consulting Agreement for Good Cause only. For purposes of the Consulting Agreement, the term "Good Cause" shall consist of [1] a material breach of the Consulting Agreement or this Agreement by Mr. Grieco,which remains uncured for thirty (30) days after receipt by Mr. Grieco of written notice from the Company, informing him of its intention to terminate under this Section, and providing him with the reasons therefore, in detail sufficient to allow cure; or [2] Mr. Grieco's failure to provide the consulting services called for under the Consulting Agreement for a period of twenty (20) or more consecutive days; provided, however, that Mr. Grieco shall be entitled to reasonable vacation during the Term and, provided further, that if serious illness or other excusable factor beyond Mr. Grieco's control prevents him from providing such services, the Company shall extend the 20-day period for a reasonable time; or [3] Mr. Grieco bringing any action against the Company or any of the Releasees as defined in Section 3(a) of any kind in any forum, except as provided in Sections 2(b)(ii) and 3(b) or to enforce this Agreement. [b] BY MR. GRIECO FOR GOOD REASON. Mr. Grieco shall have the right to terminate the Consulting Agreement for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following circumstances: (i) a material breach of the terms of the Consulting Agreement by FMC or FMCAG, which remains uncured for thirty (30) days after receipt by Mr. Grieco of written notice from the Company, informing him of its intention to terminate under this Section, and providing him with the reasons therefore, in detail sufficient to allow cure; (ii) a change in Mr. Grieco's reporting line to Dr. Runte or his successor; (iii) any interference by FMC or FMCAG in the relationship between Mr. Grieco and his employer, which remains uncured for thirty (30) days after receipt by the Company of written notice from Mr. Grieco, informing it of his intention to terminate under this Section, and providing it with the reasons therefore, in detail sufficient to allow cure, provided further that the Company shall be entitled to only one such notice and cure period during each year of the Term; (iv) the Company bringing any action against Mr. Grieco of any kind in any forum, except as provided in Sections 2(b)(ii) and 3(b) or to enforce this Agreement. -6- 7 [c] BY MR. GRIECO FOR CONVENIENCE. Mr. Grieco may terminate this Agreement for convenience, upon thirty (30) days written notice. [d] EFFECT OF TERMINATION ON COMPANY'S CONSULTING FEE OBLIGATION. In the event of a termination properly in accordance with Section 2(h)(viii)[a] or Section 2(h)(viii)[c], the Company shall pay Mr. Grieco Consulting Fees through the then-current quarter, any further obligation to pay to Mr. Grieco Consulting Fees shall cease, and no further Consulting Fees shall be due Mr. Grieco under the Consulting Agreement. In the event of a termination properly in accordance with Section 2(h)(viii)[b], the Company's obligations with respect to the Consulting Fees shall continue, and all Consulting Fees remaining through the end of the Term shall be accelerated, and shall become due and owing thirty (30) days after the date of any such termination under Section 2(h)(viii)[b]. (viii.) Mr. Grieco will be reimbursed for the expenses he incurs in connection with such consulting, following the submission of documentation confirming the expenses in accordance with Company policy. i. ENTIRE CONSIDERATION: Mr. Grieco understands and agrees that the payments and benefits provided for in this Agreement are in excess of those to which he otherwise would be entitled and that they are being provided to him in consideration for his signing of this Agreement, which consideration he agrees is adequate and satisfactory to him. Mr. Grieco understands and agrees that other than as set forth in this Agreement, he will not receive any compensation, payment or benefit of any kind from the Company and he expressly acknowledges and agrees that other than as noted in Sections 2(b)(ii) and 3(b), he is not entitled to any such further compensation, payment or benefit of any kind, including any payment with respect to any bonus. 3. GRIECO RELEASE: Mr. Grieco, for the consideration given by the Company as set forth above, which he acknowledges is adequate and satisfactory to him, hereby commits as follows: a. With the exception of any claims under Sections 2(b)(ii) and 3(b), Mr. Grieco covenants not to sue and irrevocably and unconditionally remises, releases, waives and forever discharges the Company including its past and present parents, subsidiaries, affiliates, predecessors, insurers and their successors and assigns; and its and their past, present and future directors, officers, agents, representatives and employees, and all persons acting by, through, under or in concert with them (together the "Releasees"), from any and all manner of liabilities, -7- 8 actions, causes of action, contracts, agreements, promises, claims and demands of any kind or nature whatsoever, in law or equity, including attorneys' fees, whether known or unknown, which Mr. Grieco has ever had or now has against the Company or the Releasees up to and including the Effective Date, including, but not limited to, claims arising out of or relating to his employment with the Company and compensation and benefits with the Company, his Employment Agreement and the separation of his employment from the Company. Mr. Grieco further agrees, promises and covenants that neither he nor any person, organization, or other entity acting on his behalf will file, charge, claim, sue or cause or permit to be filed, charged or claimed, any action for damages or other relief on his behalf (including injunctive, declaratory, monetary relief or other) against the Company or any of the Releasees for any liabilities, actions, causes of action, contracts, agreements, promises, claims and demands of any kind whatsoever, in law or equity, including attorneys' fees, whether known or unknown, which he has ever had or now has against the Company or the Releasees up to and including the Effective Date, including, but not limited to, claims arising out of or relating to his employment with the Company, compensation and benefits with the Company, his Employment Agreement and the separation of his employment from the Company. Mr. Grieco further understands and agrees that this Agreement and release shall act as a complete bar to any claim, demand or action of any kind whatsoever which could be brought by and which seeks personal, equitable or monetary relief for him against the Company or the Releasees up to and including the Effective Date, including, without limitation, any claim, demand or action under Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss 2000e, et seq., the Age Discrimination in Employment Act, 29 U.S.C. ss 621, et seq., the Employee Retirement Income Security Act of 1974, chapters 93A and 151B of the Massachusetts General Laws; all claims of defamation or damage to reputation; all claims for reinstatement; all claims for punitive or emotional distress damages; all claims for wages, benefits, bonuses, expenses, severance, back or front pay or other forms of compensation; all claims for stock or stock options; and all claims for attorney's fees and costs, and any and all other federal, state or local statutes, or common laws, except for claims for a breach of this Agreement and with respect to any benefits in which Mr. Grieco has a vested interest under the terms and conditions of any of the Company's employee benefit plans. Mr. Grieco hereby waives and relinquishes any and all rights he may have under any federal, state or local statute, rule, regulation or principle of common law or equity which may in any way limit the effect of this release with respect to claims which he did not know or suspect to exist in his favor at the time he executed this Agreement. b. The released claims in Section 3(a) shall not, however, include any claims to enforce any obligations under this Agreement, and it is further understood and agreed by the parties that Mr. Grieco is not waiving and hereby expressly reserves the right to seek payment of the "Special Bonus" discussed in the second paragraph of Section 4(b) of the Employment Agreement (on p. 2), upon and under the terms and conditions set forth in Section 4(b) of the Employment Agreement. The parties hereby agree that all issues, if any, with respect to the Special Bonus are reserved. c. Mr. Grieco agrees that other than in an action brought by him under Section -8- 9 2(b)(ii) and 3(b), neither he nor any person, organization or entity acting on his behalf will file, participate, join in, encourage, assist, facilitate or permit the bringing or maintenance of any claim or cause of action against the Company or the Releasees relating to Mr. Grieco's employment or other matters arising during his employment with the Company for which he had responsibility, unless his participation as a witness is called for by a prosecutorial agency or is required by subpoena or other legal process of which he shall give reasonable notice to the Company, provided that this paragraph shall not be violated by his participation in any class action or action brought by the government provided that he opt out at the first possible opportunity. This Section 3(c) shall not apply in any situation which conflicts with his ethical obligations under the rules governing the practice of attorneys in Massachusetts or his interest as an individual witness or defendant in any investigations or claims which give rise to such interests. d. Mr. Grieco agrees that other than as set forth herein, he is not entitled to any future employment with the Company or any of the Releasees, whether as an employee, consultant or otherwise, except as set forth in this Agreement, and that he will not in the future seek any employment with the Company or any of the Releasees, whether as an employee consultant or otherwise, except as set forth in this Agreement and the Consultant Agreement. 4. FMC AND FMCAG RELEASE: The Company and FMCAG, and their affiliates, predecessors, successors, assigns, officers, directors, representatives and attorneys hereby irrevocably and unconditionally release, acquit and forever discharge Mr. Grieco and his successors, assigns, agents, representatives and attorneys, and all persons acting by, through, under or in concert with him (collectively "Employer's Releasees"), and any of them, from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of any nature whatsoever, known or unknown (collectively "Employer's Released Claims"), which the Company and/or FMCAG now has, owns, or holds, or claims to have, own, or hold, or which the Company and/or FMCAG at any time had, owned, or held, or claimed to have, own, or hold against each of any of the Employer's Releasees from the beginning of time until the Effective Date of this Agreement. The Employer's Released Claims shall include, without express or implied limitation, all claims of breach of express or implied contract; all claims under Massachusetts General Laws chapter 93A; all claims of interference with contractual or advantageous relations, whether prospective or existing; all claims of deceit or misrepresentation; all claims of defamation or damage to reputation; all claims for punitive damages; and all claims for attorney's fees and costs. The Employer's Released Claims shall not include any claims to enforce any obligation under this Agreement, and it is further understood and agreed by the parties that the Company and FMCAG are not waiving and hereby expressly reserve the right to assert any and all claims and defenses it may have with respect to the Special Bonus in any proceeding brought by Mr. Grieco. 5. NON-DISPARAGEMENT: Each of the Parties agrees that it shall not issue any communication, written, verbal or otherwise, that disparages any other party including with respect -9- 10 to Mr. Grieco's job performance or his employment as Senior Vice President and General Counsel of FMC or which encourage any adverse action, provided that the parties shall testify truthfully under oath pursuant to a subpoena and/or Court order or other valid legal process. There will be no liquidated damages for any breach of this clause and Ben Lipps will not have any personal liability under this Section 5 unless Massachusetts law permits the imposition of personal liability and a breach is proven in a court of law to have been engaged in by Mr. Lipps himself. 6. INDEMNIFICATION: The Company and FMCAG agree to indemnify Mr. Grieco and hold him harmless from any and all claims against Mr. Grieco arising out of his employment with NMC or with the Company, arising out of his position as Senior Vice President, arising out of his position as member of the Board of the Company, arising out of his position as officer, director, or shareholder of any affiliate of the Company or FMCAG, arising out of his Consulting Agreement, or arising out of any combination or all of the above. The Company agrees that Mr. Grieco shall be entitled to retain counsel, consultants, and expert witnesses in connection with the defense of, or his involvement in, any such claims, and agrees to indemnify Mr. Grieco for any resulting reasonable attorney's fees, reasonable consultants' fees, and reasonable expert witness fees. The Company represents and warrants that, at all times during Mr. Grieco's employment, Mr. Grieco has been covered by the Company's Directors' and Officers' Insurance which is and has been good and sufficient in light of known or anticipated claims. The Company further represents and warrants that such coverage for Mr. Grieco will remain in place, for the period during which Mr. Grieco might remain exposed to such claims. 7. COOPERATION AND ASSISTANCE: Mr. Grieco acknowledges that he may have historical information or knowledge which may be useful to the Company in connection with current or future legal, regulatory or administrative proceedings. Mr. Grieco will cooperate with the Company in the defense or prosecution of any such claims which relate to events or occurrences that transpired during Mr. Grieco's employment with the Company. Mr. Grieco's cooperation in connection with such claims or actions shall include being reasonably available to meet with counsel to prepare for discovery or trial and to testify truthfully as a witness when reasonably requested by the Company at reasonable times and with reasonable advance notice to Mr. Grieco. The Company shall promptly reimburse Mr. Grieco for any out-of-pocket expenses, including Mr. Grieco's personal attorney's fees, that he incurs in connection with such cooperation. The Company shall also provide Mr. Grieco with compensation on an hourly basis at the rate of three hundred fifty dollars ($350.00) per hour for such requested cooperation, including preparation time. The Company agrees that time spent by Mr. Grieco in fulfilling his obligations under this Section 7 shall not involve the OIG Investigation defense or any related litigation matters, which services are governed exclusively by Section 2(h) of this Agreement. Mr. Grieco shall not be obligated to provide such cooperation which conflicts with his ethical obligations under the rules governing the practice of attorneys in Massachusetts. 8. NOTICE OF PUBLIC INFORMATION RELEASE: For a period of two (2) years commencing on the Effective Date, the Company and FMCAG agree that at least two (2) days before dissemination -10- 11 it will provide Mr. Grieco with a copy of any information to be released by the Company and FMCAG publicly that references Mr. Grieco, his employment, or Mr. Grieco's involvement in the Investigation, including, but not limited to, any SEC filing, Investor Communication, or press statement (collectively "Mr. Grieco-Related Statements"). Any inaction by Mr. Grieco shall not affect the Company's obligations under Section 5. 9. OUTPLACEMENT BENEFITS: For a period of one year following the Separation Date the Company will provide Mr. Grieco with executive/professional-level out-placement at a firm to be agreed upon by the parties, with the Company's consent to the selection of a firm by Mr. Grieco not to be unreasonably withheld. 10. LETTER OF REFERENCE: Within fourteen (14) days of the Separation Date, the Company will provide Mr. Grieco with a mutually acceptable, written, letter of reference. 11. UNEMPLOYMENT BENEFITS: The Company agrees that it will not protest any claim Mr. Grieco may file for unemployment compensation. 12. PAYMENTS TO ESTATE: Should Mr. Grieco die, any payments remaining unpaid under this Agreement at the time of his death, shall be paid to his estate. 13. RETURN OF PROPERTY: Mr. Grieco expressly agrees that by the Separation Date he will return to the Company all property of the Company including, but not limited to, any and all files, computers, computer equipment and software and diskettes, documents, papers, records, accords, notes, agenda, memoranda, plans, calendars and other books and records of any kind and nature whatsoever containing information concerning the Company or its customers or operations. Mr. Grieco affirms that he has not retained and will not retain copies of any such property or other materials. It is agreed that as the only exception to this Section 13, Mr. Grieco may retain one copy of his own attorney work product and any other documents covered under Massachusetts Rules of Professional Conduct Rule 1.16, and at the request of the Company Mr. Grieco has agreed to and will provide a list of all such documents to the Company within a reasonable period of time of the Separation Date. Mr. Grieco agrees that he will not disclose such retained documents to any other individual or entity without the written permission of the Company, except as permitted under the ethical rules governing the practice of law in the Commonwealth of Massachusetts. At Mr. Grieco's request, the Company shall provide, at its own expense, secretarial, paralegal and other assistance to Mr. Grieco to prepare the list. 14. NON-DISCLOSURE: Mr. Grieco agrees that he has not, except in performing his duties, and will not at any time hereafter directly or indirectly publish, disclose, market or use, or authorize, advise, hire, counsel or otherwise procure any other person or entity, directly or indirectly, to publish, disclose, market or use, any trade secret or other information of a confidential or proprietary nature of the Company ("Trade Secrets"), whether patentable or nor, of which he became aware or informed during this employment with the Company. Mr. Grieco may, -11- 12 however, comply with legal process, provided he (i) gives the Company prompt notice of the date any disclosure must be made to enable the Company to respond to any such process, and (ii) waits until the last possible date to make any such disclosure. 14. NON-DISCLOSURE: Mr. Grieco acknowledges and affirms that he continues to be bound and will abide by, and following the Separation Date will continue to be bound and abide by, the nondisclosure provisions contained in Paragraph 6 of the Employment Agreement. 15. NO ADMISSION: Nothing in this Agreement shall be deemed to constitute an admission or evidence of any wrongdoing or liability on the part of the Company or Mr. Grieco and the parties agree that neither this Agreement nor any of the terms or conditions contained herein other than as set forth in Section 16, may be used in any future dispute or proceeding except one to enforce the terms of this Agreement, and except if the parties agree in writing. 16. CONFIDENTIALITY: Mr. Grieco agrees that he will keep confidential the terms of this Agreement, and agrees that he will not disclose its terms to anyone other than members of his immediate family, counsel and tax advisors who must also each agree prior to such disclosure to them to keep the terms of this Agreement confidential, or as required by law, or as permitted by the ethical rules governing the practice of law in the Commonwealth of Massachusetts, or as requested by a government taxing authority. The Company shall also treat this Agreement as confidential and shall not disclose it to persons other than those required for its approval and proper implementation within the Company, and to its counsel and tax advisors or as required by law or regulation or to government taxing authorities, provided that it is agreed that as the only exceptions to this Section 16, Mr. Grieco and the Company may disclose (i) that Mr. Grieco has separated from the Company, (ii) that this was a mutually agreeable separation, (iii) that Mr. Grieco has been retained as a consultant, (iv) that Mr. Grieco's rate as a consultant is $500.00 per hour and (v) that all issues regarding Mr. Grieco's Special Bonus have been reserved. 17. BINDING NATURE OF AGREEMENT: This Agreement shall be binding upon each of the Parties and upon their heirs, administrators, representatives, executors, successors and assigns, and shall inure to the benefit of each party and to their heirs, administrators, representatives, executors, successors and assigns. 18. NO ORAL MODIFICATION: This Agreement may not be changed orally and no modification, amendment or waiver of any provision contained in this Agreement, or any future representation, promise or condition in connection with the subject matter of this Agreement shall be binding upon any party hereto unless made in writing and signed by such party. 19. ENTIRE AGREEMENT: Pursuant to Section 2(h) of this Agreement, the parties contemplate executing a Consulting Agreement incorporating the terms set forth in Section 2(h). This Agreement will incorporate that Consulting Agreement upon execution of that Consulting Agreement, and will then contain the entire agreement between the parties and supersede any and -12- 13 all previous agreements of any kind whatsoever between them, whether written or oral. All prior and contemporaneous discussions and negotiations have been and will then be merged and integrated into, and be superseded by, this Agreement. This is an integrated document. 20. SEVERABILITY: In the event that any provision of this Agreement or the application thereof should be held to be void, voidable, unlawful or, for any reason, unenforceable, the remaining portion and application shall remain in full force and effect, and to that end the provisions of this Agreement are declared to be severable. 21. GOVERNING LAW: This Agreement is made and entered into, and shall be subject to, governed by, and interpreted in accordance with the laws of the Commonwealth of Massachusetts and shall be fully enforceable in the courts of that state, without regard to principles of conflict of laws. The Parties (i) agree that any suit, action or other legal proceeding arising out of this Agreement may be brought in the United States District Court for the District of Massachusetts, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Suffolk County, Massachusetts; (ii) consent to the jurisdiction of any such court; and (iii) waive any objection which they may have to the laying of venue in any such court. The parties also consent to the service of process, pleadings, notices or other papers by regular mail, addressed to the party to be served, postage prepaid, and registered or certified with return receipt requested. 22. NOTICES: All notices, requests, consents, approvals and other communications required or permitted under this Agreement ("Notices") shall be in writing and shall be delivered to the addresses listed below, by mail, by hand, or by facsimile transmission, unless otherwise provided in this Agreement. Such Notices shall be effective (i) if sent by mail, three business days after mailing; (ii) if sent by hand, on the date of delivery; and (iii) if sent by facsimile, on the date indicated on the facsimile confirmation. A copy of any Notice sent by facsimile shall also be sent by express air mail or overnight mail on the date such Notice is transmitted by facsimile. In the case of Mr. Grieco: William F. Grieco 115 Marlborough Street, Unit 1 Boston, Massachusetts 02116 Phone: 617-353-0536 Fax: 617-353-0536 with a copy to: Ieuan G. Mahony, Esq. Holland & Knight LLP One Beacon Street -13- 14 Boston, MA 02018 Phone: 617-523-2700 Fax: 617-523-6850 In the case of Fresenius Medical Care Holdings, Inc. and Fresenius Medical Care AG: Fresenius Medical Care Holdings, Inc. and Fresenius Medical Care AG c/o Fresenius Medical Care Holdings, Inc. 95 Hayden Avenue Lexington, Massachusetts 02420 Attention: Brian O'Connell, Vice President Human Resources Phone: 781-402-9205 Fax: 781-402-9734 and Fresenius Medical Care AG Else-Kroner-Strasse 61352 Bad Homburg v.d.H. Germany Attention: Dr. Rainer Runte with a copy to: Christopher A. Parlo, Esq. Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178 Phone: 212-309-6000 Fax: 212-309-6273 Any party may change its address or facsimile number for notification purposes by giving the other parties notice, in accordance with the notice provisions set forth in this Section, of the new address or facsimile number and the date upon which it will become effective. 23. NO ASSIGNMENT: Neither this Agreement nor any portion hereof is assignable. The Parties represent, warrant and covenant that they have not previously assigned or transferred, or purported to assign or transfer, to any individual or entity, any of the rights being released herein, and agree that no such assignment or transfer may occur without a written consent executed by both parties, and any attempt to do so shall be void. 24. COUNTERPARTS: This Agreement may be executed in counterparts, and each -14- 15 counterpart, when executed, shall have the effect of a signed original. 25. ACKNOWLEDGMENT OF KNOWING AND VOLUNTARY RELEASE: Mr. Grieco certifies that he has read the terms of this Agreement. The execution hereof by Mr. Grieco shall indicate that this Agreement conforms to Mr. Grieco's understandings and is acceptable to him as a final agreement. It is further understood and agreed that Mr. Grieco has been advised of the opportunity to consult with counsel of his choice and that he has been given a reasonable and sufficient period of time of no less than 21 days in which to consider and return this document. It is further agreed and understood that upon Mr. Grieco's execution and return of this document he is thereafter permitted to revoke the Agreement at any time during a period of seven (7) days following his execution hereof. This agreement shall not be effective until the seven day revocation period has expired. To be effective, the revocation must be in writing and must be hand-delivered or telecopied to counsel for the Company within the seven-day period. WHEREFORE, intending to be legally bound, the parties have agreed to the aforesaid terms and indicate their agreement by signing below. [PLEASE READ CAREFULLY. THIS AGREEMENT IS A LEGAL DOCUMENT AND INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS, INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, ALL CLAIMS ARISING UNDER TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, AS AMENDED, THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AS AMENDED, THE EMPLOYEE RETIREMENT INCOME SECURITY ACT, AS AMENDED, AND CHAPTERS 93A AND 151B OF THE MASSACHUSETTS GENERAL LAWS. BY SIGNING THIS AGREEMENT I ACKNOWLEDGE AND AFFIRM THAT I AM COMPETENT, THAT I HAVE BEEN AFFORDED A TIME PERIOD OF 21 DAYS TO REVIEW AND CONSIDER THIS AGREEMENT AND HAVE BEEN ADVISED TO DO SO WITH AN ATTORNEY OF MY CHOICE. THAT I HAVE READ AND UNDERSTAND AND ACCEPT THIS DOCUMENT AS FULLY AND FINALLY WAIVING AND RELEASING ANY AND ALL CLAIMS, DEMANDS, DISPUTES AND ANY DIFFERENCES OF ANY KIND WHATSOEVER WHICH I MAY HAVE HAD OR NOW HAVE AGAINST THE COMPANY ARISING OUT OF OR RELATING TO MY EMPLOYMENT WITH THE COMPANY, COMPENSATION AND BENEFITS WITH THE COMPANY, SEPARATION FROM EMPLOYMENT OR OTHERWISE, EXCEPT AS PROVIDED HEREIN, THAT NO REPRESENTATIONS, PROMISES OR INDUCEMENTS HAVE BEEN MADE TO ME EXCEPT AS SET FORTH IN THIS AGREEMENT, AND THAT I HAVE SIGNED THIS DOCUMENT FREELY AND VOLUNTARILY, INTENDING TO BE LEGALLY BOUND BY ITS TERMS, AND WITH FULL UNDERSTANDING OF ITS CONSEQUENCES. WILLIAM F. GRIECO -15- 16 /s/ William F. Grieco __________________ --------------------- William F. Grieco Date FRESENIUS MEDICAL CARE HOLDINGS, INC. d/b/a FRESENIUS MEDICAL CARE NORTH AMERICA By: /s/ Ben Lipps _________________ ------------- Ben Lipps, Chief Executive Officer Date FRESENIUS MEDICAL CARE AG By: /s/ Ben Lipps ________________ ------------- Ben Lipps, Chairman and Date Chief Executive Officer By /s/ Dr. Rainer Runte ________________ -------------------- ppa. Dr. Rainer Runte Date General Counsel Senior Vice President -16- EX-11 3 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- The weighted average number of shares of ---------- ---------- ---------- ---------- Common Stock were as follows.................................... 90,000 90,000 90,000 90,000 ========== ========== ========== ========== Income used in the computation of earnings per share were as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- CONTINUED OPERATIONS 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Earnings..................................................... $ 21,404 $ 12,770 39,031 $ 22,616 Dividends paid on preferred stocks............................... (130) (130) (260) (260) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income used in per share computation of earnings................. $ 21,274 $ 12,640 38,771 $ 22,356 ========== ========== ========== ========== Basic and fully dilutive earnings per share...................... $ 0.24 $ 0.14 0.43 $ 0.25 ========== ========== ========== ========== THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- DISCONTINUED OPERATIONS 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Earnings..................................................... $ -- $(101,468) -- $(105,897) Dividends paid on preferred stocks............................... -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income used in per share computation of earnings................. $ -- $(101,468) -- $(105,897) ========== ========== ========== ========== Basic and fully dilutive earnings per share...................... $ -- $ (1.13) -- - $ (1.18) ========== ========== ========== ========== THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- --------------------------- CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cumulative effect of accounting change........................... $ -- $ -- -- $ (4,890) Dividends paid on preferred stocks............................... -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income used in per share computation of earnings................. $ -- $ -- -- $ (4,890) ========== ========== ========== ========== Basic and fully dilutive earnings per share...................... $ -- $ -- -- $ (0.05) ========== ========== ========== ========== THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- CONSOLIDATED 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Earnings..................................................... $ 21,404 $ (88,698) 39,031 $ (88,171) Dividends paid on preferred stocks............................... (130) (130) (260) (260) ---------- ---------- ---------- ---------- Income used in per share computation of earnings................. $ 21,274 $ (88,828) 38,771 $ (88,431) ========== ========== ========== ========== Basic and fully dilutive earnings per share...................... $ 0.24 $ (0.99) 0.43 $ (0.98) ========== ========== ========== ==========
EX-27.1 4 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 17,695 0 333,500 52,060 166,406 845,866 628,286 207,660 4,611,393 834,637 0 0 16,318 90,000 1,881,320 4,611,393 125,186 698,466 87,176 471,548 124,732 4,671 52,504 45,011 23,607 21,404 0 0 0 21,404 0.24 0.24
EX-27.2 5 FINANCIAL DATA SCHEDULE
5 0000042872 FRESENIUS MEDICAL CARE, INC. 1000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 17,695 0 333,500 52,060 166,406 845,866 628,286 207,660 4,611,393 834,637 0 0 16,318 90,000 1,881,320 4,611,393 243,869 1,370,606 168,800 921,980 243,677 19,729 102,630 82,590 43,559 39,031 0 0 0 39,031 0.43 0.43
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