-----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, I33/UL+RrUvUIpopJgd2RDG+pBXK+vM+tmZUehg+p742YecYbX+KfHbSBBwZo+be 90r8fh/UxpoaRwGuNr71NA== 0000950135-02-001821.txt : 20020415 0000950135-02-001821.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950135-02-001821 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRESENIUS MEDICAL CARE HOLDINGS INC /NY/ CENTRAL INDEX KEY: 0000042872 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 133461988 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03720 FILM NUMBER: 02596244 BUSINESS ADDRESS: STREET 1: TWO LEDGEMONT CENTER STREET 2: 95 HAYDEN AVE CITY: LEXINGTON STATE: MA ZIP: 02420 BUSINESS PHONE: 6174029000 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /NY/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FRESENIUS NATIONAL MEDICAL CARE HOLDINGS INC DATE OF NAME CHANGE: 19961015 10-K 1 b42238fme10-k.txt FRESENIUS MEDICAL CARE HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM_____ TO_____ . COMMISSION FILE NUMBER 1-3720 FRESENIUS MEDICAL CARE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-3461988 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) (JURISDICTION OF INCORPORATION OR ORGANIZATION) 95 HAYDEN AVE., LEXINGTON, MA 02420 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code: 781-402-9000 -------------- Securities registered pursuant to Section 12(b) of the Act: None ------ Securities registered pursuant to Section 12(g) of the Act: Class D Special Dividend Preferred Stock, par value $.10 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405). $1,603,122 March 26, 2002. 1 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of April 1, 2002, 90,000,000 shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Definitive Information Statement with respect to its 2001 Annual Meeting of Stockholders, to be filed on or before April 30, 2002. (Part III) 2 TABLE OF CONTENTS PART I Item 1. Business ............................................................4 Item 2. Properties .........................................................28 Item 3. Legal Proceedings...................................................29 Item 4. Submission of Matters to a Vote of Security Holders.................32 PART II .....................................................................32 Item 5. Market Price for Registrant's Common Equity and Related Stockholder Matters...............................................32 Item 6. Selected Financial Data.............................................33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................34 Item 7A. Quantitative and Qualitative Disclosures About Market Risks.........43 Item 8. Consolidated Financial Statements and Supplementary Data............45 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..........................................45 PART III ....................................................................45 Item 10. Directors and Executive Officers of the Registrant .................45 Item 11. Executive Compensation..............................................45 Item 12. Security Ownership of Certain Beneficial Owners and Management......45 Item 13. Certain Relationships and Related Transactions......................45 PART IV .....................................................................45 Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K...............................................46 3 PART I ITEM 1. BUSINESS This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of Fresenius Medical Care Holdings, Inc. (collectively with all its direct and indirect subsidiaries, the "Company"), government reimbursement, future plans and management's expectations regarding future performance. Actual results could differ materially from those contained in these forward-looking statements due to certain factors including, without limitation, changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, the realization of anticipated tax deductions, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this 2001 Form 10-K and in the Company's reports filed from time to time with the Securities and Exchange Commission (the "Commission") could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. Fresenius Medical Care Holdings, Inc., a New York corporation, is a subsidiary of Fresenius Medical Care AG, a German corporation ("FMC" or "Fresenius Medical Care"). The Company conducts its operations through five principal subsidiaries: National Medical Care, Inc. ("NMC"), Fresenius USA Marketing Inc.; Fresenius USA Manufacturing Inc.; and SRC Holding Company, Inc., all Delaware corporations and Fresenius USA Inc., a Massachusetts corporation. The Company is primarily engaged in (i) providing kidney dialysis services, and clinical laboratory testing services, and (ii) manufacturing and distributing products and equipment for dialysis treatment, which accounted for 87% and 13% of 2001 net revenues, respectively. - KIDNEY DIALYSIS AND OTHER SERVICES. The Company is the largest private provider in the U.S. of kidney dialysis and related services. At December 31, 2001, the Company owned 1,033 outpatient dialysis facilities in the U.S. (including Puerto Rico), treating approximately 76,600 chronic patients (26.7% of estimated U.S. patients). The Company operated or managed an additional 54 facilities treating approximately another 3,700 patients (1.3% of estimated U.S. patients). Collectively, these company-operated facilities treated 27.9% of the estimated dialysis patients in the U.S. The Company believes its next largest competitor treated approximately 14.6% of U.S. patients. Additionally, the Company provides inpatient dialysis services, therapeutic apheresis, hemoperfusion, and other services under contract to hospitals in the U.S. - DIALYSIS PRODUCTS. The Company manufactures a comprehensive line of dialysis products, including hemodialysis machines, peritoneal dialysis systems and disposable products. The Company manufactures innovative and technologically advanced products, including the Fresenius Polysulfone(TM) dialyzer, which the Company believes is the best-performing, mass-produced dialyzer on the market, and Delflex(R) peritoneal solutions with Safe-Lock(R) connectors. The Company's principal executive office is located at 95 Hayden Avenue, Lexington, MA 02420-9192. Its telephone number is (781) 402-9000. RENAL INDUSTRY OVERVIEW END-STAGE RENAL DISEASE End-stage renal disease ("ESRD") is the state of advanced chronic kidney disease that is characterized by the irreversible loss of kidney function and requires routine dialysis treatment or kidney transplantation to sustain life. A normally functioning human kidney removes waste products and excess water from the blood, preventing toxin buildup, eventual poisoning of the body and water overload. Chronic kidney disease can be caused by a number of conditions, primarily nephritis, inherited diseases, hypertension and diabetes. Nearly 60% of all people with ESRD acquire the disease as a complication of one or more of these primary conditions. Based on the most recent information published by the Center for Medicare & Medicaid Services ("CMS") of the Department of Health and Human Services ("HHS"), the number of patients in the U.S. who received chronic dialysis grew from approximately 66,000 in 1982 to approximately 273,300 at December 31, 2000 or at a compound annual rate of 8.2%. The Company attributes the continuing growth in the number of dialysis patients principally to an increase in general life 4 expectancy and, thus, the overall aging of the general population, the shortage of donor organs for kidney transplants, improved dialysis technology that has expanded the patient population able to undergo life prolonging dialysis and better treatment and survival of patients with hypertension, diabetes and other illnesses that lead to ESRD. Moreover, improved technology has enabled older patients and those who previously could not tolerate dialysis due to other illnesses to benefit from this life-prolonging treatment. There are currently only two methods for the treatment of ESRD: dialysis and kidney transplantation. Transplants are limited by the scarcity of compatible kidneys. Approximately 14,300 patients received kidney transplants in the U.S. during 2000. Therefore, most patients suffering from ESRD must rely on dialysis, which is the removal of toxic waste products and excess fluids from the body by artificial means. There are two major dialysis modalities commonly used today, hemodialysis and peritoneal dialysis. Generally, the method of treatment used by an ESRD patient is chosen by the physician in consultation with the patient, and is based on the patient's medical conditions and needs. According to CMS data, as of December 31, 2000, there were approximately 3,927 Medicare-certified dialysis treatment centers in the U.S. Ownership of these centers was fragmented. The Company estimates that at that time, the five largest multi-facility providers accounted for approximately 2,280 facilities (58% of facilities) and 174,000 patients (64% of patients). The remaining 36% of patients were divided among smaller multi-facility providers, freestanding facilities (many privately owned by physicians) and hospital-affiliated facilities. The Company believes that these proportions remained similar in 2001. The Company estimates that the five multi-center providers accounted for approximately 189,000 patients, or 66% of estimated U.S. patients at December 31, 2001. According to CMS, as of December 31, 2000, approximately 90% of dialysis patients in the U.S. received in-center treatment (virtually all hemodialysis) and approximately 10% were treated at home. Of those treated at home, more than 94% received peritoneal dialysis. TREATMENT OPTIONS FOR ESRD Hemodialysis. Hemodialysis removes waste products and excess fluids from the blood extracorporeally. In hemodialysis, the blood flows outside the body by means of plastic tubes known as bloodlines into a specially designed filter, a dialyzer, which functions as an artificial kidney by separating waste products and excess water from the blood by diffusion and ultrafiltration. Dialysis solution removes the waste products and excess water, and the cleansed blood is returned to the patient. The movement of the blood and dialysis solution is controlled by a hemodialysis machine, which pumps blood, adds anti-coagulants, regulates the purification process and controls the mixing of dialysis solution and the rate of its flow through the system. This machine may also monitor and record the patient's vital signs. According to CMS, as of December 31, 2000, hemodialysis patients represented 90% of all dialysis patients in the U.S. Hemodialysis treatments are generally administered to a patient three times per week and typically last from two and one-half to four hours or longer. The majority of hemodialysis patients are referred to outpatient dialysis centers, such as those operated by Fresenius Medical Care, where hemodialysis treatments are performed with the assistance of a nurse or dialysis technician under the general supervision of a physician. Peritoneal Dialysis. Peritoneal dialysis removes waste products and excess fluids from the blood by use of the peritoneum, the membrane lining covering the internal organs located in the abdominal area. Most peritoneal dialysis treatments are self-administered by patients in their own homes and workplaces, either by a treatment known as continuous ambulatory peritoneal dialysis ("CAPD") or by a treatment introduced by Fresenius USA in 1980 known as continuous cycling peritoneal dialysis ("CCPD"). In both of these treatments, the patient has a catheter surgically implanted to provide access to the peritoneal cavity. Using this catheter, a sterile dialysis solution is introduced into the peritoneal cavity and the peritoneum operates as the dialyzing membrane. A typical CAPD peritoneal dialysis program involves the introduction and disposal of solution four times a day. With CCPD a machine is used to "cycle" solution to and from the patient's peritoneum during sleep. In both CAPD and CCPD the patient undergoes dialysis daily, and typically does not experience the buildup of toxins and fluids experienced by hemodialysis patients on the days they are not treated. In addition, because the patient is not required to make frequent visits to a hemodialysis clinic, and because the solution exchanges can be accomplished at convenient (although more frequent) times, a patient on peritoneal dialysis may experience much less disruption to his or her life than a patient on hemodialysis. Certain aspects of peritoneal dialysis, however, limit its use as a long-term therapy for 5 some patients. First, certain patients cannot make the required sterile connections of the peritoneal dialysis tubing to the catheter, leading to excessive episodes of peritonitis, a bacterial infection of the peritoneum which can result in serious adverse health consequences, including death. Second, treatment by current forms of peritoneal dialysis may not be as effective as hemodialysis in removing wastes and fluids for some patients. STRATEGY The Company's objective is to focus on generating revenue growth that exceeds market growth of the dialysis industry, as measured by growth in patient population, while maintaining the Company's leading position in the market and increasing earnings at a faster pace than revenue growth. The Company's dialysis services and product businesses have grown faster than the market in terms of revenues over the past five years, and the Company believes that it is well positioned to continue this growth by focusing on the following strategies: - Continue to Provide High Standards of Patient Care. The Company believes that its reputation for providing high standards of patient care is a competitive advantage. The Company believes that NMC's proprietary Patient Statistical Profile ("PSP") database, which contains historical and current clinical and demographic data on more than 290,000 dialysis patients, is the most comprehensive body of information about dialysis patients in the world. The Company believes that this database provides a unique advantage in continuing to improve dialysis treatment outcomes, reduce mortality rates and improve the quality and effectiveness of dialysis products. By improving dialysis outcomes and overall ESRD patient care, the Company may be able to contain hospitalization and other costs of ESRD. - Expand Presence in the U.S. The Company intends to continue to take advantage of its reputation and market recognition by acquiring and establishing new dialysis clinics within attractive markets. The Company also expects to continue to enhance its presence in the U.S. by acquiring individual or small groups of dialysis clinics in selected markets, expanding existing clinics, and opening new clinics, although the Company will consider large acquisitions in the U.S. if suitable opportunities, such as Everest, become available to it. - Increase Spectrum of Dialysis Services. One of the Company's objectives is to continue to expand its role within the broad spectrum of services provided to dialysis patients. The Company has begun to implement this strategy by providing expanded and enhanced patient services, including laboratory services, to both its own clinics and those operated by third parties. The Company estimates that Spectra Renal Management provides laboratory services for 40% of the ESRD patients in the United States. The Company has developed disease state management methodologies which involve total patient care for ESRD patients, that it believes are attractive to managed care payors. The Company has formed Optimal Renal Care, LLC, a joint venture with Permanente Medical Group of Southern California, a subsidiary of Kaiser Permanente which has the largest dialysis patient population of any managed care organization. The Company expects that Optimal Renal Care will double its patient volume in 2002. Optimal Renal Care is expanding its focus to offer services to a wider range of chronic kidney disease patients, which includes more mild impairment of renal function. The Company has also formed Renaissance Health Care as a joint venture with participating nephrologists. Renaissance is currently contracted with 16 health plans, in 13 states. The Company provides ESRD and Chronic Kidney Disease programs to more than 3,000 patients. 6 - Continue to Offer Complete Dialysis Product Lines. The Company offers broad and competitive hemodialysis and peritoneal dialysis product lines. These product lines enjoy broad market acceptance and enable customers to purchase all of their dialysis machines, systems and disposable products from a single source. During the year ended December 31, 2001 the Company's product revenues were derived approximately 23% from machine sales and 77% from sales of disposable products. These disposable products provide a continuing source of revenue from our installed base of dialysis equipment. - Extend Our Position as an Innovator in Product and Process Technology. The Company is committed to technological leadership in both hemodialysis and peritoneal dialysis products. FMC has a global research and development team with approximately 220 members focused on developing dialysis systems that are safer, more effective and easier to use and that can be easily customized to meet the differing needs of customers around the world. The Company believes that its extensive expertise in patient treatment and clinical data will further enhance its ability to develop more effective products and treatment methodologies. The Company's ability to manufacture dialysis products on a cost-effective and competitive basis results in large part from our process technologies. Over the past several years, the Company has reduced manufacturing costs per unit through development of proprietary manufacturing technologies that have streamlined and automated its production processes. Fresenius Medical Care intends to further improve its proprietary, highly automated manufacturing system to further reduce product manufacturing costs, while continuing to achieve a high level of quality control and reliability. - Expand into Related Services. In 2001, Fresenius Medical Care Cardiovascular Resources Holdings ("FMC-CVR"), in which the Company has 45% equity, purchased Edwards Lifesciences Cardiovascular Resources Inc. a leading provider of perfusion and related cardiovascular services. The addition of this business provides a strong nationwide platform for expansion and innovation in the extracorporeal service business which compliments our extracorporeal dialysis service business well. For a description of other elements of the Company's strategy see "--Dialysis Services" and "--Dialysis Products Business." For additional information in respect to the Company's industry segments, see Notes to Consolidated Financial Statements - Note 18, "Industry Segments and Information about Foreign Operations." DIALYSIS SERVICES OVERVIEW The Company is the largest provider in the U.S. of kidney dialysis and related services to patients suffering from chronic kidney disease. The Company also provides clinical laboratory testing services for dialysis patients (Company owned and non-Company owned clinics). The Company's provider business is primarily operated through the Dialysis Services business unit ("Dialysis Services"). Clinical laboratory testing services are primarily provided by Spectra Renal Management ("SRM") DIALYSIS SERVICES As of December 31, 2001, the Company owned 1,033 dialysis centers in the U.S. The centers are generally concentrated in areas of high population density. In 2001, the Company acquired 64 existing centers, developed 58 new centers and consolidated or sold 10 centers. The number of patients treated at the Company's centers has increased from approximately 68,000 at December 31, 2000 to approximately 76,600 at December 31, 2001. With the Company's large patient population, it has developed the PSP database which enables it to improve dialysis treatment outcomes, and improve the quality and effectiveness of dialysis products, resulting in reduced mortality rates. In addition to the Company's patient database, it believes that local physicians, hospitals and managed care plans refer their ESRD patients to its clinics for treatment due to: - its reputation for quality patient care and treatment; 7 - its extensive network of dialysis clinics, which enables physicians to refer their patients to conveniently located clinics; and - its reputation for technologically advanced products for dialysis treatment. The Company treats approximately 26.7% of the dialysis patients in the U.S., and based on publicly available reports, the Company believes its next largest competitor treats approximately 14.6% of U.S. dialysis patients. For the year 2001, dialysis services accounted for 87% of its total revenue. At the Company's centers, hemodialysis treatments are provided at individual "stations" through the use of dialysis machines. A nurse or dialysis technician attaches the necessary tubing to the patient and monitors the dialysis equipment and the patient's vital signs. The capacity of a center is a function of the number of stations and such factors as the type of treatment, patient requirements, length of time per treatment and local operating practices and ordinances regulating hours of operation. Most of the Company's centers operate two or three patient shifts per day. Each of the Company's dialysis centers is under the general supervision of a medical director ("Medical Director") and, in some cases, one or more Associate Medical Directors, who are physicians. See "Patient, Physician and Other Relationships." Each dialysis center also has an administrator or clinic manager who supervises the day-to-day operations of the facility and the staff. The staff typically consists of registered nurses, licensed practical nurses, patient care technicians, a social worker, a registered dietician, a unit clerk and biomedical technicians. As part of the dialysis therapy, the Company provides various related services to ESRD patients in the U.S. at its dialysis centers, including the administration of erythropoietin ("EPO"), a bioengineered protein that stimulates the production of red blood cells. EPO is used to treat anemia, a medical complication frequently experienced by ESRD patients, and is administered to most of the Company's patients. EPO is produced by a single source manufacturer, Amgen Inc., and any interruption of supply could materially adversely affect the Company's business and results of operations. The Company's current contract with Amgen Inc. covers the period from January 2002 to December 2003 with price guarantees and volume and outcome based discounts. The Company's centers also offer services for home dialysis patients, the majority of whom are treated with peritoneal dialysis. For such patients, the Company' provides certain materials, training and patient support services, including clinical monitoring, supply of EPO, follow-up assistance and arrangements for the delivery of the supplies to the patient's residence. See "--Regulatory and Legal Matters-- Reimbursement" and "--Legal Proceedings" for a discussion of billing for such products and services. The manner in which each center conducts its business is dependent, in large part, upon applicable laws, rules and regulations of the jurisdiction in which the center is located, as well as the Company's clinical policies. However, a patient's attending physician (who may be the center's Medical Director or an unaffiliated physician with staff privileges at the center) has medical discretion as to the particular treatment modality and medications to be prescribed for that patient. Similarly, the attending physician has discretion in selecting the particular medical products prescribed, although all supplies and equipment, regardless of brand, are typically purchased by the center in consultation with the medical director through the Company's central purchasing operations. The Company also provides dialysis services under contract to hospitals in the U.S. on an "as needed" basis for patients suffering from acute kidney failure and for ESRD patients who are hospitalized. The Company services these patients either at their bedside, using portable dialysis equipment, or at a dialysis site maintained by the hospital. Contracts with hospitals generally provide for payment at negotiated rates that are higher than the Medicare reimbursement rates for chronic in-center treatments. 8 ACQUISITIONS The Company's growth in revenues and operating earnings in prior years has resulted, in significant part, from its ability to effect acquisitions of health care businesses, particularly dialysis centers, on reasonable terms. In the U.S., owners may be motivated to sell their centers to obtain relief from day-to-day administrative responsibilities and changing governmental regulations, to focus on patient care and to realize a return on their investment. While price is typically the key factor in securing acquisitions, the Company believes that it will be an attractive acquirer or partner to many dialysis center owners due to its reputation for patient treatment, its proprietary PSP database (which contains clinical and demographic data on approximately 88,700 dialysis patients), its comprehensive clinical and administrative systems, manuals and policies, its ability to provide ancillary services to dialysis centers and patients and its reputation for technologically advanced products. The Company believes that these factors will also be advantages when opening new centers. The Company paid aggregate consideration, consisting of both cash and FMC preference shares, for acquisitions of new clinics of approximately $388 million in 2001 and approximately $116 million in 2000. On January 8, 2001, the Company acquired Everest Healthcare Services Corporation through a merger of Everest into a subsidiary of Fresenius Medical Care at a purchase price of $365 million. Approximately $99 million was funded by the issuance of 2.25 million preference shares to Everest shareholders. The remaining purchase price was paid with cash of $266 million including assumed debt. Everest owns, operates or manages approximately 70 clinic facilities providing therapy to approximately 6,800 patients in the eastern and central United States. Everest also conducts extracorporeal blood services and acute dialysis businesses which provide acute dialysis, apheresis and hemoperfusion services to approximately 100 hospitals. The Company also expects to continue to enhance its presence in the U.S. by acquiring individual or small groups of dialysis clinics in selected markets, expanding existing clinics, and opening new clinics, although it will consider large acquisitions in the U.S. if suitable opportunities, such as Everest, become available to the Company. The U.S. health care industry has experienced significant consolidation in recent years, particularly in the dialysis service sectors in which the Company competes, resulting, in some cases, in increased costs of acquisitions in these sectors. Moreover, because of the ongoing consolidation in the dialysis services industry, the availability of acquisitions may decrease. The Company's ability to make acquisitions also will depend, in part, on the Company's available financial resources and the limitations imposed under two credit facilities (collectively, "the NMC Credit Facilities"). See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources." The inability of the Company to continue to effect acquisitions in the provider business on reasonable terms could have an adverse impact on growth in its business and on its results of operations. The Company regularly evaluates and explores opportunities with various other health care companies and other businesses regarding acquisitions and joint business ventures. In 2001, the Company completed new acquisitions and acquisitions of previously managed clinics totaling 64 dialysis facilities in the U.S. providing care to approximately 6,270 patients. These acquisitions and agreements expand the Company's presence in selected key areas of the United States. QUALITY ASSURANCE IN DIALYSIS CARE At each of the Company's dialysis clinics, a quality assurance committee is responsible for reviewing quality of care reports that the PSP database generates, setting goals for quality enhancement and monitoring the progress of quality assurance initiatives. The Company believes that it enjoys a reputation of providing high quality care to dialysis patients. In 2001, the Company continued to develop and implement programs to assist in achieving its quality goals. The Company's Access Intervention Management Program ("AIM"), started in 2001, detects and corrects arteriovenous access failure in hemodialysis treatment, which is the major cause of hospitalization and morbidity. The Company's PD Services program, a regionalization program to enhance peritoneal dialysis services, has expanded from six regions in 2000 to seventeen at the end of 2001. Kidney Options, a pre-ESRD program to educate patients about prevention, slowing kidney failure and treatment options has been highly successful, with its website generating over 900,000 hits since its inception in October of 2000. PATIENT DATA COLLECTION AND ANALYSIS The Company engages in systematic efforts to measure, maintain and improve the quality of the services at its dialysis clinics. Each clinic collects and analyzes quality assurance and patient data, which its division and corporate management regularly reviews. 9 The Company's clinical laboratory results have been a critical element in the development of its proprietary PSP database, which contains historical and current clinical, laboratory and demographic data on over 290,000 dialysis patients in the U.S. The Company uses this database to assist physicians in providing quality care to dialysis patients. In addition, its PSP database is a key resource in ongoing research, both within the Company and at outside research institutions, to decrease mortality rates among dialysis patients and improve their quality of life. SOURCES OF DIALYSIS SERVICES NET REVENUES The following table provides information for the periods indicated regarding the percentage of the Company's U.S. dialysis treatment services net revenues provided by (a) the Medicare ESRD program, (b) private/alternative payors, such as commercial insurance and private funds, (c) Medicaid and other government sources and (d) hospitals. YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 ----- ----- ----- Medicare ESRD program 59.7% 59.1% 60.2% Private/alternative payors 31.2 32.1 30.3 Medicaid and other government 4.6 4.2 4.2 sources 4.5 4.6 5.3 Hospitals ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== Under the Medicare ESRD program, Medicare reimburses dialysis providers for the treatment of certain individuals who are diagnosed as having ESRD, regardless of age or financial circumstances. When Medicare assumes responsibility as the primary payor, it pays for dialysis and certain specified related services at 80% of the payment methodology commonly referred to as the composite rate method ("Composite Rate"). In addition, subject to various restrictions and co-payment limitations, Medicare pays separately for certain dialysis-related and therapeutic services not included in the Composite Rate. A secondary payor, usually a Medicare supplemental insurer, a state Medicaid program or, to a lesser extent, the patient or the patient's private insurer, is responsible for paying any co-payment (typically 20%), other approved services not paid by Medicare and the annual deductible. Most of the states in which the Company currently operates dialysis centers provide Medicaid benefits to qualified recipients to supplement their Medicare entitlement. Prior to the time at which Medicare becomes the primary payor, most dialysis treatments are paid for by another third-party payor, such as the patient's private insurer, or by the patient. ESRD patients under age 65 who are covered by an employer health plan must wait 33 months (consisting of a three-month entitlement waiting period and an additional 30-month "coordination of benefits period") before Medicare becomes the primary payor. During this 33-month period, the employer health plan is responsible for payment as primary payor at its negotiated rate or, in the absence of such a rate, at the Company's usual and customary rates (which generally are higher than the rates paid by governmental payors, such as Medicare), and Medicare is the secondary payor. See "--Regulatory and Legal Matters--Reimbursement." A significant portion of the Company's revenues for dialysis services are derived from reimbursement provided by non-governmental third-party payors. A substantial portion of third-party health insurance in the U.S. is now furnished through some type of managed care plan, including health maintenance organizations ("HMOs"). Non-governmental payors generally reimburse for dialysis treatments at higher rates than governmental payors such as Medicare. However, managed care plans have been more aggressive in selectively contracting with a smaller number of providers willing to furnish services for lower rates and subject to a variety of service restrictions. For example, managed care plans and traditional indemnity third-party payors increasingly are demanding alternative fee structures, such as capitation arrangements whereby a provider receives a fixed payment per month per enrollee and bears the risk of loss if the costs of treating such enrollee exceed the capitation payment. These market forces have resulted in pressures to reduce the reimbursement the Company receives for its services and products. The Company's ability to secure rates with indemnity and managed care plans has largely been due to the relatively small number of ESRD patients which any single HMO has enrolled. By regulation, ESRD patients have been prohibited from joining an HMO unless they are otherwise eligible for Medicare coverage, due to age or disability, and are members of a managed care plan when they first experience kidney failure. CMS has a pilot evaluation underway for treatment of Medicare ESRD patients by managed care companies under capitated contracts. If successful, this pilot program could result in the elimination of the regulation that precludes ESRD patients from enrolling in managed care organizations. If Medicare HMO enrollments increase and the number of ESRD patients in managed care plans also increases, managed care plans' leverage to negotiate lower rates or reduce services provided by the Company may become greater. In addition, the HMO 10 may have contracted with another provider, or may have stricter controls on access the certain ancillary services that we typically provide to ESRD patients. Any of the developments could limit the Company's future reimbursement for services. The Company has formed two joint ventures seeking to contract "at risk" with managed care organizations for the care of ESRD patients. Renaissance Health Care, Inc. is a joint venture between the Company and participating nephrologists throughout the U.S. Optimal Renal Care, LLC is a joint venture between Permanente Medical Group of Southern California, a subsidiary of Kaiser Permanente and the Company. As managed care programs expand market share and gain greater bargaining power vis-a-vis health care providers, there will be increasing pressure to reduce the amounts paid for services and products furnished by the Company. These trends would be accelerated if future changes to the Medicare ESRD program require private payors to assume a greater percentage of the cost of care given to dialysis patients. The Company is presently seeking to expand the portion of its revenues attributable to non-governmental private payors. However, the Company believes that the historically higher rates of reimbursement paid by non-governmental payors may not be maintained at such levels. If substantially more patients of the Company join managed care plans or such plans reduce reimbursements to the Company, the Company's business and results of operations could be adversely affected, possibly materially. See "--Regulatory and Legal Matters--Reimbursement," "--Anti-Kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse Laws--Changes in the Health Care Industry. PATIENT, PHYSICIAN AND OTHER RELATIONSHIPS The Company believes that its success in establishing and maintaining dialysis centers, in the U.S. depends in significant part upon its ability to obtain the acceptance of, and referrals from, local physicians, hospitals and managed care plans. A dialysis patient generally seeks treatment at a center that is convenient to the patient and at which the patient's nephrologist has staff privileges. Virtually all of the Company's clinics maintain open staff privileges for local nephrologists. The Company's ability to provide quality dialysis care and otherwise to meet the needs of local patients and physicians is central to its ability to attract nephrologists to the Company's centers and to receive referrals from such physicians. See "--Anti- kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse Laws." The conditions for coverage under the Medicare ESRD program require that treatment at a dialysis center be under the general supervision of a Medical Director. Generally, the Medical Director must be board certified or board eligible in internal medicine and have at least 12 months of training or experience in the care of patients at ESRD centers. The Company's Medical Directors maintain their own private practices. The Company has written agreements with the physicians who serve as Medical Directors at its centers. The Medical Director agreements entered into by the Company generally have terms of three years, although some have terms of as long as five to ten years. The compensation of Medical Directors and other physicians under contract with the Company is individually negotiated and generally depends upon competitive factors in the local market, the physician's professional qualifications, experience and responsibilities and the size of and services provided by the center. The aggregate compensation of the Medical Directors and other physicians under contract is fixed in advance for a period of one year or more and is based in part on various efficiency and quality incentives. The Company believes that compensation is paid at fair market value. Virtually all of the Medical Director agreements, as well as the typical contract under which the Company acquires existing dialysis centers, include noncompetition covenants covering specified activities within specified geographic areas for specified periods of time, although they do not prohibit the physicians from providing direct patient care services at other locations and, consistent with law, do not require a physician to refer patients to the Company or particular centers or to buy or use specific medical products. In certain states, non-competition covenants may not be enforceable. COMPETITION Dialysis Services. The dialysis services industry is highly competitive. Ownership of dialysis centers in the U.S. is fragmented, with a large number of operators each owning 10 or fewer centers and a small number of larger providers, the largest of which is the Company. Consolidation of the industry has been ongoing over the last decade. In urban areas, where many of the Company's dialysis centers are located, there frequently are many competing centers in proximity to the Company's centers. The Company experiences direct competition from time to time from former Medical Directors, former employees or referring physicians who establish their own centers. Furthermore, other health care providers or product 11 manufactures, some of which have significant operations or resources, may decide to enter the dialysis services business in the future. Because services to the majority of patients in the U.S. are primarily reimbursed under government programs, competition for patients is based primarily on quality and accessibility of service and the ability to obtain referrals from physicians and hospitals. However, extension of periods during which commercial insurers are primarily responsible for reimbursement and the growth of managed care has placed greater emphasis on service costs. The Company believes that it competes effectively in all of these areas. In particular, based upon the Company's knowledge and understanding of other providers of dialysis treatments, as well as from information obtained from publicly available sources, the Company believes that it is among the most cost-efficient providers of kidney dialysis services. In addition, as a result of its large size relative to most other dialysis service providers, the Company enjoys economies of scale in areas such as purchasing, billing, collections and data processing. LABORATORY SERVICES The Company provides clinical laboratory testing services through its business unit known as Spectra Renal Management ("SRM"). SRM is the leading U.S. dialysis clinical laboratory providing blood, urine and other bodily fluid testing services to assist physicians in determining whether a dialysis patient's therapy regimen, diet and medicines remain optimal. SRM laboratories are located in New Jersey and Northern California. In 2001, SRM performed over 34 million tests for more than 100,000 dialysis patients across the United States. SRM also provided testing services to clinical research projects and others. The Company plans to expand SRM into related markets such as hospital dialysis units and physician office practices to offer assistance with the pre-ESRD patient base. The Company's clinical laboratory results have been a critical element in the development of the Company's proprietary PSP database, which contains historical & current clinical, laboratory and demographic data on more than 290,000 dialysis patients. The Company uses PSP to assist physicians in providing quality care to dialysis patients. In addition, PSP is a key resource in ongoing research, both within the Company and at outside research institutions, to decrease mortality rates among dialysis patients and improve their quality of life. COMPETITION SRM competes in the U.S. with large nationwide laboratories, dedicated dialysis laboratories and numerous local and regional laboratories, including hospital laboratories. In the laboratory services market, companies compete on the basis of performance, including quality of laboratory testing, timeliness of reporting test results and cost-effectiveness. The Company believes that SRM's services are competitive in these areas. 12 DIALYSIS PRODUCTS The Company manufactures and distributes equipment and disposable products for the treatment of kidney failure using both hemodialysis and peritoneal dialysis. Such products include hemodialysis machines, peritoneal dialysis cyclers and related equipment, dialyzers, peritoneal dialysis solutions in flexible plastic bags, hemodialysis concentrates and solutions, granulate mixes, bloodlines, disposable tubing assemblies and equipment for water treatment in dialysis centers. Other products manufactured by third parties and distributed by the Company include dialyzers, special blood access needles, heparin (used to prevent blood clotting) and commodity supplies such as bandages, clamps and syringes. OVERVIEW The following table shows for 2001, 2000 and 1999 actual net revenues of the Company's products business related to hemodialysis products, peritoneal dialysis products and other activities, principally technical service:
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) ----------------------------------------------------------------- 2001 2000 1999 -------------------- ------------------- ------------------- Total % of Total % of Total % of Revenues Total Revenues Total Revenues Total -------- -------- -------- -------- -------- -------- Hemodialysis Products $340,841 71% $334,447 70% $329,561 67% Peritoneal Dialysis Products 83,653 18 90,985 19 105,096 21 Other 53,324 11 54,635 11 56,254 12 -------- -------- -------- -------- -------- -------- Total $477,818 100% $480,067 100% $490,911 100% ======== ======== ======== ======== ======== ========
HEMODIALYSIS PRODUCTS The Company believes that it is a leader in the hemodialysis product field and continually strives to extend and improve the capabilities of its hemodialysis systems to offer an advanced treatment mode at reasonable cost. The Company, through its Dialysis Products business unit ("Dialysis Products"), offers a comprehensive hemodialysis product line, consisting of hemodialysis machines, modular accessories for dialysis machines, polysulfone dialyzers, bloodlines, dialysis solutions and concentrates, fistula needles, connectors, data management systems, machines and supplies for the reuse of dialyzers. Dialysis Machines. The Company assembles, tests and calibrates hemodialysis machines and sells these machines in the U.S., Canada and Mexico. Components for these machines are provided by Fresenius Medical Care and other suppliers. FMC introduced its first dialysis machine in 1980, and their dialysis machines are currently in their fifth generation of development. The Company sells its dialysis machines as Series 2008H and 2008K models in the U.S. The Company's dialysis machines offer the following features and advantages: - Volumetric dialysate balancing and ultrafiltration control system. This system, was introduced in 1977, provides for safe and more efficient use of highly permeable dialyzers, permitting faster dialysis with controlled rates of fluid removal; - Proven hydraulic systems, providing reliable operation and servicing flexibility; - Compatibility with all manufacturers' dialyzers and a wide variety of blood-lines and dialysis solutions, permitting maximum flexibility in both treatment and disposable products usage; - Modular design, which permits us to offer dialysis clinics a broad range of options to meet specific patient or regional treatment requirements. Modular design also allows upgrading through module substitution without the need to replace the entire machine; - Additional modules that provide monitoring and response capability for selected bio-physical patient parameters, such as body temperature, relative blood volume and electrolyte balances. This concept, known as physiological dialysis, permits hemodialysis treatments with lower incidence of a variety of symptoms or side effects, which still occur frequently in standard hemodialysis. Our most recent module, the Blood Volume Monitor(TM) controls removal of excess fluid from the patient; 13 - Sophisticated microprocessor controls, and display and readout panels that are adaptable to meet local language requirements; - Battery backup, which continues operation of the blood circuit and all protective systems for 15 to 20 minutes following a power failure; - Online clearance, measurement of dialyzer clearance for quality assurance with the On-Line Clearance Module, providing immediate effective clearance information, real time treatment outcome monitoring, and therapy adjustment during dialysis without requiring invasive procedures or blood samples; - On-line data collection capabilities and computer interfacing with our Hypercare module and FDS08(R) system. Our machines can: - monitor and assess prescribed therapy; - connect a large number of hemodialysis machines and peripheral devices, such as patient scales, blood chemistry analyzers and blood pressure monitors, to a personal computer network; - enter nursing records automatically at bedside to register and document patient treatment records, facilitate billing, and improve record-keeping and staff efficiency; - adapt to new data processing devices and trends; - perform home hemodialysis with remote monitoring by a staff caregiver; and - record and analyze trends in medical outcome factors in hemodialysis patients; and Dialyzers. The Company manufactures dialyzers using hollow fiber polysulfone membranes, a synthetic material. FMC is the leading worldwide producer of polysulfone dialyzers. While competitors currently sell polysulfone membranes in the market, FMC developed and is the only manufacturer with more than 15 years' experience in applying the technology required to mass produce polysulfone membranes. FMC believes that polysulfone offers the following superior performance characteristics compared to other materials used in dialyzers: - higher biological compatibility, resulting in reduced incidence of adverse reactions to the fibers; - greater capacity to clear uremic toxins from patient blood during dialysis, permitting more thorough, more rapid dialysis, resulting in shorter treatment time; and - a complete range of permeability, or membrane pore size, which permits dialysis at prescribed rates -- high flux, medium flux and low flux, as well as ultra flux for acute dialysis, and allows tailoring of dialysis therapy to individual patients. FMC's full line of polysulfone dialyzers includes the new F Series Optiflux family as well as the traditional reuse and non-reuse dialyzers. Single use dialyzers are becoming more popular, and the Company has increased production of single-use dialyzers at its Ogden, Utah facility to meet demand for these products. Other Hemodialysis Products. The Company manufactures and distributes arterial, venous, single needle and pediatric bloodlines. The Company produces both liquid and dry dialysate concentrates. Liquid dialysate concentrate is mixed with purified water by the hemodialysis machine to produce dialysis solution, which is used in hemodialysis treatment to remove the waste products and excess water from the patient's blood. Dry acid concentrate requires less storage space. The Company also produces dialysis solutions in bags, including solutions for priming and rinsing hemodialysis bloodlines, as well as connection systems for central concentrate supplies and devices for mixing dialysis solutions and supplying them to hemodialysis machines. Other distributed products include solutions for priming bloodlines, disinfecting and decalcifying hemodialysis machines, fistula needles, hemodialysis catheters, and products for acute renal treatment. 14 PERITONEAL DIALYSIS PRODUCTS The Company offers a full line of peritoneal dialysis products. The Company manufactures peritoneal dialysis solutions in bags, peritoneal dialysis cycling machines for CCPD and disposable products for both CAPD and CCPD, such as tubing, sterile solutions and sterile kits to prepare patients for dialysis. CAPD Systems. The Company manufactures standard and specialized peritoneal dialysis solutions. The Company believes that its peritoneal dialysis products offer significant advantages for CAPD, including: - ease of use and greater protection against contamination by touch than other peritoneal dialysis systems presently available. Its products incorporate our Safe-Lock(R) connection system for introducing and draining dialysis solution into and from the abdominal cavity, using the same bag for introduction and drainage; - Safe-Lock(R) products may be used only by peritoneal dialysis patients whose catheters include the Safe-Lock connector, which attaches to a solution bag fitted with the other part. The Company also manufactures the Premier Plus twin bag CAPD system. This system comprises a single product, the Delflex(R) solution bag and the tubing and drainage set necessary for CAPD exchanges. The Premier Plus twin bag system also utilizes Safe-Lock(R) connectors and, because fewer connections are required, may help to reduce patient complications associated with peritoneal dialysis therapy. The Premier Plus twin bag system offers the physician the ability to prescribe larger dosages without requiring the patient to do more exchanges during the day. CCPD Products. The Company introduced the first peritoneal dialysis cycler machine in 1980. The Company believes that CCPD therapy offers benefits over CAPD therapy for patients who need more therapy due to body size, ultrafiltration loss or other reasons. In a standard CAPD program, a patient manually introduces two liters of fresh peritoneal dialysis solution and drains the used solution four times over a 24-hour period. Treatment occurs seven days per week and the patient must perform the treatment while awake. With CCPD therapy, the cycler automatically delivers a prescribed volume of dialysis solution into the peritoneal cavity through an implanted catheter, allows the solution to dwell for a specified time, and completes the process by draining the solution. CCPD therapy offers the following benefits over CAPD: - Solution exchanges take place automatically, which may reduce the risk of peritonitis due to less frequent handling of the catheter and connections; 15 - The patient can cycle at home, throughout the night while asleep. The patient has complete daytime freedom, wearing only the surgically implanted catheter and capping device; and - CCPD delivers more effective therapy than CAPD due to the supine position of the patient during the night, higher volume exchanges and preferable cycle management. The Company cycling equipment incorporates microprocessor technology, and the patient, hospital or clinic staff can easily program it to perform specific prescribed therapy for a given patient. Since all components are monitored and programmable, these machines allow the physician to prescribe any of a number of current therapy procedures. Our CCPD products and therapies include: - PD-PLUS(R), a variant on CCPD therapy the Company introduced in 1994. PD-PLUS(R)therapy provides a more tailored therapy than regular CCPD using a simpler nighttime cycler and, where necessary, includes one manual dialysis solution exchange during the day. The Company believes that PD-PLUS(R)therapy is less costly and easier to administer than typical CCPD. The Company also believes that PD-PLUS(R)therapy improves toxin removal by more than 40% compared to CAPD. By increasing the effectiveness of peritoneal dialysis treatments, PD-PLUS(R)may also effectively prolong the time period during which a patient will be able to remain on peritoneal dialysis before requiring hemodialysis. PD-PLUS(R)therapy can only be performed using the Fresenius Freedom(TM) Cycler and special tubing using Safe-Lock(R)connectors; and - IQcard(TM), for use with the Freedom TM Cycler PD-PLUS(R) to monitor CCPD therapy for a full treatment history and improved therapy compliance. Other Peritoneal Dialysis Products. The Company also manufactures and distributes pediatric treatment systems for administration of low volumes of dialysis solutions, assist devices to facilitate automated bag exchange for handicapped patients, catheters, catheter implantation instruments, silicon glue, Pack-PD(TM) (a computer program which analyzes patient and peritoneal characteristics to present a range of treatment options for individual therapies), disinfectants, bag heating plates, adapters, and products to assist and enhance connector sterility. The Company also provides scientific and patient information products, including support materials, such as brochures, slides, videos, instructional posters and training manuals. New Peritoneal Dialysis Products. The Company has introduced the IQcard(TM) system which has been developed to monitor patient compliance in Automated Peritoneal Dialysis Therapy. The IQcard is used with the Freedom(TM) Cycler PD+ to monitor the delivered dose of APD Therapy and record a full treatment history for each patient. It is estimated that patient non-compliance with prescribed Peritoneal Dialysis Therapy varies from 11% to 80%. Lack of compliance may be the most significant cause of inadequate dialysis and poor clinical outcomes. With IQcard, the physician has a tool for assessing patient compliance and making adjustments to the prescription as necessary to meet therapy goals. MARKETING, DISTRIBUTION AND SERVICE Most of the Company's products are sold to hospitals, clinics and specialized treatment centers. With its comprehensive product line and years of experience in dialysis, the Company believes that it has been able to establish and maintain very close relationships with its clinic customer base. Close interaction among the Company's sales force and FMC research and development personnel enables concepts and ideas that develop in the field to be considered and integrated into product development. The Company maintains a direct sales force of trained salespersons engaged in the sale of both hemodialysis and peritoneal dialysis products. This sales force engages in direct promotional efforts, including visits to physicians, clinical specialists, hospitals, clinics and dialysis centers, and represents the Company at industry trade shows. The Company also sponsors medical conferences and scientific symposia as a means for disseminating product information. The sales force is assisted by clinical nurses who provide clinical support, training and assistance to customers. 16 The Company offers customer service, training and education, and technical support such as field service, spare parts, repair shops, maintenance, and warranty regulation. The Company also provides training sessions on the Company's equipment. The Company provides supportive literature on the benefits of its core business products. The Company's management believes its service organizations have a reputation for reliability and high quality service. MANUFACTURING OPERATIONS The Company assembles, tests, and calibrates equipment, including hemodialysis machines, dialyzer reuse devices and peritoneal dialysis cyclers, at its facility in Walnut Creek, California. Components of the Company's hemodialysis machines are supplied by FMC as well as other suppliers. The Company has experienced no difficulties in obtaining sufficient quantities of such components. In connection with the sale and installation of the machines, Company technicians and engineers calibrate the machines and add computer software for record keeping and monitoring. The Company owns an approximately 600,000 square-foot facility in Ogden, Utah which operates as a fully integrated manufacturing and research and development facility for polysulfone dialyzers and peritoneal dialysis solutions. This facility uses automated equipment for the production of polysulfone dialyzers and sterile solutions in flexible plastic containers. The Company believes that it is the principal manufacturer of polysulfone dialyzers in the U.S. While the Company obtains the film used in the manufacture of its plastic bags used with its peritoneal solutions from one supplier located in the Netherlands, the Company believes that there are readily available alternative sources of supply for which the FDA could grant expedited approval. The Company also manufactures dialysis products at additional plants in the U.S. Bloodlines and PD sets are produced at a facility in Reynosa, Mexico, and concentrates are produced at five facilities in the U.S. Each step in the manufacture of the Company's products, from the initial processing of raw materials through the final packaging of the completed product, is carried out under controlled quality assurance procedures required by law and under Good Manufacturing Practices ("GMP"), as well as under comprehensive quality management systems, such as the internationally recognized ISO 9000-9004 and CE Mark standards, which are mandated by regulatory authorities in the countries in which the Company operates. The facilities in Ogden, Utah and Reynosa, Mexico received ISO 9001 certification in 1999. The facility in Walnut Creek, California received ISO 9001 certification in 2000. The Company is expanding its manufacturing capacity substantially. During the first quarter of 2001, the Company started with the increase in dialyzer production capacity at its Ogden, Utah manufacturing facility, where the Company also produces peritoneal dialysis solutions and dry concentrates. Dialyzer production capacity will be increased by 200% over the next 24 months in order to accommodate the continuous trend towards single-use dialyzers in the U.S. In 2001, the single-use high performance Optiflux(TM) series dialyzer was introduced. Optiflux(TM) polysulfone fibers are engineered to deliver superior small (urea) and middle molecular weight solute clearance coupled with superior membrane composition and biocompatibility. Fresenius Medical Care's polysulfone dialyzer production technology is developed to allow segmentation and selection of portions of the technology to be implemented on a regional basis depending on the market needs with minimal redundant capital. Demand for this dialyzer was strong during 2001. It accounted for 18% of the dialyzers we sold in the United States during the fourth quarter of 2001. Construction of the liquid concentrate manufacturing facility in Irving, Texas was completed in 2001. In addition, the Company increased production capacity for dry concentrate in its Perrysburg, Ohio facility. With these additions the Company now can achieve greater distribution efficiencies for the concentrate products in the U.S. In December 2001, the Mexican Reynosa manufacturing bloodline facility was awarded the State Secretary of Health Recognition Award for outstanding support of the Reynosa Regional General Hospital, which serves a population of 1 million in the state of Tamaulipas, Mexico. SOURCES OF SUPPLY Raw materials essential to the Company's dialysis products business are purchased worldwide from numerous suppliers and no serious shortages or delays in obtaining raw materials have been encountered. To assure continuous high quality, FMC has single supplier agreements for many of its polymers, including polysulfone, polyvinylpyrrolidone, and polyurethane for dialyzer production, and for certain other raw materials. Wherever single supplier agreements exist, the Company believes 17 alternative suppliers are available. However, use of raw materials obtained from alternative suppliers could cause costs to rise due to necessary adjustments in the production process or interruptions in supply. Incoming raw materials for solutions undergo tests, such as, infrared, ultraviolet and physical and chemical analyses to assure quality and consistency. During the production cycle, sampling and testing take place in accordance with established quality assurance procedures to ensure the finished product's sterility, safety and potency. Pressure, temperature and time for various processes are monitored to assure consistency of semi-finished goods. Environmental conditions are monitored to assure that particulate and bacteriological levels do not exceed specified maximums. The Company maintains continuing quality control and Good Manufacturing Policies education and training programs for its employees. See "Regulatory and Legal Matters." The Company obtains bloodlines under an agreement with Medisystems Corporation as a secondary source of supply to the Company's self manufactured bloodlines from Reynosa, Mexico. The agreement expires in 2002. ENVIRONMENTAL MANAGEMENT The Company's vision to innovate for a better life also extends to our daily efforts to preserve nature and its resources for the benefit of both present and future generations. The Company plans to achieve environmental certification. With this in mind, the Company will continually intensify its waste minimization program efforts for solid, medical and hazardous waste. This will be accomplished by monitoring all medical waste costs in its dialysis clinics on a quarterly basis. This monitoring focuses on the generation of medical waste and its correct separation and disposal. Recycling programs for cardboard, plastics and metal waste generated at its Ogden production facility has been initiated. The Company is promoting further community-centered activities by utilizing high-efficiency heating, ventilation and air-conditioning equipment. The Company has thereby achieved reductions in energy consumption. In addition, the Company expects its suppliers to meet certain environmental requirements and avoid any adverse environmental impact on the community. For the year 2002, the Company will further pursue its environmental policy and plans to reduce the quantities and costs of waste. RESEARCH AND DEVELOPMENT Current research and development activities ae primarily conducted through two FMC locations in the U.S. Walnut Creek, California and Ogden, Utah. We remain strongly focused on the development of new products, technologies, and treatment concepts to optimize the quality of treatment for dialysis patients. FMC focused in 2001 on the introduction of new products, enhancement of existing products and the advancement of key projects. Examples of our activities are briefly described below. - - Online Clear Monitor. Monitor patient access flow rate without the need for additional expensive equipment or specifically trained personnel. - - 2008H and 2008K Hemodialysis Machine Module. Provides immediate information on treatment efficiency. - - 2008K Hemodialysis Machine. Improved operator interface. Logically designed displays and information presentation. Modular design allows easy upgrading. Flexible treatment options. - - Optiflux Dialyzer Family (NR and A Series). Superior small (Urea) and middle molecular weight solute clearance through the use of Optimal Dialysate Flow (ODF)/KD+ technology. Superior member composition and biocompatibility. - - Newton IQ(TM) Cycler. Developed to take advantage of higher flow rates available with gravity fill and drain. Cycler software includes automatic prescription upload from physician-programmed IQ Card(TM). - - Premier(TM) Plus Double Bag. Twin bag system, incorporating solution bag and tubing. Utilizes Safe-lock(TM) connectology and Snap(TM) disconnect features. Fewer connections for the patient lowers risk of infection - - Bio-Plexus PUNCTUR-GUARD(R). Patented technology developed to improve clinical staff safety when using blood access fistula needles. The needle point can be covered prior to removal from the patient. - - Neutrolin(TM) Catheter Lock Solution. A patented solution in development to decrease the risks of infection among patients using catheters from dialysis treatments. 18 PATENTS, TRADEMARKS AND LICENSES The Company believes that its success will depend, in large part, on FMC's technology. While FMC, as a standard practice, obtains such legal protections it believes are appropriate for its intellectual property, such intellectual property is subject to infringement or invalidation claims. In addition, technological developments in ESRD therapy could reduce the value of FMC's existing intellectual property, which reduction could be rapid and unanticipated. COMPETITION The markets in which the Company sells its dialysis products are highly competitive. Among the Company's competitors in the sale of hemodialysis and peritoneal dialysis products are Gambro AB, Baxter International Inc., Asahi Medical Co., Ltd., B. Braun Melsungen AG, Nissho Corporation (including Nissho Nipro Corporation Ltd.), Nikkiso Co., Ltd., Terumo Medical Corporation and Toray Medical Co., Ltd. Some the Company's competitors possess greater financial, marketing and research and development resources than the Company. The Company believes that in the dialysis product market, companies compete primarily on the basis of product performance, cost-effectiveness, reliability, assurance of supply and service and continued technological innovation. The Company believes its products are highly competitive in all of these areas. Dialysis centers acquired by other product manufacturers may elect to limit or terminate their purchases of the Company's dialysis products in order to avoid purchasing products manufactured by a competitor. The Company believes, however, that customers will continue to consider its long-term customer relationships and reputation for product quality in making product purchasing decisions, and the Company intends to compete vigorously for such customers. 19 EMPLOYEES At December 31, 2001, the Company employed approximately 30,195 employees, including part-time and per diem employees. Such persons are employed by the Company's principal businesses as follows: dialysis treatment and laboratory services, approximately 26,514 employees; and dialysis products, approximately 3,681 employees. Medical Directors of the Company's dialysis centers are retained as independent contractors and are excluded from the employee total. Management believes that its relations with its employees are good. Approximately 650, or 2% of the Company's employees are covered by union agreements. 20 REGULATORY AND LEGAL MATTERS REGULATORY OVERVIEW The operations of the Company are subject to extensive governmental regulation at the federal, state and local levels regarding the operation of dialysis centers, laboratories and manufacturing facilities, the provision of quality health care for patients, the maintenance of occupational, health, safety and environmental standards and the provision of accurate reporting and billing for governmental payments and/or reimbursement. In addition, some states prohibit ownership of health care providers by for-profit corporations or establish other regulatory barriers to direct ownership by for-profit corporations. In those states, the Company works within the framework of local laws to establish alternative contractual arrangements for the provision of services to those facilities. Any failure by the Company or its subsidiaries to receive required licenses, certifications or other approvals for new facilities, significant delays in such receipt, loss of its various federal certifications, termination of licenses under the laws of any state or other governmental authority or changes resulting from health care reform or other government actions that reduce reimbursement or reduce or eliminate coverage for particular services rendered by the Company or its subsidiaries could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company must comply with legal and regulatory requirements under which it operates, including the federal Medicare and Medicaid Fraud and Abuse Amendments of 1977, as amended (the "anti-kickback statute"), the federal restrictions on certain physician referrals (commonly known as the "Stark Law") and other fraud and abuse laws and similar state statutes, as well as similar laws in other countries. Moreover, there can be no assurance that applicable laws, or the regulations thereunder, will not be amended, or that enforcement agencies or the courts will not make interpretations inconsistent with those of the Company, any one of which could have a material adverse effect on its business, reputation, financial condition and results of operations of the Company. Sanctions for violations of these statutes may include criminal or civil penalties, such as imprisonment, fines or forfeitures, denial of payments, and suspension or exclusion from the Medicare and Medicaid programs. In the U.S., these laws have been broadly interpreted by a number of courts, and significant government funds and personnel have been devoted to their enforcement because such enforcement has become a high priority for the federal government and some states. The Company, and the health care industry in general, will continue to be subject to extensive federal, state and foreign regulation, the full scope of which cannot be predicted. The Company has entered into a corporate integrity agreement with the U.S. government which requires that the Company staff and maintain a comprehensive compliance program, including a written code of conduct, training program and compliance policies and procedures. The corporate integrity agreement requires annual audits by an independent review organization and periodic reporting to the government. The corporate integrity agreement permits the U.S. government to exclude the Company and its subsidiaries from participation in U.S. federal health care programs if there is a material breach of the agreement that is not cured by the Company within thirty days after the Company receives written notice of the breach. PRODUCT REGULATION In the U.S., the FDA and comparable state regulatory agencies impose requirements on certain subsidiaries of the Company as a manufacturer and a seller of medical products and supplies under their jurisdiction. These require that products be manufactured in accordance with GMP and that the Company comply with FDA requirements regarding the design, safety, advertising, labeling, recordkeeping and reporting of adverse events related to the use of its products. In addition, in order to clinically test, produce and market certain medical products and other disposables (including hemodialysis and peritoneal dialysis equipment and solutions, dialyzers, bloodlines and other disposables) for human use, the Company must satisfy mandatory procedures and safety and efficacy requirements established by the FDA or comparable state and foreign governmental agencies. Such rules generally require that products be approved by the FDA as safe and effective for their intended use prior to being marketed. The Company's peritoneal dialysis solutions have been designated as drugs by the FDA and, as such, are subject to additional FDA regulation under the Food, Drug and Cosmetic Act of 1938 ("FDC Act"). The approval process is expensive, time consuming and subject to unanticipated delays. The FDA may also prohibit the sale or importation of products, order product recalls or require post-marketing testing and surveillance programs to monitor a product's effects. The Company believes that it has filed for or obtained all necessary approvals for the manufacture and sale of its products in jurisdictions in which those products are currently produced or sold. There can be no 21 assurance that the Company will obtain necessary regulatory approvals or clearances within reasonable time frames, if at all. Any such delay or failure to obtain regulatory approval or clearances could have a materially adverse effect on the business, financial condition and results of operations of the Company. FACILITIES AND OPERATIONAL REGULATION The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") subject virtually all clinical laboratory testing facilities, including those of the Company, to the jurisdiction of HHS. CLIA establishes national standards for assuring the quality of laboratories based upon the complexity of testing performed by a laboratory. Certain operations of the Company are also subject to federal laws governing the repackaging and dispensing of drugs and the maintenance and tracking of certain life sustaining and life-supporting equipment. The operations of the Company are subject to various U.S. Department of Transportation, Nuclear Regulatory Commission and Environmental Protection Agency requirements and other federal, state and local hazardous and medical waste disposal laws. As currently in effect, laws governing the disposal of hazardous waste do not classify most of the waste produced in connection with the provision of dialysis, or laboratory services as hazardous, although disposal of nonhazardous medical waste is subject to specific state regulation. However, the Company's laboratory businesses do generate hazardous waste which is subject to specific disposal requirements. The operations of the Company are also subject to various air emission and wastewater discharge regulations. Federal, state and local regulations require the Company to meet various standards relating to, among other things, the management of facilities, personnel qualifications and licensing, maintenance of proper records, equipment, quality assurance programs, the operation of pharmacies, and dispensing of controlled substances. All of the operations of the Company in the U.S. are subject to periodic inspection by federal and state agencies and other governmental authorities to determine if the operations, premises, equipment, personnel and patient care meet applicable standards. To receive Medicare reimbursement, the Company's dialysis centers, renal diagnostic support business and laboratories must be certified by CMS. All of the Company's dialysis centers, and laboratories that furnish Medicare services are so certified. Certain facilities of the Company and certain of their employees are also subject to state licensing statutes and regulations. These statutes and regulations are in addition to federal and state rules and standards that must be met to qualify for payments under Medicare, Medicaid and other government reimbursement programs. Licenses and approvals to operate these centers and conduct certain professional activities are customarily subject to periodic renewal and to revocation upon failure to comply with the conditions under which they were granted. The Occupational Safety and Health Administration ("OSHA") regulations require employers to provide employees who work with blood or other potentially infectious materials with prescribed protections against blood-borne and air-borne pathogens. The regulatory requirements apply to all health care facilities, including dialysis centers, laboratories and renal diagnostic support business, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide hepatitis B vaccinations, personal protective equipment, blood-borne pathogens training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, engineering and work practice controls and other OSHA-mandated programs for blood-borne and air-borne pathogens. Some states in which the Company operates have Certificate of Need ("CON") laws that require any person or entity seeking to establish a new health care service or to expand an existing service to apply for and receive an administrative determination that the service is needed. The Company currently operates in 13 states, including the District of Columbia and Puerto Rico that have CON laws applicable to dialysis centers. These requirements may, as a result of a state's internal determination of its dialysis services needs, prevent entry to new companies seeking to provide services in these states, and may constrain the Company's ability to expand its operations in these states. REIMBURSEMENT Dialysis Services. The Company's dialysis centers provide outpatient hemodialysis treatment and related services for ESRD patients. In addition, some of the Company's centers offer services for the provision of peritoneal dialysis and hemodialysis treatment at home. 22 The Medicare program is the primary source of Dialysis Services revenues from dialysis treatment. For example, in 2001, approximately 60% of Dialysis Services revenues resulted from Medicare's ESRD program. As described below, Dialysis Services is reimbursed by the Medicare program in accordance with the Composite Rate for certain products and services rendered at the Company's dialysis centers. As described in the next paragraph, other payment methodologies apply to Medicare reimbursement for other products and services provided at the Company's dialysis centers and for products (such as those sold by the Company) and support services furnished to ESRD patients receiving dialysis treatment at home (such as those of Dialysis Products). Medicare reimbursement rates are fixed in advance and are subject to adjustment from time to time by the U.S. Congress. Although this form of reimbursement limits the allowable charge per treatment, it provides the Company with predictable per treatment revenues. When Medicare assumes responsibility as primary payor (see "Reimbursement--Coordination of Benefits"), Medicare is responsible for payment of 80% of the Composite Rates set by CMS for dialysis treatments. The Composite Rates govern the Medicare reimbursement available for a designated group of dialysis services, including the dialysis treatment, supplies used for such treatment, certain laboratory tests and certain medications. The Composite Rates consists of labor and non labor components with adjustments made for regional wage costs subject to a national payment rate schedule. The Composite Rates for 2001 were increased by an average of 2.4% (as a result of set increases over the year), with a new payment ceiling of $144 per treatment. Some exceptions based on specified criteria are paid at a higher rate. The method under which the Company is reimbursed for home dialysis is based on which supplier is selected to provide dialysis supplies and equipment. If the center is designated as the supplier ("Method I"), the center provides all dialysis treatment related services, including equipment and supplies, and is reimbursed using a methodology based on the Composite Rate. If Dialysis Products is designated as the direct supplier ("Method II"), Dialysis Products provides the patient directly with all necessary equipment and supplies and is reimbursed by Medicare subject to a capitated ceiling. Clinics provide home support services to Method II patients and these services are reimbursed at a monthly fee for service basis subject to a capitated ceiling. The reimbursement rates under Method I and Method II differ, although both are prospectively determined and are subject to adjustment from time to time by Congress. Certain items and services that the Company furnishes at its dialysis centers are not included in the Composite Rate and are eligible for separate Medicare reimbursement, typically on the basis of established fee schedule amounts. Such items and services include certain drugs (such as EPO), blood transfusions and certain diagnostic tests. Medicare payments are subject to change by legislation and pursuant to deficit reduction measures. The Composite Rate was unchanged from commencement of the ESRD program in 1972 until 1983. From 1983 through December 1990, numerous congressional actions resulted in a net reduction of the average reimbursement rate from $138 per treatment in 1983 to approximately $125 per treatment in 1990. Congress increased the ESRD reimbursement rate, effective January 1, 1991, to an average rate of $126 per treatment. Effective January 1, 2000, the reimbursement rate was increased by 1.2%. In December 2000 an additional increase of 2.4% was approved for the year 2001. Accordingly, there was a 1.2% reimbursement increase on January 1, 2001. A second increase was delayed until April 1, 2001, when rates were increased 1.6% to make up for the delay. The Company is unable to predict what, if any, future changes may occur in the rate of Medicare reimbursement. Any significant decreases in the Medicare reimbursement rates could have a material adverse effect on the Company's provider business and, because the demand for products is affected by Medicare reimbursement, on its products business. Increases in operating costs that are affected by inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, also may adversely affect the Company's business and results of operations. The patient or third-party insurance payors, including employer-sponsored health insurance plans, commercial insurance carriers and the Medicaid program, are responsible for paying any co-payment amounts for approved services not paid by Medicare (typically the annual deductible and 20% co-insurance), subject to the specific coverage policies of such payors. The extent to which the Company is actually paid the full co-payment amounts depends on the particular responsible party. Each third-party payor, including Medicaid, makes payment under contractual or regulatory reimbursement provisions which may or may not cover the full 20% co-payment or annual deductible. Where the patient has no third-party insurance or the third party insurance does not cover copayment or deductible and the patient is responsible for paying the co-payments or the deductible, which the Company frequently does not collect fully despite reasonable collection efforts. Under an advisory opinion from the Office of the Inspector General, subject to specified conditions, the Company and the other similarly situated providers may make contributions to a non-profit organization that has volunteered to make premium 23 payments for supplemental medical insurance and/or medigap insurance on behalf of indigent ESRD patients, including patients of the Company. Laboratory Tests. A substantial portion of SRM's net revenues are derived from Medicare, which pays for clinical laboratory services provided to dialysis patients in two ways. First, payment for certain routine tests is included in the Composite Rate paid to the centers. As to such services, the dialysis centers obtain the services from a laboratory and pay the laboratory for such services. In accordance with industry practice, SRM usually provides such testing services under capitation agreements with its customers pursuant to which it bills a fixed amount per patient per month to cover the laboratory tests included in the Composite Rate at the designated frequencies. In October 1994, the OIG issued a special fraud alert in which it stated its view that the industry practice of providing tests covered by the Composite Rate at below fair market value raised issues under the anti-kickback statutes, as such an arrangement with an ESRD facility appeared to be an offer of something of value (Composite Rate tests at below market value) in return for the ordering of additional tests billed directly to Medicare. See "--Anti-kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse Laws" for a description of this statute. Second, laboratory tests performed by SRM for Medicare beneficiaries that are not included in the Composite Rate are separately billable directly to Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts, which are limited by national ceilings on payment rates, called National Limitation Amounts ("NLAs"). Congress has periodically reduced the fee schedule rates and the NLAs, with the most recent reductions in the NLAs occurring in January 1998. (As part of the Balanced Budget Act of 1997, Congress lowered the NLAs from 76% to 74% effective January 1, 1998.) Congress has also approved a five year freeze on the inflation updates based on the Consumer Price Index (CPI) for 1998-2002. Medicare carriers have aggressively implemented Local Medical Review Policies (LMRPs) limiting the coverage of certain clinical laboratory services to an established list of diagnosis codes supporting medical necessity. These LMRPs set forth medical necessity criteria based on diagnosis coding as well as frequency of service provisions. Provisions in the Balanced Budget Act of 1997 require the Secretary of HHS to adopt uniform coverage and payment policies for laboratory testing to be effective November 2002. The adoption of additional coverage policies would reduce the number of covered services and could materially affect the Company's revenues. Laboratory tests are ordered only by physicians based on the needs of their patients. EPO. Future changes in the EPO reimbursement rate, inclusion of EPO in the Medicare Composite Rate, changes in the typical dosage per administration or increases in the cost of EPO purchased by NMC could adversely affect the Company's business and results of operations, possibly materially. Coordination of Benefits. Medicare entitlement begins for most patients in the fourth month after the initiation of chronic dialysis treatment at a dialysis center. During the first three months, considered to be a waiting period, the patient or patient's insurance, Medicaid or a state renal program are responsible for payment. Patients who are covered by Medicare and are also covered by an employer group health plan ("EGHP") are subject to a 30 month coordination period during which the EGHP is the primary payor and Medicare the secondary payor. During this coordination period the EGHP pays a negotiated rate or in the absence of such a rate, the Company's standard rate or a rate defined by its plan documents. The payments are generally higher than the Medicare Composite Rate. Insurance will therefore generally cover a total of 33 months, the 3 month waiting period plus the 30 month coordination period. Patients who already are eligible for Medicare based on age when they become ESRD patients are dual eligible patients. If these patients are covered under an EGHP that is their primary payor for covered services, then these patients will have a 30 month coordination period. If Medicare is already the primary payor when ESRD entitlement begins, Medicare remains the primary payor, the EGHP is the secondary payor and no coordination period will apply. All ESRD patients or patients over 65 who do not have a health insurance retirement benefit plan can purchase Medigap plans. Possible Changes in Medicare. Because the Medicare program represents a substantial portion of the federal budget, the U.S. Congress takes action in almost every legislative session to modify the Medicare program by refining the amounts payable to health care providers. Legislation or regulations may be enacted in the future that could substantially modify or reduce the amounts paid for services and products offered by the Company and its subsidiaries. It is also possible that statutes may be adopted or regulations may be promulgated in the future that impose additional eligibility requirements for 24 participation in the federal and state health care programs. Such new legislation or regulations may adversely affect the Company's businesses and results of operations. ANTI-KICKBACK STATUTES, FALSE CLAIMS ACT, STARK LAW AND FRAUD AND ABUSE LAWS Various operations of the Company are subject to federal and state statutes and regulations governing financial relationships between health care providers and potential referral sources and reimbursement for services and items provided to Medicare and Medicaid patients. Such laws include the anti-kickback statute, health care fraud statutes, the False Claims Act, the Stark Law, other federal fraud and abuse laws and similar state laws. These laws apply because the Company's Medical Directors and other physicians with whom the Company has financial relationships refer patients to, and order diagnostic and therapeutic services from, the Company's dialysis centers and other operations. As is generally true in the dialysis industry, at each dialysis facility a small number of physicians account for all or a significant portion of the patient referral base. An ESRD patient generally seeks treatment at a center that is convenient to the patient and at which the patient's nephrologist has staff privileges. Virtually all of the Company's centers maintain open staff privileges for local nephrologists. The ability of the Company to provide quality dialysis care and to otherwise meet the needs of patients and local physicians is central to its ability to attract nephrologists to dialysis facilities and to receive referrals from such physicians. The U.S. federal government, many states and private third-party insurance payors have made combating health care waste, fraud and abuse one of their highest enforcement priorities, resulting in increasing resources devoted to this problem. Consequently, the OIG and other enforcement authorities are increasing scrutiny of arrangements between physicians and health care providers for possible violations of the anti-kickback statute or other federal or state laws. ANTI-KICKBACK STATUTES The federal anti-kickback statute establishes criminal prohibitions against and civil penalties for the knowing and willful solicitation, receipt, offer or payment of any remuneration, whether direct or indirect, in return for or to induce the referral of patients or the ordering or purchasing of items or services payable in whole or in part under Medicare, Medicaid or other federal health care programs. Sanctions for violations of the anti-kickback statute include criminal and civil penalties, such as imprisonment or criminal fines of up to $25,000 per violation, and civil penalties of up to $50,000 per violation, and exclusion from the Medicare or Medicaid programs and other federal programs. In addition, certain provisions of federal criminal law that may be applicable provide that if a corporation is found guilty of a criminal offense it may be fined no more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Some states also have enacted statutes similar to the anti-kickback statute, which may include criminal penalties, applicable to referrals of patients regardless of payor source, and may contain exceptions different from state to state and from those contained in the federal anti-kickback statute. FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS The federal False Claims Act (the "False Claims Act") imposes civil penalties for making false claims with respect to governmental programs, such as Medicare and Medicaid, for services not rendered, or for misrepresenting actual services rendered, in order to obtain higher reimbursement. Moreover, private individuals may bring qui tam or "whistle blower" suits against providers under the False Claims Act, which authorizes the payment of a portion of any recovery to the individual bringing suit. Such actions are initially required to be filed under seal pending their review by the Department of Justice. A few federal district courts have recently interpreted the False Claims Act as applying to claims for reimbursement that violate the anti- kickback statute under certain circumstances. The False Claims Act generally provides for the imposition of civil penalties of $5,500 to $11,000 per claim and for treble damages, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed to be a separate violation of the False Claims Act. Criminal provisions that are similar to the False Claims Act provide that if a corporation is convicted of presenting a claim or making a statement that it knows to be false, fictitious or fraudulent to any federal agency it may be fined not more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Some states also have enacted statutes similar to the False Claims Act which may include criminal penalties, substantial fines, and treble damages. 25 THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 HIPAA was enacted in August 1996 and substantively changed federal fraud and abuse laws by expanding their reach to all federal health care programs, establishing new bases for exclusions and mandating minimum exclusion terms, creating an additional exception to the anti-kickback penalties for risk-sharing arrangements, requiring the Secretary of HHS to issue advisory opinions, increasing civil money penalties to $10,000 (formerly $2,000) per item or service and assessments to three times (formerly twice) the amount claimed, creating a specific health care fraud offense and related health fraud crimes, and expanding investigative authority and sanctions applicable to health care fraud. It also prohibits provider payments which could be deemed an inducement to patient selection of a provider. The law expands criminal sanctions for health care fraud involving any governmental or private health benefit program, including freezing of assets and forfeiture of property traceable to commission of a health care offense. BALANCED BUDGET ACT OF 1997 The Balanced Budget Act of 1997 ("the BBA") contained sweeping adjustments to both the Medicare and Medicaid programs, as well as further expansion of the federal fraud and abuse laws. Specifically, the BBA created a civil monetary penalty for violations of the federal anti-kickback statute whereby violations will result in damages equal to three times the amount involved as well as a penalty of $50,000 per violation. In addition, the new provisions expanded the exclusion requirements so that any person or entity convicted of three health care offenses is automatically excluded from federally funded health care programs for life. Individuals or entities convicted of two offenses are subject to mandatory exclusion of 10 years, while any provider or supplier convicted of any felony may be denied entry into the Medicare program by the Secretary of HHS if deemed to be detrimental to the best interests of the Medicare program or its beneficiaries. The BBA also provides that any person or entity that arranges or contracts with an individual or entity that has been excluded from a federally funded health care program will be subject to civil monetary penalties if the individual or entity "knows or should have known" of the sanction. STARK LAW The original Stark Law, known as "Stark I" and enacted as part of the Omnibus Budget Reconciliation Act of 1989, prohibits a physician from referring Medicare patients for clinical laboratory services to entities with which the physician (or an immediate family member) has a financial relationship, unless certain exceptions apply. Sanctions for violations of the Stark Law may include denial of payment, refund obligations, civil monetary penalties and exclusion of the provider from the Medicare and Medicaid programs. The Stark Law prohibits the entity receiving the referral from filing a claim or billing for services arising out of the prohibited referral. Provisions of OBRA 93, known as "Stark II," amended Stark I to revise and expand upon various statutory exceptions, to expand the services regulated by the statute to a list of "Designated Health Services," and to prohibit Medicaid referrals where a financial relationship exists. The provisions of Stark II generally became effective on January 1, 1995, with the first phase of Stark II regulations finalized on January 4, 2001. The additional Designated Health Services include: physical therapy services; occupational therapy services; radiology services, including magnetic resonance imaging, computer axial tomography scans and ultrasound services; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. Pursuant to phase I of the final regulations implementing the Stark Law, erythropoietin (EPO) and certain other dialysis-related outpatient prescription drugs furnished in or by an ESRD facility are excepted under the self-referral law. Further, the final regulations also adopt a definition of DME which effectively excludes ESRD equipment and supplies from the category of Designated Health Services. Several states in which the Company operates have enacted self-referral statutes similar to the Stark Law. Such state self-referral laws may apply to referrals of patients regardless of payor source and may contain exceptions different from each other and from those contained in the Stark Law. 26 OTHER FRAUD AND ABUSE LAWS The Company's operations are also subject to a variety of other federal and state fraud and abuse laws, principally designed to ensure that claims for payment to be made with public funds are complete, accurate and fully comply with all applicable program rules. The civil monetary penalty provisions are triggered by violations of numerous rules under the Medicare statute, including the filing of a false or fraudulent claim and billing in excess of the amount permitted to be charged for a particular item or service. Violations may also result in suspension of payments, exclusion from the Medicare and Medicaid programs, as well as other federal health care benefit programs, or forfeiture of assets. In addition to the statutes described above, other criminal statutes may be applicable to conduct that is found to violate any of the statutes described above. HEALTH CARE REFORM Health care reform is considered by many in the U.S. to be a national priority. Members of Congress from both parties and officials from the executive branch are continuing to consider many health care proposals, some of which are comprehensive and far-reaching in nature. Several states are also currently considering health care proposals. It cannot be predicted what additional action, if any, the federal government or any state may ultimately take with respect to health care reform or when any such action will be taken. Health care reform may bring radical changes in the financing and regulation of the health care industry, which could have a material adverse effect on the business of the Company and the results of its operations. 27 ITEM 2. PROPERTIES The table below describes the Company's principal facilities as of the date hereof. FLOOR AREA (APPROXIMATE CURRENTLY OWNED LOCATION SQUARE FEET) OR LEASED USE Lexington, Massachusetts 200,000 leased Corporate headquarters and administration. Walnut Creek, California 85,000 leased Manufacture of hemodialysis machines and peritoneal dialysis cyclers; research and development. 17,500 leased Warehouse Space - Machine components Ogden, Utah 590,000 owned(1) Manufacture polysulfone membranes and dialyzers and peritoneal dialysis solutions; research and development. Delran, New Jersey 42,000 leased Manufacture of liquid hemodialysis concentrate solutions. Perrysburg, Ohio 35,000 leased Manufacture of dry hemodialysis concentrates. Livingston, California 32,000 leased Manufacture of liquid hemodialysis concentrates. Irving, Texas 70,000 leased Manufacture of liquid hemodialysis solution. Reynosa, Mexico 150,000 leased Manufacture of bloodlines. Fremont, California 72,000 leased Clinical laboratory testing Rockleigh, New Jersey 85,000 leased Clinical Laboratory testing - ---------- (1) Land and majority of equipment is leased, building is owned. The lease on the Walnut Creek facility expires in 2012. The Company leases 16 warehouses throughout the U.S. These warehouses are used as regional distribution centers for the Company's peritoneal dialysis products business. All such warehouses are subject to leases with remaining terms not exceeding ten years. At December 31, 2001, the Company distributed its products through all these 16 warehouse facilities. The Company leases its corporate headquarters in Lexington, Massachusetts. This lease expires on October 31, 2007. The Company's subsidiaries lease most of the dialysis centers, manufacturing, laboratory, distribution and administrative and sales facilities in the U.S. on terms which the Company believes are customary in the industry. 28 ITEM 3. LEGAL PROCEEDINGS LEGAL PROCEEDINGS COMMERCIAL LITIGATION Since 1997, the Company, NMC, and certain NMC subsidiaries have been engaged in litigation with Aetna Life Insurance Company and certain of its affiliates ("Aetna") concerning allegations of inappropriate billing practices for nutritional therapy and diagnostic and clinical laboratory tests and misrepresentations. In January 2002, the Company entered into an agreement in principle with Aetna to establish a process for resolving these claims and the Company's counterclaims relating to overdue payments for services rendered by the Company to Aetna's beneficiaries. Other insurance companies have filed claims against the Company, similar to those filed by Aetna, that seek unspecified damages and costs. The Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend all lawsuits. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. Other private payors have contacted the Company and may assert that NMC received excess payments and, similarly, may join the lawsuits or file their own lawsuit seeking reimbursement and other damages. Although the ultimate outcome on the Company of these proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. In light of the Aetna agreement in principle the Company established a pre-tax accrual of $55 million at December 31, 2001 to provide for the anticipated settlement of the Aetna lawsuit and estimated legal expenses related to the continued defense of other commercial insurer claims and resolution of these claims, including overdue payments for services rendered by the Company to these insurers' beneficiaries. No assurance can be given that the anticipated Aetna settlement will be consummated or that the costs associated with such a settlement or a litigated resolution of Aetna's claims and the other commercial insurers' claims will not exceed the $55 million pre-tax accrual. On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al. (Sup. Court of Calif., S.F. County, #315465) was filed as a class action by plaintiffs claiming to be creditors of W. R. Grace & Co.-Conn ("Grace Chemicals") against Grace Chemicals, the Company and other defendants, principally alleging that the Merger which resulted in the original formation of the Company (described in greater detail in "Indemnification by W. R. Grace & Co. and Sealed Air Corporation" below) was a fraudulent transfer, violated the uniform fraudulent transfer act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R. Grace & Company, et al.) and additional class actions were filed subsequently with substantially similar allegations; all cases have either been stayed and transferred to the U.S. District Court or are pending before the U.S. Bankruptcy Court in Delaware in connection with Grace's Chapter 11 proceeding. The Company has requested indemnification from Grace Chemicals and Sealed Air Corporation pursuant to the Merger agreements (see "Indemnification by W.R. Grace & Co. and Sealed Air Corporation"). If the Merger is determined to have been a fraudulent transfer, if material damages are proved by the plaintiffs, and if the Company is not able to collect, in whole or in part on the indemnity, from W.R. Grace & Co., Sealed Air Corporation, or their affiliates or former affiliates or their insurers, and if the Company is not able to collect against any party that may have received distributions from W.R. Grace & Co., a judgment could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is confident that no fraudulent transfer or conspiracy occurred and intends to defend the cases vigorously. OBRA 93 The Omnibus Budget Reconciliation Act of 1993 affected the payment of benefits under Medicare and employer health plans for dual-eligible ESRD patients. In July 1994, the Centers for Medicare and Medicaid Services (CMS) (formerly known as the Health Care Financing Administration, or HCFA) issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by that act would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than those provided under Medicare. In April 1995, CMS issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. CMS further proposed that its new instruction be effective retroactive to August 1993, the effective date of the Omnibus Budget Reconciliation Act of 1993. 29 NMC ceased to recognize the incremental revenue realized under the original instruction as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by the Omnibus Budget Reconciliation Act of 1993 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by the act, and then began to re-bill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.95-0860 (WBB)) seeking to preclude CMS from retroactively enforcing its April 24, 1995 implementation of the Omnibus Budget Reconciliation Act of 1993 provision relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude CMS from enforcing its new policy retroactively, that is, to billing for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction and in December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that CMS' retroactive application of the April 1995 rule was legally invalid. CMS cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding CMS' retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also permanently enjoined CMS from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on CMS' motion for summary judgment pending completion of the outstanding discovery. On October 5, 1998, NMC filed its own motion for summary judgment requesting that the Court declare CMS' prospective application of the April 1995 rule invalid and permanently enjoin CMS from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. CMS elected not to appeal the Court's June 1995 and January 1998 orders. CMS may, however, appeal all rulings at the conclusion of the litigation. If CMS should successfully appeal so that the revised interpretation would be applied retroactively, NMC may be required to refund the payment received from employer health plans for services provided after August 10, 1993 under the CMS' original implementation, and to re-bill Medicare for the same services, which would result in a loss to NMC of approximately $120 million attributable to all periods prior to December 31, 1995. Also, in this event, the Company's business, financial condition and results of operations would be materially adversely affected. In July, 2000, NMC filed a complaint in the U.S. District Court for the Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical Applications of Virginia, Inc. v. Aetna Life Insurance Co., Inc., Aetna U.S. Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S. Healthcare and health plans administered by Aetna U.S. Healthcare for claims related to primary payor liability for dual eligible ESRD patients under the Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed the action pending resolution of the District of Columbia Court action. The Company's agreement in principle with Aetna establishes a process for resolving these claims. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the U.S. anti-kickback statute, the False Claims Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. In the U.S., enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and continuing inquiries, claims and litigation relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. 30 The Company operates a large number facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the False Claims Act, among other laws, and the Company cannot predict whether law enforcement authorities may use such information to initiate further investigations of the business practices disclosed or any of its other business activities. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. At December 31, 2001, the Company recorded a pre-tax accrual to reflect anticipated expenses associated with the continued defense and resolution of these claims. No assurances can be given that the actual costs incurred by the Company in connection with the continued defense and resolution of these claims will not exceed the amount of this accrual. INDEMNIFICATION BY W. R. GRACE & CO. AND SEALED AIR CORPORATION The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. Proceedings have been brought against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.-Conn., principally alleging that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act, and constituted a conspiracy. See "Legal Proceedings" above. Pre-merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); that during those years Grace deducted approximately $122.1 million in interest attributable to corporate owned life insurance ("COLI") policy loans; that Grace has paid $21.2 million of tax and interest related to COLI deductions taken in tax years prior to 1993; and that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation. Subject to certain representations made by Grace, the Company and Fresenius AG, Grace and certain of its affiliates agreed to indemnify the Company against this or other pre-Merger or Merger related tax liabilities. Subsequent to the Merger, Grace was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. 31 Subsequent to the Sealed Air transaction Grace and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result of the Company's continuing observation and analysis of the Service's on-going audit of Grace's pre-Merger tax returns, the Sealed Air litigation and the Grace bankruptcy proceedings, and based on its current assessment of the potential impact of these matters on the Company, the Company recorded a pre-tax accrual of $171.5 million at December 31, 2001 to reflect the Company's estimated exposure for liabilities and legal expenses related to the Grace bankruptcy. The Company intends to continue to pursue vigorously its rights to indemnification from Grace and its insurers and former and current affiliates, including Sealed Air, for all costs incurred by the Company relating to pre-Merger tax and Merger-related claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's common stock is held by FMC. The NMC Credit Facilities and the indentures pertaining to the Senior Subordinated Notes of FMC and one of its subsidiaries impose certain limits on the Company's payment of dividends. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations". FRESENIUS MEDICAL CARE HOLDINGS CLASS D PREFERRED SHARES The Company distributed its Class D Preferred Shares exclusively to W.R. Grace ("Grace") common shareholders in connection with the 1996 reorganization involving Grace and FMC. The Class D Preferred Shares trade over-the-counter only in the United States under the symbol FSMEP.OB. Holders of the Company's Class D Preferred Shares were entitled to a one-time special dividend if (but only if) conditions specified in the Company's Certificate of Incorporation are met. The Class D Preferred Shares are not entitled to receive any dividends other than this special dividend. In particular, the Company's Class D Preferred Shares are not entitled to any dividend that FMC may pay on FMC Preference shares or FMC ADSs. The special dividend is payable only if the cumulative adjusted cash flow to FMC's ordinary shareholders (defined as FMC's net income plus depreciation and amortization) from January 1, 1997 through December 31, 2001 exceeds US$3.7 billion. If FMC's cumulative adjusted cash flow meets that threshold, 44.8% of any amount exceeding US $3.7 billion will be distributed as a special dividend on the Company's Class D Preferred Shares. Based on FMC's calculations which were reviewed by KPMG Deutsche Treuhand-Gesellschaft, Fresenius Medical Care's cumulative consolidated adjusted cash flow for the five year period ended December 31, 2001 was approximately $1.7 billion. Consequently, no special dividend is due or payable with respect to the Class D Preferred Shares. The Class D Preferred Shares are redeemable at the Company's sole option after the date it makes its public announcement of the amount of the special dividend (if any) in 2002. The redemption price is the greater of the liquidation preference ($0.10 cents per Class D Preferred Share) and any unpaid special dividend amount. The Company is not, however, required to redeem the Class D Preferred Shares. The Class D Preferred Shares are redeemable at any time at the option of FMCH at a redemption price of $0.10 per share. FMCH intends to redeem the 89 million outstanding Class D Preferred Shares at a total expected redemption price of approximately $9 million in early 2003. This description of the material terms of the Company's Class D Preferred Shares is not complete and is qualified in its entirety by the terms of the Company's Certificate of Incorporation. The Company's Certificate of incorporation is on file with the Secretary of the State of New York and the Securities and Exchange Commission. 32 ITEM 6. SELECTED FINANCIAL DATA
-------------------------------------------------------- YEAR ENDED DECEMBER 31, (Dollars in Millions, Except Shares and -------------------------------------------------------- Per Share Data) 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Statement of Operations Data Continuing Operations Net sales $ 3,609 $ 3,089 $ 2,815 $ 2,571 $ 2,166 Cost of Sales 2,510 2,109 1,880 1,707 1,456 -------- -------- -------- -------- -------- Gross Profit 1,099 980 935 864 710 Selling, general and administrative and research and development 675 560 540 529 452 Special charge for settlement of investigation and related costs -- -- 601 -- -- Special charge for legal matters 258 -- -- -- -- -------- -------- -------- -------- -------- Operating income (loss) 166 420 (206) 335 258 Interest expense (net) 226 187 202 209 178 Interest expense on settlement of investigation (net) -- 30 -- -- -- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and cumulative effect of changes in accounting for start up costs (60) 203 (408) 126 80 Income tax (benefit) expense 19 98 (81) 74 46 -------- -------- -------- -------- -------- Income (loss) from continuing operations before cumulative effect of change in accounting for start up costs $ (79) $ 105 $ (327) $ 52 $ 34 -------- -------- -------- -------- -------- Discontinued Operations Loss from discontinued operations, net of income taxes -- -- -- (9) (14) Loss on disposal of discontinued operations, net of income tax benefit -- -- -- (97) -- -------- -------- -------- -------- -------- Loss from discontinued operations -- -- -- (106) (14) -------- -------- -------- -------- -------- Cumulative effect of change in accounting for start up costs, net of tax benefit -- -- -- (5) -- -------- -------- -------- -------- -------- Net income (loss) $ (79) $ 105 $ (327) $ (59) $ 20 ======== ======== ======== ======== ======== Net Income (loss) Per Common and Common Equivalent Share: Continuing Operations $ (0.89) $ 1.16 $ (3.64) $ 0.57 $ 0.37 Discontinued Operations -- -- -- (1.18) (0.15) Cumulative effect of accounting change -- -- -- (0.05) -- Net Income (0.89) 1.16 (3.64) (0.66) 0.22 Weighted average number of shares of Common stock and common stock equivalents: Primary (000's) 90,000 90,000 90,000 90,000 90,000 AT DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Balance Sheet Data: Working capital (deficit) $ (176) $ (154) $ (456) $ 294 $ 394 Total assets 5,003 4,553 4,645 4,613 4,771 Total long term debt and capital lease obligations 302 589 616 1,014 1,622 Mandatorily redeemable preferred securities 692 305 -- -- -- Stockholders' equity 1,598 1,726 1,622 1,949 1,987
33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company. The discussion should be read in conjunction with the consolidated financial statements included elsewhere in this document. This section contains certain forward-looking statements that are subject to various risks and uncertainties. Such statements include, without limitation, discussions concerning the outlook of the Company, government reimbursement, future plans and management's expectations regarding future performance. Actual results could differ materially from those contained in these forward-looking statements due to certain factors including, without limitation, changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings, the realization of anticipated tax deductions, and the availability of financing. These and other risks and uncertainties, which are more fully described elsewhere in this Item 7 and in the Company's reports filed from time to time with the Commission, could cause the Company's results to differ materially from the results that have been or may be projected by or on behalf of the Company. OVERVIEW The Company is primarily engaged in (a) providing kidney dialysis services and clinical laboratory testing and (b) manufacturing and distributing products and equipment for dialysis treatment. Throughout the Company's history, a significant portion of the Company's growth has resulted from the development of new dialysis centers and the acquisition of existing dialysis centers, as well as from the acquisition and development of complementary businesses in the health care field. The Company derives a significant portion of its net revenues from Medicare, Medicaid and other government health care programs (approximately 57% in 2001). The reimbursement rates under these programs, including the Composite Rate, the reimbursement rate for EPO, and the reimbursement rate for other dialysis and non-dialysis related services and products, as well as other material aspects of these programs, have in the past and may in the future be changed as a result of deficit reduction and health care reform measures. The Company also derives a significant portion of its net revenues from reimbursement by non-government payors. Historically, reimbursement rates paid by these payors generally have been higher than Medicare and other government program rates. However, non-government payors are imposing cost containment measures that are creating significant downward pressure on reimbursement levels that the Company receives for its services and products. SPECIAL CHARGE FOR LEGAL MATTERS In the fourth quarter of 2001, the Company recorded a $258 million ($177 after tax) special charge to address 1996 merger related legal matters, estimated liabilities including legal expenses arising in connection with the W.R. Grace Chapter 11 proceedings and the cost of resolving pending litigation and other disputes with certain commercial insurers. In January 2002, the Company reached an agreement in principle to resolve pending litigation with Aetna Life Insurance Company (Aetna). The special charge is primarily comprised of three major components relating to (i) the W.R. Grace bankruptcy, (ii) litigation with commercial insurers and (iii) other legal matters. The Company has assessed the extent of potential liabilities as a result of the W.R. Grace Chapter 11 proceedings. The Company accrued $172 million principally representing a provision for income taxes payable for the years prior to the 1996 merger for which the Company has been indemnified by W.R. Grace, but may ultimately be obligated to pay as a result of W.R. Grace's Chapter 11 filing. In addition, that amount includes the costs of defending the Company in litigation arising out of W.R. Grace's Chapter 11 filing. The Company has entered into an agreement in principle with Aetna to establish a process for resolving its pending litigation. The Company has included in the special charge the amount of $55 million to provide for settlement obligations, legal expenses and the resolution of disputed accounts receivable for Aetna and the other commercial litigants. If the Company is unable to settle the pending matters with any of the remaining commercial insurers, whether on the basis of the 34 Aetna agreement in principle or otherwise, the Company believes that this charge reasonably estimates the costs and expenses associated with such litigation. The remaining amount of $31 million pre-tax was accrued for (i) assets and receivables that are impaired in connection with other legal matters and (ii) anticipated expenses associated with the continued defense and resolution of the legal matters. See also Note 16- "Commitment and Contingencies- Legal Proceedings." SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS RECORDED IN 1999 On January 18, 2000, the Company, NMC and certain affiliated companies executed definitive agreements (the "Settlement Agreements") with the United States Government (the "Government") to settle (i) matters concerning violations of federal laws and (ii) NMC's claims with respect to outstanding Medicare receivables for nutrition therapy (collectively, the "Settlement"). In anticipation of the Settlement, the Company recorded a special pre-tax charge against its consolidated earnings in 1999 totaling $601 million ($419 million after tax). In 2001, the Company remitted final payment of $85.9 million pursuant to the Settlement. In addition, the Company received final payment of $5.2 million in the first quarter of 2001 from the U.S. Government, related to the Company's claims for outstanding Medicare receivables. The letter of credit of $89 million at December 31, 2000 securing the settlement obligation was closed out with the last payment. RESULTS OF OPERATIONS The following table summarizes certain operating results of the Company by principal business unit for the periods indicated. Intercompany eliminations primarily reflect sales of medical supplies by Dialysis Products to Dialysis Services. YEAR ENDED DECEMBER 31, ----------------------------- (DOLLARS IN MILLIONS) 2001 2000 1999 ------- ------- ------- NET REVENUES Dialysis Services .................. $ 3,149 $ 2,625 $ 2,339 Dialysis Products .................. 755 717 707 Intercompany Eliminations .......... (295) (253) (231) ------- ------- ------- Net Revenues ........................... $ 3,609 $ 3,089 $ 2,815 ======= ======= ======= Operating Earnings: Dialysis Services .................. $ 422 $ 403 $ 386 Dialysis Products .................. 138 118 126 ------- ------- ------- Operating Earnings ..................... 560 521 512 ------- ------- ------- Other Expenses: General Corporate .................. $ 131 $ 97 $ 113 Research & Development ............. 5 4 4 Interest Expense, Net .............. 226 187 202 Interest Expense on Settlement, Net -- 30 -- Special Charge for OIG Settlement .. -- -- 601 Special Charge for Legal Matters ... 258 -- -- ------- ------- ------- Total Other Expenses ................... 620 318 920 ------- ------- ------- Income (Loss) Before Income Taxes ...... (60) 203 (408) Provision (Benefit) for Income Taxes .. 19 98 (81) ------- ------- ------- Income (Loss) .......................... $ (79) $ 105 $ (327) ------- ------- ------- 35 YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Net revenues for the year ended December 31, 2001 increased by 17% ($520 million) over the comparable period in 2000. Excluding the effects of the special charge for legal matters of $258 million ($177 million after tax) recorded in the fourth quarter 2001, net income for the year 2001 would have decreased by 7% ($7 million) as a result of increased operating earnings ($39 million), offset by increased corporate expense ($34 million, including foreign exchange losses of $15 million), interest expense ($9 million) and income taxes ($2 million). DIALYSIS SERVICES Dialysis Services net revenues increased by 20% to $3,132 million (net of $17 million of intercompany sales); 10% attributable to base business revenue growth and 10% to acquisitions. The increase in dialysis services revenue resulted primarily from a $404 million (15%) increase in treatment volume, reflecting both base business growth and the impact of 2001 and 2000 acquisitions. Revenue was also favorably impacted by an increase in revenue per treatment of approximately $118 million (5%) as an aggregate result of increased Medicare reimbursement rates, increased ancillary services and introduction of perfusion services, as compared to 2000. For the year 2001 EPO represented approximately 27% of dialysis services revenue and approximately 24% of total revenue. Medicare reimbursement rates increased 1.2% as of January 1, 2001 due to legislation passed in January 2000. Additional legislation passed during the fourth quarter 2000 provided for an additional 1.2% rate increase. However, this second increase was delayed until April 1, 2001 at which time rates were increased to make up for this delay. Dialysis Services operating earnings grew by 5% in 2001 due primarily to increased treatment volume, improved treatment rates, increased ancillary services and increased earnings from laboratory testing. The operating earnings margin decreased 2% from 15.4% in 2000 to 13.4% in 2001. This was mainly due to delayed earnings contributed from the Everest acquisition, expenses caused by dialysis services converting from re-use to single use dialyzers, an increase in personnel expenses not fully compensated for by the increase in reimbursement rates, higher bad debt expenses relating to changes in payor mix and aging of accounts receivable and increased costs to certify new clinics. The lower operating earnings contribution from Everest was caused by transition and integration costs that occurred during the first half of the year. DIALYSIS PRODUCTS Dialysis Products net revenues decreased slightly to $477 million (net of $278 million of intercompany sales). This is primarily attributable to a shortfall in reuse dialyzer sales, increased sales of single use dialyzers and a loss of large sales accounts. Dialysis Products operating earnings increased by 17% to $138 million. This increase was primarily the result of decreased freight and distribution costs (4%), improvements in gross margin (4%), and reductions in other manufacturing and operating costs (9%). OTHER EXPENSES Excluding the effects of the special charge for legal matters of $258 million recorded in the fourth quarter of 2001, the Company's other expenses for 2001 increased by 14% ($44 million) over the comparable period of 2000. General corporate expenses increased by $34 million and interest expense increased by $9 million. The increases in general corporate expenses were primarily due to foreign exchange fluctuations ($15 million resulting from $7 million foreign exchange losses in 2001 versus $8 million foreign exchange gains in 2000), increased health and general liability insurance costs ($8 million), increased legal fees ($2 million) and increases in other general expenses ($9 million). The increase of $9 million in interest expense is the net result of increased expenses of $39 million related to a change in mix of debt instruments offset by $30 million decrease in interest expense recorded in 2000 related to the settlement of the OIG investigation in 2000. 36 INCOME TAXES The Company has recorded income tax provisions of $19 million and $98 million for the years 2001 and 2000, respectively. Excluding the tax benefit of $81 million for the special charge for legal matters, the effective income tax rate of 2001 is higher than 2000 due primarily to non-deductible merger goodwill. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Net revenues from continuing operations for 2000 increased by 10% ($274 million) over 1999. Income from continuing operations increased by $432 million over 1999 as a result of increased operating earnings ($9 million), reduced corporate expense ($4 million), and no comparable 2000 expense relating to the special charge for settlement of investigation and related costs ($419 million, after income taxes) recorded in 1999, partially offset by increased interest expense. Excluding the effect of the special charge for settlement of investigation and related costs, net income from operations increased by 14% over 1999. DIALYSIS SERVICES Dialysis Services net revenues for 2000 increased by 12% ($286 million) over 1999, primarily as a result of a 9% increase in the number of treatments provided, the impact of increased Medicare reimbursement rates, consolidation of joint ventures, higher revenues in other pharmaceuticals and increased laboratory testing revenues. The treatment increase was a result of base business growth and the impact of 1999 and 2000 acquisitions. The laboratory testing revenues increased as a result of higher patient volume. Dialysis Services operating earnings for 2000 increased by 4% ($17 million) over 1999 primarily due to increases in treatment volume, the impact of increased Medicare reimbursement rates, higher earnings in other pharmaceuticals, and increased earnings from laboratory testing. These increases were partially offset by higher personnel costs, increased costs of EPO, higher provisions for doubtful accounts, and higher equipment lease expenses. DIALYSIS PRODUCTS Dialysis Products net revenues for 2000 increased by 1% ($10 million) over the comparable period of 1999. This is primarily due to increased sales of hemo products including machines and disposables, partially offset by decreased sales of peritoneal products. Dialysis Products operating earnings for 2000 decreased by 6% ($8 million) over the comparable period of 1999. This is a result of higher sales and marketing costs and freight and distribution expenses as well as an increased provision for doubtful accounts, partially offset by improvements in gross margin. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS On January 18, 2000, the Company, NMC and certain affiliated companies executed definitive agreements (the "Settlement Agreements") with the United States Government (the "Government") to settle (i) matters concerning violations of federal laws and (ii) NMC's claims with respect to outstanding Medicare receivables for nutrition therapy (collectively, the "Settlement"). In anticipation of the Settlement, the Company recorded a special pre-tax charge against its consolidated earnings in 1999 totaling $601 million ($419 million after tax). In 2001, the Company remitted final payment of $85.9 million pursuant to the Settlement. In addition, the Company received final payment of $5.2 million in the first quarter of 2001 from the U.S. Government, related to the Company's claims for outstanding Medicare receivables. The letter of credit of $89 million at December 31, 2000 securing the settlement obligation was closed out with the last payment. OTHER EXPENSES The Company's other expenses for 2000 decreased by 1% ($1 million) over the comparable period of 1999 excluding the special charge. General corporate expenses decreased by $16 million and operating interest expense decreased by $15 37 million primarily due to the change in the mix of debt instruments. The decreases in general corporate and operating interest expenses for 2000 were offset by $30 million of increased interest expense related to the settlement of the OIG investigation in January 2000. INCOME TAXES The Company has recorded an income tax provision of $98 million for 2000 as compared to an income tax benefit of $81 million for 1999. The income tax provision in 2000 is higher than the statutory tax rate primarily due to the non-deductible merger goodwill. The income tax benefit in 1999 is lower than the statutory tax rate primarily due to the tax effect of the special charge for the Settlement and related costs, partially offset by non-deductible merger goodwill. LIQUIDITY AND CAPITAL RESOURCES YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 The Company's cash requirements in 2001 and 2000, including acquisitions and capital expenditures, have been funded by cash generated from operations, additional intercompany borrowings, borrowings under the credit facility ("NMC Credit Facility"), and net increases in a receivable financing facility. Cash from operations has increased by $91 million from $263 million in 2000 to $354 million in 2001. The improvement is primarily related to favorable changes in operating assets and liabilities of $382 million offset by decreased earnings ($184 million, including the special charge for legal matters) and decreases in net income adjustments of $107 million. The movement in operating assets and liabilities includes the collection of $5 million related to IDPN receivables. Increases in accounts receivable of $133 million for the period ended December 31, 2001 are primarily due to the Company's revenue growth and the impact of acquisitions, offset by a two day reduction in days sales outstanding. Decreases in accounts payable were primarily due to timing of disbursements. Cash on hand was $27 million and $33 million at December 31, 2001 and 2000, respectively. Net cash flows used in investing activities totaled $436 million in 2001 compared to $220 million in 2000. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations and intercompany borrowings. Acquisitions totaled $289 million in 2001 (including Everest for $266 million) and $116 million in 2000, respectively, net of cash acquired. In 2001, the Company also funded another $99 million in consideration for Everest through the issuance of 2.25 million FMC preference shares. Capital expenditures of $125 million and $104 million in 2001 and 2000, respectively, were made for new clinics, improvements to existing clinics and expansion and maintenance of production facilities. Net cash flows provided by financing activities totaled $75 million in 2001 compared to net cash flows used of $23 million in 2000. For the twelve months ended December 31, 2001, the Company made final payments to the U.S. Government totaling $86 million pursuant to the January 2000 Settlement Agreement. In addition, debt and capital lease obligations decreased by $290 million, primarily due to the pay down of the Company's credit facility of $282 million. Proceeds from financing activities in 2001 included $284 million (net of mark to market change of $5 million) for the issuance of mandatorily redeemable preferred stock to an affiliated company. The Company has an asset securitization facility (the "Accounts Receivable Facility") whereby receivables of NMC and certain affiliates are sold to NMC Funding Corporation (the "Transferor"), a wholly-owned subsidiary of NMC, and subsequently the Transferor transfers and assigns percentage ownership interests in receivables to certain bank investors. The amount of the accounts receivable facility was last amended on December 21, 2001, when the Company increased the accounts receivable facility to $560 million and extended its maturity to October 24, 2002. For the twelve months ended December 31, 2001, the Company had decreased its borrowings under the accounts receivable facility by $3 million from $445 million at December 31, 2000 to $442 million at December 31, 2001. Outstanding amounts under the Accounts Receivable Facility are reflected as reductions in accounts receivable. The Company's capacity to generate cash from the accounts receivable facility depends on the availability of sufficient accounts receivable that meet certain criteria defined in the agreement with the third party funding corporation. A lack of 38 availability of such accounts receivable may have a material impact on the Company's ability to utilize the facility for its financial needs. At December 31, 2001, the Company had additional borrowing capacity of approximately $697 million (including letters of credit of $216 million) under the NMC Credit Facility and $118 million under its accounts receivable facility. OBLIGATIONS
CONTRACTUAL CASH OBLIGATIONS PAYMENTS DUE BY PERIOD OF -------------------------------------------------- TOTAL 1 YEAR 1-4 YEARS OVER 4 YEARS ---------- ---------- ---------- ------------ Mandatorily Redeemable Preferred Securities $ 692,330 $ 338,234 $ 354,096 $ -- Long Term Debt 450,627 150,027 300,600 -- Capital Lease Obligations 3,694 2,019 1,675 -- Operating Leases 858,085 166,644 548,231 143,210 Unconditional Purchase Obligation 137,387 61,351 76,036 -- Borrowings from Affiliates 1,297,029 291,360 350,995 654,674 ---------- ---------- ---------- ---------- Total Contractual Cash Obligations $3,439,152 $1,009,635 $1,631,633 $ 797,884 ========== ========== ========== ========== OTHER COMMERCIAL COMMITMENTS EXPIRATION PER PERIOD OF -------------------------------------------------- TOTAL 1 YEAR 1-4 YEARS OVER 4 YEARS ---------- ---------- ---------- ------------ Unused Senior Credit Lines $ 481,900 $ -- $ 481,900 $ -- Standby Letters of Credit 215,554 -- 215,554 -- ---------- ---------- ---------- ---------- Total Other Commercial Commitments $ 697,454 $ -- $ 697,454 $ -- ========== ========== ========== ==========
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 The Company's cash requirements in 2000 and 1999, including acquisitions and capital expenditures, have been funded by cash generated from operations, additional intercompany borrowings, and an increase in the receivable financing facility. Cash from operations has improved by $14 million from $249 million in 1999 to $263 million in 2000. This improvement is primarily related to an increase in earnings and the addback of non-cash expenses of $125 million offset by net decreases in operating assets and liabilities of $111 million. These changes have been adjusted to exclude the special charge for the settlement of the OIG investigation in 1999. The movement in operating assets and liabilities includes the collection of $54 million related to IDPN receivables; increases in accounts receivable primarily due to increases in days sales outstanding resulting from slower payment patterns from third parties, specifically from non-governmental payors as well as the impact of new acquisitions; decreases in accounts payable due primarily to timing of disbursements; decreases in accrued liabilities primarily due to timing for physician compensation payments, unreconciled payments and compliance and legal costs. Cash on hand was $33 million at December 31, 2000 compared to $13 million at December 31, 1999. Under the final settlement with the government, the Company is required to make net settlement payments totaling approximately $427 million, of which $14 million had previously been paid prior to 2000. This amount is net of approximately $59.2 million of reimbursement for Medicare receivables from the Government. During 2000, the Company made payments to the Government totaling $387 million and received $54 million from the Government. Under the definitive agreements with the Government, the Company entered into a note payable for the settlement payment obligations to the Government. Interest on installment payments to the Government accrues at 6.3% on $51.2 million of the obligation and at 7.5% annually on the balance, until paid in full. Under the terms of the note payable, the remaining obligation is payable in six quarterly installments which began April 2000 and will end July 2001. The first three of these quarterly installments of $35.4 million including interest of 7.5% were made in April, July, and October 2000. The fourth quarterly installment was made in the amount of $35.4 million including interest at 7.5% in January 2001. The remaining two installments of $27.8 million including interest at 6.3% will be made in April and July 2001, respectively. The Government has remitted the balance of the Company's outstanding Medicare 39 receivables in four quarterly payments of $5.2 million plus interest at 7.5%. The first three quarterly payments from the Government were received in May, August, and October 2000. The final payment was received in February 2001. Net cash flows used in investing activities of operations during 2000 totaled $220 million compared to $146 million in 1999. The Company funded its acquisitions and capital expenditures primarily through cash flows from operations and intercompany borrowings. Acquisitions totaled $116 million and $65 million in 2000 and 1999, respectively, net of cash acquired. Capital expenditures of $104 million and $81 million were made for internal expansion, improvements, new furnishings and equipment in 2000 and 1999, respectively. Net cash flows used in financing activities of operations during 2000 totaled $23 million as compared to net cash flows used of $96 million in 1999. During 2000, the Company made payments to the government of $387 million for the Settlement. In addition, debt and capital lease obligations were paid down by $18 million and repayments of $33 million were made on intercompany borrowings. Proceeds from financing activities in 2000 included $306 million for the issuance of mandatorily redeemable preferred stock to an affiliated company and increased borrowings under a receivable financing facility (the "A/R Facility") by $110 million. At December 31, 2000 the Company had additional borrowing capacity of approximately $69.8 million under its credit facility ("NMC Credit Facility") and $54.7 million under its A/R Facility. CRITICAL ACCOUNTING POLICIES The Company has identified the following selected accounting policies and issues that the Company believes are critical to understand the financial reporting risks presented in the current economic environment. These matters and judgements, and uncertainties affecting them, are also essential to understanding the Company's reported and future operating results. See Notes to Consolidated Financial Statements - Note 2, "Summary of Significant Accounting Policies." RECOVERABILITY OF GOODWILL AND INTANGIBLE ASSETS The growth of the Company's business through acquisitions has created a significant amount of intangible assets, including goodwill, patient relationships, tradenames and other. At December 31, 2001, the carrying amount of net intangible assets amounted to $3,419 million representing approximately 68% of our total assets. In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company reviews the carrying value of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. As discussed in Note 2 to the Consolidated Financial Statements, any impairment is tested by a comparison of the carrying amount of intangible assets to future net cash flows expected to be generated. If such intangible assets are considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. A prolonged downturn in the healthcare industry with lower than expected increases in reimbursement rates and/or higher than expected costs for providing our healthcare services could adversely affect the Company's estimates of future net cash flows in any given country or segment. Consequently, it is possible that the Company's future operating results could be materially and adversely affected by additional impairment charges related to goodwill. LEGAL CONTINGENCIES The Company is a party to litigation relating to a number of matters, including the commercial insurer litigation, OBRA 93, W.R. Grace & Co. bankruptcy and Sealed Air Corporation indemnification and other litigations arising in the ordinary course of the Company's business as described in Note 16 "Commitments and Contingencies" in the Company's Consolidated Financial Statements. The outcome of these matters may have a material effect on the Company's financial position, results of operations or cash flows. The Company regularly analyzes current information including, as applicable, our defenses and provides accrual for probable contingent losses including the estimated legal expenses to resolve the matter. The Company uses the resources of its internal legal department as well as external lawyers for the assessment. In making the decision, the Company considers the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of contingent loss. 40 If an unfavorable outcome is probable but the amount of loss cannot be reasonably estimated by management, appropriate disclosure is provided, but no contingent losses are accrued. The filing of a suit or formal assertion of a claim or assessment does not automatically indicate that accrual of a loss may be appropriate. REVENUE RECOGNITION Revenues are recognized on the date services and related products are provided/shipped and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare and Medicaid. The Company records an allowance for estimated uncollectible accounts receivable based upon an analysis of historical collection experience. The analysis considers difference in collection experience by payor mix and aging of the accounts receivable. From time to time, the Company reviews the accounts receivable for changes in historical collection experience to ensure the appropriateness of the allowances. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net Revenues from machines sales for 2001, 2000 and 1999 include $46.2 million, $54.5 million and $36.0 million, respectively, of net revenues for machines sold to a third party leasing company which are utilized by the dialysis services division to provide services to our customers. The profits on these sales are deferred and amortized to earnings over the lease terms. SELF INSURANCE PROGRAMS The Company is self-insured for professional, product and general liability, auto and worker's compensation claims up to predetermined amounts above which third party insurance applies. Estimates include ultimate costs for both reported and incurred but not reported claims. IMPACT OF INFLATION A substantial portion of the Company's net revenue is subject to reimbursement rates which are regulated by the federal government and do not automatically adjust for inflation. Non-governmental payors also are exerting downward pressure on reimbursement levels. Increased operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, may adversely affect the Company's business and results of operations. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued SFAS No.141, Business Combinations ("SFAS 141"), and SFAS No.142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of SFAS 141 immediately, and will adopt SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001 is not amortized, but will be evaluated for impairment in accordance with SFAS 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 have been amortized through December 31, 2001. SFAS 141 will require, upon adoption of SFAS 142, that the Company evaluate existing intangible assets and goodwill that were acquired in prior purchase business combinations, and that it make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to 41 test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, SFAS 142 will require that the Company perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in its statement of operations. Because of the extensive effort needed to comply with adopting SFAS 142, it is currently not practicable to reasonably estimate the impact of adopting this statement on the Company's financial statements at this time, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. However, based on our current assessments and subject to continuing analysis, had SFAS 142 been effective as of January 1, 2001 the Company estimates that there would have been a favorable impact to pre-tax earnings of approximately $100 million. The favorable pre-tax impact in 2002 should approximate $90 million. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting requirements for the retirement of tangible long-lived assets and asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently reviewing the impact of SFAS No. 143 on its results of operations. In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less selling costs. SFAS 144 also broadens the reporting of discontinued operations and will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 31, 2001. The Company is currently reviewing the impact of adopting this statement. 42 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its market risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations and purchase commitments. The Company does not hold or issue derivative instruments for trading or speculative purposes. Hedge accounting is applied if the derivative reduces the risk of the underlying hedged item and is designated at inception as a hedge. Additionally, changes in the value of the derivative must result in payoffs that are highly correlated to the changes in value of the hedged item. Derivatives are measured for effectiveness both at inception and on an ongoing basis. The Company enters into foreign exchange contracts that are designated as, and effective as, hedges for forecasted purchase transactions. Also, since the Company carries a substantial amount of floating rate debt, the Company uses interest rate swaps to synthetically change certain variable-rate debt obligations to fixed-rate obligations, as well as options to mitigate the impact of interest rate fluctuations. Gains and losses on foreign exchange contracts accounted for as hedges are deferred in other assets or liabilities. The deferred gains and losses are recognized as adjustments to the underlying hedged transaction when the future sales or purchases are recognized. Interest rate swap payments and receipts are recorded as part of interest expense. The fair value of the swap contracts is recognized in other liabilities in the financial statements. Cash flows from derivatives are recognized in the consolidated statement of cash flows in the same category as the item being hedged. If a derivative instrument ceases to meet the criteria for deferral, any subsequent gains or losses are recognized in operations. If a firm commitment does not occur, the foreign exchange contract is terminated and any gain or loss is recognized in operations. If a hedging instrument is sold or terminated prior to maturity, gains or losses continue to be deferred until the hedged item is recognized. Should a swap be terminated while the underlying obligation remains outstanding, the gain or loss is capitalized as part of the underlying obligation and amortized into interest expense over the remaining term of the obligation. At December 31, 2001, the fair value of the Company's interest rate agreements, which consisted entirely of interest rate swaps, is approximately ($66.6 million). The table below presents information on the Company's significant debt obligations, some of which are subject to interest rate changes, and the interest rate protection agreements used to hedge both long-term and short-term obligations. Interest Rate Exposure December 31, 2001 ($ millions)
2002 2003 2004 Thereafter Totals ---- ---- ---- ---------- ------ Principal Payments Due on NMC Credit Facility $150 $301 $451 Variable Interest Rate of approx. 3.24% Principal Payments Due on A/R Facility $442 $442 Variable Interest Rate of approx. 1.97% Borrowings from Affiliates Variable Interest Rate of 2.40%-2.85% $291 $291 Fixed Interest Rate = 9.25% $351 $351 Fixed Interest Rate = 8.43% $437 $437 Fixed Interest Rate = 8.25% $217 $217 Interest Rate Agreements (notional amounts) $750 $300 $1,050 Average Fixed Pay Rate = 6.52% 6.49% 6.61% Receive Rate = 3-Month LIBOR
43 At December 31, 2001, the fair value of the Company's foreign exchange contracts, which consisted entirely of forward agreements, is approximately ($13.3 million). The Company had outstanding contracts covering the purchase of $686.0 million Euros ("EUR") at an average contract price of $0.9067 per EUR, contracts covering the purchase of 84.0 million Mexican Pesos at an average contract price of 9.9992 per US dollar, and contracts covering the sale of 14.1 million Canadian Dollars at an average contract price of .6388 per C$, all contracts for delivery between January 2002 and November 2003. The Company's hedging strategy vis-a-vis the above-mentioned market risks has not changed significantly from 2000 to 2001. For additional information, see also "Notes to Consolidated Financial Statements - Note 2. Summary of Significant Accounting Policies - Derivative Financial Instruments" and "Notes to Consolidated Financial Statements - Note 14. Financial Instruments". 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is indexed in Item 14 of this Report and contained on the pages following the signature page hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with General Instruction G. (3) to Form 10-K, the information required by Part III is incorporated by reference to the Company's definitive information statement to be filed by April 30, 2002. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Consolidated Financial Statements The following consolidated financial statements are filed with this report: Report of Independent Auditors. Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000, and 1999. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2001, 2000, and 1999. Consolidated Balance Sheets as of December 31, 2001 and 2000. Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999. Consolidated Statements of Changes in Equity for the Years Ended December 31, 2001, 2000, and 1999. Schedule of Valuation and Qualifying Accounts as of December 31, 2001, 2000, and 1999. Notes to Consolidated Financial Statements. The Company is a majority-owned subsidiary of Fresenius Medical Care AG. The operating results and other financial information of the Company included in this report are not necessarily indicative of the operating results and financial condition of Fresenius Medical Care AG at the dates or for the periods presented herein. Users of the Company's financial statements wishing to obtain financial and other information regarding Fresenius Medical Care AG should consult the Annual Report on Form 20-F of Fresenius Medical Care AG, which will be filed with the Securities and Exchange Commission and the New York Stock Exchange. (b) Reports on Form 8-K. No current reports were filed during the fourth quarter of 2001. 45 (c) Exhibits. Exhibits. The following exhibits are filed or incorporated by reference as required by Item 601 of Regulation S-K. EXHIBIT NO. DESCRIPTION - ----------- Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and Fresenius AG (incorporated herein by reference to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. dated July 6, 2001 (authorizing action by majority written consent of the shareholders) (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 2001). 46 Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996). Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 1997). Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). 47 Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors , the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A. G. and Bank of America, N.A. (formerly known as NationsBank, N.A.). as Managing Agents, (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 9, 1999). Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on November 11, 2000). Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A). as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (filed herewith). Exhibit 4.16 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended effective as of August 3, 1998 (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). 48 Exhibit 4.17 Fresenius Medical Care Aktiengesellschaft 2001 International Stock Incentive Plan (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG filed August 2, 2001 (Registration No. 333-66558)). Exhibit 4.18 Senior Subordinated Indenture dated November 27, 1996, among Fresenius Medical Care AG, State Street Bank and Trust Company, as successor to Fleet National Bank, as Trustee and the Subsidiary Guarantors named therein (incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.19 Senior Subordinated Indenture dated as of February 19, 1998, among Fresenius Medical Care AG, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.20 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 3/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.21 Senior Subordinated Indenture dated as of June 6, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 4.22 Senior Subordinated Indenture dated as of June 15, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG dated August 2, 2001 (Registration No. 333-66558)). Exhibit 10.1 Employee Benefits and Compensation Agreement dated September 27, 1996 by and among W. R. Grace & Co., National Medical Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated herein by reference to the Registration Statement on Form F-1 of Fresenius Medical Care AG, as amended (Registration No. 333-05922), dated November 22, 1996 and the exhibits thereto). Exhibit 10.2 Purchase Agreement, effective January 1, 1995, between Baxter Health Care Corporation and National Medical Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.3* Product Purchase Agreement effective January 1, 2001 between Amgen, Inc. and National Medical Care, Inc. and Everest Healthcare Services Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on May 15, 2001). Exhibit 10.4 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.5 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.6 Amended and Restated Transfer and Administration Agreement dated as September 27, 1999 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). 49 Exhibit 10.7 Amendment No. 2 to Amended and Restated Transfer and Administration Agreement dated as October 26, 2000 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.8 Amendment No. 5 to Amended and Restated Transfer and Administration Agreement dated as December 21, 2001 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (filed herewith). Exhibit 10.9 Employment Agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992). Exhibit 10.10 Modification to FUSA Employment Agreement effective as of January 1, 1998 by and between Ben J. Lipps and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between Jerry A. Schneider and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between Ronald J. Kuerbitz and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.13 Employment Agreement dated March 15, 2000 by and between J. Michael Lazarus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.14 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.15 Employment Agreement dated June 1, 2000 by and between John F. Markus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.16 Subordinated Loan Note dated as of May 18, 1999, among National Medical Care, Inc. and certain Subsidiaries with Fresenius AG as lender (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 22, 1999). Exhibit 10.17 Corporate Integrity Agreement between the Offices of Inspector General of the Department of Health and Human Services and Fresenius Medical Care Holdings, Inc. dated as of January 18, 2000 (incorporated herein by reference to the Form 8-K of the Registrant filed with the Commission on January 21, 2000). Exhibit 11 Statement re: Computation of Per Share Earnings. Schedule II Valuation and Qualifying Accounts 50 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 1, 2002 FRESENIUS MEDICAL CARE HOLDINGS, INC. By: /s/ Ben J. Lipps ------------------------------------ Ben J. Lipps, President (Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE ---- ----- ---- /s/ Ben J. Lipps President and Director April 1, 2002 - -------------------------- (Chief Executive Officer) Ben J. Lipps /s/ Jerry A. Schneider Chief Financial Officer, Treasurer April 1, 2002 - ------------------------- and Director (Chief Financial and Jerry A. Schneider Accounting Officer) 51 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Fresenius Medical Care Holdings, Inc. We have audited the accompanying consolidated balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of December 31, 2001 and 2000 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the years in the three year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years then ended in conformity with accounting principles generally accepted in the United States of America. KPMG LLP February 26, 2002 Boston, MA 52 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------------ 2001 2000 1999 ----------- ----------- ----------- NET REVENUES Health care services ................................. $ 3,131,733 $ 2,609,108 $ 2,324,322 Medical supplies ..................................... 477,818 480,067 490,911 ----------- ----------- ----------- 3,609,551 3,089,175 2,815,233 ----------- ----------- ----------- EXPENSES Cost of health care services ......................... 2,178,085 1,768,914 1,542,965 Cost of medical supplies ............................. 332,770 339,908 336,749 General and administrative expenses .................. 335,961 269,574 276,408 Provision for doubtful accounts ...................... 85,448 62,949 42,243 Depreciation and amortization ........................ 246,819 222,870 217,952 Research and development ............................. 5,462 4,127 4,065 Interest expense, net, and related financing costs including $134,557, $110,746 and $88,679 interest with affiliates ................................... 226,480 187,315 201,915 Interest expense on settlement of investigation, net . -- 29,947 -- Special charge for settlement of investigation and related costs ..................................... -- -- 601,000 Special charge for legal matters ..................... 258,159 -- -- ----------- ----------- ----------- 3,669,184 2,885,604 3,223,297 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES ...................... (59,633) 203,571 (408,064) PROVISION (BENEFIT) FOR INCOME TAXES .................... 19,623 98,321 (81,037) ----------- ----------- ----------- NET INCOME (LOSS) ....................................... $ (79,256) $ 105,250 $ (327,027) =========== =========== =========== Basic and fully dilutive (loss) earnings per share ...... $ (0.89) $ 1.16 $ (3.64)
See accompanying Notes to Consolidated Financial Statements 53 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------- 2001 2000 1999 --------- --------- --------- NET INCOME (LOSS) $ (79,256) $ 105,250 $(327,027) Other comprehensive income Foreign currency translation adjustments (130) (174) (625) Derivative instruments, (net of deferred tax $26,514) (50,929) -- -- --------- --------- --------- Total other comprehensive loss (51,059) (174) (625) --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $(130,315) $ 105,076 $(327,652) ========= ========= ========= See accompanying Notes to Consolidated Financial Statements 54 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) DECEMBER 31, ---------------------------- 2001 2000 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents .................... $ 26,786 $ 33,327 Accounts receivable, less allowances of $103,859 and $80,466 ....................... 423,912 318,391 Inventories .................................. 202,221 191,699 Deferred income taxes ........................ 196,831 123,190 Other current assets ......................... 119,592 139,082 IDPN accounts receivable ..................... -- 5,189 ----------- ----------- Total Current Assets ....................... 969,342 810,878 ----------- ----------- Properties and equipment, net .................. 520,620 456,936 ----------- ----------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $718,939 and $564,880 ............................... 3,418,544 3,222,044 Other assets and deferred charges ............ 94,460 63,500 ----------- ----------- Total Other Assets ......................... 3,513,004 3,285,544 ----------- ----------- Total Assets ................................... $ 5,002,966 $ 4,553,358 =========== =========== LIABILITIES AND EQUITY Current Liabilities: Note payable for settlement of investigation . $ -- $ 85,920 Current portion of long-term debt and capitalized lease obligations .............. 152,046 151,268 Current portion of borrowing from affiliates . 291,360 341,643 Accounts payable ............................. 125,530 139,754 Accrued liabilities .......................... 231,378 228,025 Accrued special charge for legal matters ..... 221,812 -- Net accounts payable to affiliates ........... 39,934 6,317 Accrued income taxes ......................... 83,654 11,525 ----------- ----------- Total Current Liabilities .................. 1,145,714 964,452 Long-term debt ................................. 300,600 588,526 Non-current borrowings from affiliates ......... 1,005,669 786,865 Capitalized lease obligations .................. 1,675 911 Deferred income taxes .......................... 113,046 122,946 Other liabilities .............................. 146,170 58,188 ----------- ----------- Total Liabilities .......................... 2,712,874 2,521,888 ----------- ----------- Mandatorily Redeemable Preferred Securities .... 692,330 305,500 ----------- ----------- Equity: Preferred stock, $100 par value .............. 7,412 7,412 Preferred stock, $.10 par value .............. 8,906 8,906 Common stock, $1 par value; 300,000,000 shares authorized; outstanding 90,000,000 ......... 90,000 90,000 Paid in capital .............................. 1,945,014 1,942,387 Retained deficit ............................. (402,749) (322,973) Accumulated comprehensive income (loss) ...... (50,821) 238 ----------- ----------- Total Equity ............................... 1,597,762 1,725,970 ----------- ----------- Total Liabilities and Equity ................... $ 5,002,966 $ 4,553,358 =========== =========== See accompanying Notes to Consolidated Financial Statements. 55 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------- 2001 2000 1999 --------- --------- --------- Cash Flows from Operating Activities: Net income (loss) .................................... $ (79,256) $ 105,250 $(327,027) Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization ...................... 246,819 222,870 217,952 Write-off of receivables relating to settlement of investigation ................................. -- -- 94,349 Provision for doubtful accounts .................... 85,448 62,949 42,243 Deferred income taxes .............................. (68,302) 84,900 (93,124) Loss on disposal of properties and equipment ....... 965 970 713 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable ................... (133,225) (194,772) (112,095) Increase in inventories ............................ (5,401) (7,472) (12,606) Decrease (increase) in other current assets ....... 21,345 (6,025) (21,300) Decrease in IDPN receivables ....................... 5,189 53,962 -- (Increase) decrease in other assets and deferred charges .......................................... (3,561) (3,025) 1,646 (Decrease) increase in accounts payable ............ (31,810) 5,976 25,855 Increase (decrease) in accrued income taxes ........ 72,179 (908) 22 (Decrease) increase in accrued liabilities ......... (10,922) (65,227) 356,539 Increase in accrued special charge for legal matters .......................................... 221,812 -- -- Increase in other long-term liabilities ............ 2,187 12,035 102,795 Net changes due to/from affiliates ................. 38,213 (6,044) (5,605) Other, net ......................................... (7,335) (2,126) (17,088) --------- --------- --------- Net cash provided by operating activities of continued operations ............................... 354,345 263,313 253,269 --------- --------- --------- Net cash used in operating activities of discontinued operations ......................................... -- -- (3,782) --------- --------- --------- Net cash provided by operating activities ............ 354,345 263,313 249,487 --------- --------- --------- Cash Flows from Investing Activities: Capital expenditures ............................... (124,621) (104,199) (81,330) Payments for acquisitions, net of cash acquired .... (288,924) (115,601) (65,235) Increase in other assets ........................... (22,754) -- -- --------- --------- --------- Net cash used in investing activities ................ (436,299) (219,800) (146,565) --------- --------- --------- Cash Flows from Financing Activities: Payments on settlement of investigation ............ (85,920) (386,815) -- Net increase (decrease) in borrowings from affiliates ....................................... 168,521 (32,947) 172,455 Cash dividends paid ................................ (520) (520) (520) Proceeds from mandatorily redeemable preferred securities ....................................... 284,403 305,500 -- Proceeds from issuance of debt ..................... -- -- 37 Net (decrease) increase from receivable financing facility ......................................... (3,300) 110,300 29,400 Payments on debt and capitalized leases ............ (290,324) (17,660) (298,587) Other, net ......................................... 2,628 (647) 799 --------- --------- --------- Net cash provided by (used in) financing activities .. 75,488 (22,789) (96,416) --------- --------- --------- Effects of changes in foreign exchange rates ........... (75) 40 (522) --------- --------- --------- Change in cash and cash equivalents .................... (6,541) 20,764 5,984 Cash and cash equivalents at beginning of period ....... 33,327 12,563 6,579 --------- --------- --------- Cash and cash equivalents at end of period ............. $ 26,786 $ 33,327 $ 12,563 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements 56 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED ------------------------------------- 2001 2000 1999 --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ..................................... $ 196,289 $ 223,847 $ 216,647 Income taxes paid, net ....................... 16,024 14,882 8,344 Details for Acquisitions: Assets acquired .............................. 423,202 117,935 65,256 Liabilities assumed .......................... (34,156) (2,334) (21) Equity consideration.......................... (99,479) -- -- --------- --------- --------- Cash paid .................................... 289,567 115,601 65,235 Less cash acquired ........................... 643 -- -- --------- --------- --------- Net cash paid for acquisitions ............... $ 288,924 $ 115,601 $ 65,235 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements 57 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Capital in Preferred Stocks Common Stock Excess Retained Other -------------------- -------------------- of Par Earnings Comprehensive Total Shares Amount Shares Amount Value (Deficit) Income Equity ---------- ------- ---------- ------- ----------- --------- ------------- ----------- BALANCE, DECEMBER 31, 1998 89,136,435 $16,318 90,000,000 $90,000 $ 1,942,235 $(100,156) $ 1,037 $ 1,949,434 Net Loss -- -- -- -- -- (327,027) -- (327,027) Cash dividends on preferred stock -- -- -- -- -- (520) -- (520) Tax benefit of dispositions of stock options -- -- -- -- 822 -- -- 822 Other comprehensive income -- -- -- -- -- -- (625) (625) Other adjustments -- -- -- -- (23) -- -- (23) ---------- ------- ---------- ------- ----------- --------- -------- ----------- BALANCE, DECEMBER 31, 1999 89,136,435 $16,318 90,000,000 $90,000 $ 1,943,034 $(427,703) $ 412 $ 1,622,061 ========== ======= ========== ======= =========== ========= ======== =========== Net Income -- -- -- -- -- 105,250 -- 105,250 Cash dividends on preferred stock -- -- -- -- -- (520) -- (520) Other comprehensive income -- -- -- -- -- -- (174) (174) Other adjustments -- -- -- -- (647) -- -- (647) ---------- ------- ---------- ------- ----------- --------- -------- ----------- BALANCE, DECEMBER 31, 2000 89,136,435 $16,318 90,000,000 $90,000 $ 1,942,387 $(322,973) $ 238 $ 1,725,970 ========== ======= ========== ======= =========== ========= ======== =========== Net Loss -- -- -- -- -- (79,256) -- (79,256) Cash dividends on preferred stock -- -- -- -- -- (520) -- (520) Other comprehensive income - FX -- -- -- -- -- -- (130) (130) Other comprehensive income - FAS 133 -- -- -- -- -- -- (50,929) (50,929) Other adjustments -- -- -- -- 2,627 -- -- 2,627 ---------- ------- ---------- ------- ----------- --------- -------- ----------- BALANCE, DECEMBER 31, 2001 89,136,435 $16,318 90,000,000 $90,000 $ 1,945,014 $(402,749) $(50,821) $ 1,597,762 ========== ======= ========== ======= =========== ========= ======== ===========
See accompanying Notes to Consolidated Financial Statements 58 FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. THE COMPANY Fresenius Medical Care Holdings, Inc., a New York corporation ("the Company") is a subsidiary of Fresenius Medical Care AG, a German corporation ("FMC" or "Fresenius Medical Care"). The Company conducts its operations through five principal subsidiaries, National Medical Care, Inc., ("NMC"); Fresenius USA Marketing, Inc., Fresenius USA Manufacturing, Inc., and SRC Holding Company, Inc., ("SRC"), all Delaware corporations and Fresenius USA, Inc., a Massachusetts corporation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and those financial statements where the Company controls professional corporations in accordance with Emerging Issues Task Force Issue 97-2. The Company is primarily engaged in (i) providing kidney dialysis services, and clinical laboratory testing, and (ii) manufacturing and distributing products and equipment for dialysis treatment. BASIS OF PRESENTATION BASIS OF CONSOLIDATION The consolidated financial statements in this report at December 31, 2001, 2000 and 1999, respectively, have been prepared in accordance with accounting principles general accepted in the United States of America. These consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for the fair presentation of the consolidated results for all periods presented. All intercompany transactions and balances have been eliminated in consolidation. All assets acquired and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets acquired is capitalized as goodwill and amortized over the estimated period of benefit on a straight-line basis. Pursuant to SFAS 141, Business Combinations, in connection with SFAS 142, Goodwill and Intangible Assets, goodwill arising from business combinations accounted for as a purchase after June 30, 2001, is no longer amortized. EARNINGS PER SHARE Basic earnings per share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted earnings per share includes the effect of all dilutive potential common shares that were outstanding during the year. The number of shares used to compute basic and diluted earnings per share was 90,000 in all periods as there were no potential common shares and no adjustments to income to be considered for purposes of the diluted earnings per shares calculation. TWELVE MONTHS ENDED DECEMBER 31, -------------------------- 2001 2000 1999 ------ ------ ------ The weighted average number of shares of Common Stock were as follows ......... 90,000 90,000 90,000 ====== ====== ====== 59 Net income (loss) used in the computation of earnings per share is as follows:
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 -------- --------- --------- CONSOLIDATED Net income (loss) ..................................... $(79,256) $ 105,250 $(327,027) Dividends paid on preferred stocks .................... (520) (520) (520) -------- --------- --------- Income (loss) used in per share computation of earnings $(79,776) $ 104,730 $(327,547) ======== ========= ========= Basic and fully dilutive earnings (loss) per share .... $ (0.89) $ 1.16 $ (3.64) ======== ========= =========
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities (including disclosed amounts of contingent assets and liabilities) at the dates of the consolidated financial statements and the reported revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. CASH EQUIVALENTS Cash equivalents consist of highly liquid instruments with maturities of three months or less when purchased. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and the related amendments of SFAS No. 138. The cumulative effect of adopting SFAS 133 as of January 1, 2001 was not material to the Company's consolidated financial statements. The Company is exposed to market risk due to changes in interest rates and foreign currencies. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with debt obligations, forecasted raw material purchases and Euro denominated mandatorily redeemable preferred stock. The interest rate swaps are designated as cash flow hedges effectively converting certain variable interest rate payments into fixed interest rate payments. After tax losses of $40 million ($67 million pretax) for the twelve months ended December 31, 2001 were deferred in other comprehensive income. Interest payable and interest receivable under the swap terms are accrued and recorded as an adjustment to interest expense at each reporting date. The Company enters into forward rate agreements that are designated and effective as hedges of forecasted raw material purchases. After tax losses of $0.4 million ($0.6 million pretax) for the twelve months ended December 31, 2001 were deferred in other comprehensive income and will be reclassified into cost of sales in the period during which the hedged transactions affect earnings. All deferred amounts will be reclassified into earnings within the next twelve months. The Company enters into forward rate agreements that are designated and effective as hedges of changes in the fair value of the Euro denominated mandatorily redeemable preferred stock. Changes in fair value are recorded in earnings and 60 offset against gains and losses resulting from the underlying exposures. Ineffective amounts had no material impact on earnings for the twelve months ended December 30, 2001. Periodically, the Company enters into derivative instruments with related parties to form a natural hedge for currency exposures on intercompany obligations. These instruments are reflected in the balance sheet at fair value with changes in fair value recognized in earnings. EVEREST ACQUISITION On January 8, 2001, FMC acquired Everest Healthcare Services Corporation (now known as Everest Healthcare Holdings, Inc., "Everest") through a merger of Everest into a subsidiary of FMC at a purchase price of $365 million. Approximately $99 million was funded by the issuance of 2.25 million FMC preference shares to Everest shareholders. The remaining purchase price was paid with cash of $266 million, including assumed debt. Everest owned, operated or managed approximately 70 clinic facilities providing therapy to approximately 6,800 patients in the United States. Everest also operated extracorporeal blood services and acute dialysis businesses that provide acute dialysis, apheresis and hemoperfusion services to approximately 100 hospitals. On August 22, 2001 FMC transferred its interests in Everest to the Company at its book value. There was no gain or loss recorded on this sale as it is a transfer between entities under common control. The consolidated operations and cash flows of the Company for the twelve months ended December 31, 2001 include the consolidated operations and cash flows of Everest retroactive to January 1, 2001. Accordingly, the Company's previously reported revenues and results of operations for the six months ended June 30, 2001 have been restated to include Everest revenues and earnings of $134 million and $11 million, respectively. In addition Everest assets and liabilities of approximately $417 million and $306 million, including intercompany obligations of $79 million at June 30, 2001, have been transferred to the Company. REVENUE RECOGNITION Revenues are recognized on the date services and related products are provided/shipped and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare and Medicaid. The Company establishes appropriate allowances based upon factors surrounding credit risks of specific third party payors, historical trends and other information. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net Revenues from machines sales for 2001, 2000 and 1999 include $46.2 million, $54.5 million and $36.0 million, respectively, of net revenues for machines sold to a third party leasing company which are utilized by the dialysis services division to provide services to our customers. The profits on these sales are deferred and amortized to earnings over the lease terms. CONCENTRATION OF CREDIT RISK The Company is engaged in providing kidney dialysis treatment, clinical laboratory testing and other ancillary services and in the manufacture and sale of products for all forms of kidney dialysis principally to health care providers throughout the world. The Company performs ongoing evaluations of its customers' financial condition and, generally, requires no collateral. A significant percentage of the Company's health care services revenues are paid by and subject to regulations under governmental programs, primarily Medicare and Medicaid, health care programs administered by the United States government. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTIES AND EQUIPMENT Properties and equipment are stated at cost. Significant improvements are capitalized; repairs and maintenance costs that do not extend the lives of the assets are charged to expense as incurred. Property and equipment under capital leases are stated at the present value of future minimum lease payments at the inception of the lease. The cost and accumulated depreciation of assets 61 sold or otherwise disposed of are removed from the accounts, and any resulting gain or loss is included in income when the assets are disposed. The cost of properties and equipment is depreciated over estimated useful lives on a straight - line basis as follows: buildings - 20 to 40 years, equipment and furniture - 3 to 10 years, equipment under capital leases and leasehold improvements - the shorter of the lease term or useful life. For income tax purposes, depreciation is calculated using accelerated methods to the extent permitted. The Company capitalizes interest on borrowed funds during construction periods. Interest capitalized during 2001, 2000 and 1999 was $3,397, $2,705, and $1,500 respectively. EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS In accordance with SFAS 141, Business Combinations and SFAS 142, Goodwill and Intangible Assets, goodwill and identifiable intangibles with indefinite lives from business combinations consummated after June 30, 2001 are not amortized whereas other identifiable intangibles are amortized. See "New Pronouncements". For business combinations consummated on or before June 30, 2001, goodwill and identifiable assets are amortized. The Company has adopted the following useful lives and methods to amortize intangible assets: trade name, 40 years; goodwill--25 to 40 years on a straight-line basis; acute care agreements - over the term of the agreement, generally from 1 to 2 years; patient relationships and other intangible assets - over the estimated period to be benefited, generally from 5 to 6 years on a straight line basis. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired on business combinations accounted for as a purchase. DEBT ISSUANCE COSTS Costs related to the issuance of debt are amortized over the term of the related obligation. SELF INSURANCE PROGRAMS The Company is self insured for professional, product and general liability, auto and worker's compensation claims up to predetermined amounts above which third party insurance applies. Estimates include ultimate costs for both reported and incurred but not reported claims. IMPAIRMENT In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers various valuation factors including discounted cash flows, fair values and replacement costs to assess any impairment of goodwill and other long lived assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. See "New Pronouncements". FOREIGN CURRENCY TRANSLATION The Company follows the provisions of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". Substantially all assets and liabilities of the Company's foreign subsidiaries are translated at year end exchange rates, while revenue and expenses are translated at exchange rates prevailing during the year. Adjustments for foreign currency translation fluctuations are excluded from net earnings and are deferred in the cumulative translation adjustment component of equity. In addition, the translation of certain intercompany borrowings denominated in foreign currencies, which are considered foreign equity investments, is included in the cumulative translation adjustment. 62 Gains and losses resulting from the translation of revenues and expenses and intercompany borrowings, which are not considered equity investments, are included in general and administrative expense. Translation gains (losses) amounted to ($4,519), $5,927 and $58 for the twelve months ended December 31, 2001, 2000 and 1999, respectively. INCOME TAXES Deferred income taxes are provided for temporary differences between the reporting of income and expense for financial reporting and tax return purposes. Deferred tax liabilities or assets at the end of each period are determined using the tax rates then in effect for the periods when taxes are actually expected to be paid or recovered. Accordingly, income tax expense provisions will increase or decrease in the period in which a change in tax rates is enacted. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. LEGAL COSTS The Company accrues for loss contingencies when they are probable and can be reasonably estimable. Included in the Company's accrual is an estimate of the legal costs associated with the contingencies. NEW PRONOUNCEMENTS In July 2001, the FASB issued SFAS No.141, Business Combinations ("SFAS 141"), and SFAS No.142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of SFAS 141 immediately, and will adopt SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001 is not amortized, but will be evaluated for impairment in accordance with SFAS 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 have been amortized through December 31, 2001. SFAS 141 will require, upon adoption of SFAS 142, that the Company evaluate existing intangible assets and goodwill that were acquired in prior purchase business combinations, and that it make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, SFAS 142 will require that the Company perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of 63 the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in its statement of operations. Because of the extensive effort needed to comply with adopting SFAS 142, it is currently not practicable to reasonably estimate the impact of adopting this statement on the Company's financial statements at this time, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. However, based on our current assessments and subject to continuing analysis, had SFAS 142 been effective as of January 1, 2001 the Company estimates that there would have been a favorable pre-tax impact to pre-tax earnings of approximately $100 million. The favorable impact in 2002 should approximate $90 million. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses the reporting requirements for the retirement of tangible long-lived assets and asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently reviewing the impact of adopting this statement. In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less selling costs. SFAS 144 also broadens the reporting of discontinued operations and will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 31, 2001. The Company is currently reviewing the impact of adopting this statement. RECLASSIFICATION Certain 2000 and 1999 amounts have been reclassified to conform with the 2001 presentation. NOTE 3. ACQUISITIONS The Company acquired certain health care facilities for a total consideration of $388,403, $115,601 and $65,235 for the twelve months ended December 31, 2001, 2000 and 1999, respectively. These acquisitions have been accounted for as purchase transactions and, accordingly, are included in the results of operations from the dates of acquisition. The excess of the total acquisition costs over the fair value of tangible net assets acquired was $321,728, $93,417 and $62,376 for the twelve months ended December 31, 2001, 2000 and 1999, respectively. Had the acquisitions that occurred during the twelve months ended December 31, 2001 been consummated on January 1, 2000, unaudited proforma net revenues for the twelve months ended December 31, 2001 and 2000 would have been $3,614,291 and $3,358,910, respectively. Unaudited proforma net income (loss) would have been ($78,942) and $97,015 for the twelve months ended December 31, 2001 and 2000, respectively. Had the acquisitions that occurred during the twelve months ended December 31, 2000 been consummated on January 1, 1999, unaudited proforma net revenues for the twelve months ended December 31, 2000 and 1999 would have been $3,139,406 and $2,929,550, respectively. Unaudited proforma net income (loss) would have been $106,505 and ($325,648) for the twelve months ended December 31, 2000 and 1999, respectively. 64 NOTE 4. OTHER BALANCE SHEET ITEMS DECEMBER 31, ------------------------ 2001 2000 ---------- ---------- INVENTORIES Raw materials $ 40,834 $ 44,787 Manufactured goods in process 11,053 10,516 Manufactured and purchased inventory available for sale 84,789 80,520 ---------- ---------- 136,676 135,823 Health care supplies 65,545 55,876 ---------- ---------- Total $ 202,221 $ 191,699 ========== ========== Under the terms of certain purchase commitments, the Company is obligated to purchase raw materials and health care supplies of $137,387 of which $61,351 is committed at December 31, 2001 for fiscal year 2002. The terms of these agreements run 1 to 3 years. OTHER CURRENT ASSETS Miscellaneous accounts receivable $ 66,656 $ 98,668 Deposits and prepaid expenses 52,936 40,414 ---------- ---------- Total $ 119,592 $ 139,082 ========== ========== EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS: Goodwill, less accumulated amortization of $384,381 and $302,757 $2,885,617 $2,701,281 Patient relationships, less accumulated amortization of $155,769 and $116,856 77,721 72,662 Other intangible assets, less accumulated amortization of $178,789 and $145,267 455,206 448,101 ---------- ---------- Total $3,418,544 $3,222,044 ========== ========== ACCRUED LIABILITIES Accrued salaries and wages $ 62,056 $ 50,988 Accounts receivable credit balances 57,386 38,215 Accrued insurance 39,047 47,021 Accrued operating expenses 22,638 36,062 Accrued physician compensation 17,436 17,649 Accrued interest 16,492 14,974 Accrued other 16,323 18,130 Accrued other related costs for OIG investigation -- 4,986 ---------- ---------- Total $ 231,378 $ 228,025 ========== ========== Accounts receivable credit balances principally reflect overpayments from third party payors and are in the process of repayment. 65 NOTE 5. SALE OF ACCOUNTS RECEIVABLE The Company, has an asset securitization facility (the "Accounts Receivable Facility") whereby receivables of NMC and certain affiliates are sold to NMC Funding Corporation (the "Transferor"), a wholly-owned subsidiary of NMC, and subsequently the Transferor transfers and assigns percentage ownership interests in the receivables to certain bank investors. NMC Funding Corporation is not consolidated as it does not meet the control criteria of SFAS No. 140. The retained interest in accounts receivable is reflected on the face of the balance sheet net of uncollectable accounts to approximate fair value. The Company has a servicing obligation to act as collection agent on behalf of the Transferor. The amount of the accounts receivable facility was last amended on December 21, 2001, when the Company increased the Accounts Receivable Facility to $560,000 from $500,000, and extended its maturity to October 24, 2002. At December 31, 2001 and 2000, $442,000 and $445,300, respectively, had been received pursuant to such sales and are reflected as reductions to accounts receivable. The Transferor pays interest to the bank investors, calculated based on the commercial paper rates for the particular tranches selected. The effective interest rate was approximately 2.38% at year-end 2001. Under the terms of the agreement, new interests in accounts receivable are sold without recourse as collections reduce previously sold accounts receivables. The cost related to such sales are expensed as incurred and recorded as interest expense and related financing costs. There were no gains or losses on these transactions. NOTE 6. DEBT Long-term debt to outside parties consists of: DECEMBER 31, -------------------- 2001 2000 -------- -------- NMC Credit Facility $450,600 $732,500 Note payable for settlement of investigation -- 85,920 Other 27 7,120 -------- -------- 450,627 825,540 Less amounts classified as current 150,027 237,014 -------- -------- $300,600 $588,526 ======== ======== In September 1996, NMC entered into a credit agreement with a group of banks (collectively, the "Lenders"), pursuant to which the Lenders made available to NMC and certain specified subsidiaries and affiliates an aggregate of $2,000,000 through two credit facilities (collectively, the "NMC Credit Facility"). The NMC Credit Facility, as amended, includes: (i) a revolving credit facility of up to $1,000,000 for up to seven years (of which up to $250,000 is available for letters of credit, up to $450,000 is available for borrowings in certain non-U.S. currencies, up to $50,000 is available as swing lines in U.S. dollars and up to $20,000 is available as swing lines in certain non-U.S. currencies) ("Facility 1") and (ii) a term loan facility of $1,000,000 for up to seven years ("Facility 2"). Loans under the NMC Credit Facility bear interest at one of the following rates, at either (i) LIBOR plus an applicable margin or (ii) a base rate equal to the sum of (1) the higher from time to time of (A) the prime rate of Bank of America, N.A. or (B) the federal funds rate plus 0.50% and (2) an applicable margin. A commitment fee is payable to the Lenders equal to a percentage per annum applied against the unused portion of the NMC Credit Facility. In addition to scheduled quarterly principal payments under Facility 2, the NMC Credit Facility will be reduced by certain portions of the net cash proceeds from certain sales of assets, sales of accounts receivable and the issuance of subordinated debt and equity securities. All borrowings outstanding under Facility 1 are due and payable at the end of the seventh year. Prepayments are permitted at any time without penalty, except in certain defined periods. The NMC Credit Agreement contains certain affirmative and negative covenants with respect to the Company, NMC and its subsidiaries, customary for this type of agreement . In December, 2001, a covenant was modified to reflect pending commercial payor litigation arising from this investigation. In February, 2002, an amendment was obtained to certain covenants that would have been affected by the special charge for potential liabilities and costs resulting from the W.R. Grace bankruptcy filing and for settlements and expenses related to commercial insurance litigation. At December 31, 2001, after receipt of the amendment, the Company was in compliance with all such covenants. 66 In February 1998, $250,000 of Facility 2 was repaid, primarily using borrowings from affiliates. The voluntary prepayment reduced the available financing under the agreement to $1,750,000. The Company has made all of its scheduled principal payments, reducing the amount available under the NMC Credit Facility at the end of 2001 and 2000 to $1,427,500 and $1,577,500, respectively. At December 31, 2001 and 2000 the Company had available $697,000 and $698,000, respectively, of additional borrowing capacity under the NMC Credit Facility including $216,000 and $103,000 respectively, available for additional letters of credit. In addition, at December 31, 2001, FMC had outstanding debt under the credit facility of $245,801. Borrowings from affiliates consists of: DECEMBER 31, ------------------------ 2001 2000 ---------- ---------- Fresenius Medical Care AG, borrowings at interest rates approximating 2.85% ........ $ 191,967 $ 18,850 Fresenius AG, borrowings at interest rates approximating 2.73% ....................... 15,000 209,000 Fresenius Medical Care Trust Finance S.a.r.l., borrowings at interest rates of 8.25%, 8.43% and 9.25% .................................. 1,005,239 786,524 Fresenius Acquisition, LLC at interest rates approximating 2.40% ....................... 83,721 113,121 Other ......................................... 1,102 1,013 ---------- ---------- Less amounts classified as current ............ 1,297,029 1,128,508 Total ......................................... 291,360 341,643 ---------- ---------- $1,005,669 $ 786,865 ========== ========== Scheduled maturities of long-term debt and borrowings from affiliates are as follows: 2002 $ 441,387 2003 300,600 2004 0 2005 0 2006 350,995 2007 and thereafter 654,674 ---------- Total $1,747,656 ========== 67 NOTE 7. SPECIAL CHARGE FOR LEGAL MATTERS In the fourth quarter of 2001, the Company recorded a $258 million ($177 after tax) special charge to address 1996 merger related legal matters, estimated liabilities including legal expenses arising in connection with the W.R. Grace Chapter 11 proceedings and the cost of resolving pending litigation and other disputes with certain commercial insurers. In January 2002, the Company reached an agreement in principle to resolve pending litigation with Aetna Life Insurance Company (Aetna). The special charge is primarily comprised of three major components relating to (i) the W.R. Grace bankruptcy, (ii) litigation with commercial insurers and (iii) other legal matters. The Company has assessed the extent of potential liabilities as a result of the W.R. Grace Chapter 11 proceedings. The Company accrued $172 million principally representing a provision for income taxes payable for the years prior to the 1996 merger for which the Company has been indemnified by W.R. Grace, but may ultimately be obligated to pay as a result of W.R. Grace's Chapter 11 filing. In addition, that amount includes the costs of defending the Company in litigation arising out of W.R. Grace's Chapter 11 filing. The Company has entered into an agreement in principle with Aetna to establish a process for resolving its pending litigation. The Company has included in the special charge the amount of $55 million to provide for settlement obligations, legal expenses and the resolution of disputed accounts receivable for Aetna and the other commercial litigants. If the Company is unable to settle the pending matters with any of the remaining commercial insurers, whether on the basis of the Aetna agreement in principle or otherwise, the Company believes that this charge reasonably estimates the costs and expenses associated with such litigation. The remaining amount of $31 million pre-tax was accrued for (i) assets and receivables that are impaired in connection with other legal matters and (ii) anticipated expenses associated with the continued defense and resolution of the legal matters. See also Note 16- "Commitment and Contingencies- Legal Proceedings." NOTE 8. SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATION AND RELATED COSTS RECORDED IN 1999 On January 18, 2000, the Company, NMC and certain affiliated companies executed definitive agreements (the "Settlement Agreements") with the United States Government (the "Government") to settle (i) matters concerning violations of federal laws and (ii) NMC's claims with respect to outstanding Medicare receivables for nutrition therapy (collectively, the "Settlement"). In anticipation of the Settlement, the Company recorded a special pre-tax charge against its consolidated earnings in 1999 totaling $601 million ($419 million after tax). In 2001, the Company remitted final payment of $85.9 million pursuant to the Settlement. In addition, the Company received final payment of $5.2 million in the first quarter of 2001 from the U.S. Government, related to the Company's claims for outstanding Medicare receivables. The letter of credit of $89 million at December 31, 2000 securing the settlement obligation was closed out with the last payment. 68 NOTE 9. INCOME TAXES Income (loss) before income taxes are as follows:
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 -------- -------- --------- Domestic $(61,655) $201,305 $(410,034) Foreign 2,022 2,266 1,970 -------- -------- --------- Total income (loss) before income taxes $(59,633) $203,571 $(408,064) ======== ======== =========
The provision (benefit) for income taxes was as follows:
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 -------- -------- --------- Current tax expense Federal $ 71,021 $ 2,616 $ 1,545 State 15,675 10,195 9,916 Foreign 1,229 610 626 -------- -------- --------- Total current 87,925 13,421 12,087 Deferred tax (benefit) expense Federal (53,396) 79,858 (87,926) State (15,077) 4,712 (4,981) Foreign 171 330 (217) -------- -------- --------- Total deferred tax (benefit) (68,302) 84,900 (93,124) -------- -------- --------- Total provision (benefit) $ 19,623 $ 98,321 $ (81,037) ======== ======== =========
Deferred tax liabilities (assets) are comprised of the following: DECEMBER 31, ----------------------- 2001 2000 --------- --------- Reserves and other accrued liabilities $(138,442) $(141,632) Depreciation and amortization 148,608 140,864 Special charge not currently deductible (67,760) -- Derivatives (26,514) -- Other 323 524 --------- --------- Net deferred tax (asset) liabilities $ (83,785) $ (244) ========= ========= The provision (benefit) for income taxes for the twelve months ended December 31, 2001, 2000, and 1999 differed from the amount of income taxes determined by applying the applicable statutory federal income tax rate to pretax earnings as a result of the following differences: TWELVE MONTHS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------------------------------- Statutory federal tax rate (benefit) (35.0%) 35.0% (35.0%) State income taxes, net of federal 0.7 4.7 0.8 tax benefit Amortization of goodwill 38.2 10.2 5.1 Special charge for legal matters 31.6 -- -- Government Settlement -- (2.3) 8.7 Foreign losses and taxes 0.7 0.6 (0.1) Other (3.3) 0.1 0.6 -------------------------------- Effective tax rate (benefit) 32.9% 48.3% (19.9%) ================================ The net (decrease) increase in the valuation allowance for deferred tax assets was $1,067, $(2,407) and $(311) for the twelve months ended December 31, 2001, 2000, and 1999, respectively. It is the Company's expectation that it is more likely 69 than not to generate future taxable income to utilize its net deferred tax asset. The changes for all three years relate to activities incurred by foreign subsidiaries. At December 31, 2001, there were approximately $9,472 of foreign net operating losses, the majority of which expire within seven years. Provision has not been made for additional federal, state, or foreign taxes on $7,926 of undistributed earnings of foreign subsidiaries. Those earnings have been, and will continue to be reinvested. The earnings could be subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to the Company or a U.S. affiliate or if the Company should sell its stock in the subsidiaries. The Company estimates that the distribution of these earnings would result in $3,054 of additional foreign withholding and federal income taxes. NOTE 10. PROPERTIES AND EQUIPMENT DECEMBER 31, ------------------------- 2001 2000 --------- --------- Land and improvements $ 5,211 $ 5,135 Buildings 69,874 63,937 Capitalized lease property 613 3,312 Leasehold improvements 315,260 235,096 Equipment and furniture 459,790 403,701 Construction in progress 51,817 38,176 --------- --------- 902,565 749,357 Accumulated depreciation and amortization (381,945) (292,421) --------- --------- Properties and equipment, net $ 520,620 $ 456,936 ========= ========= Depreciation expense relating to properties and equipment amounted to $91,328, $80,034 and $80,803 for the years ended December 31,2001, 2000 and 1999, respectively. Included in properties and equipment as of December 31, 2001, and 2000 were $28,804 and $26,816, respectively, of peritoneal dialysis cycler machines which the Company leases to customers with end-stage renal disease on a month-to-month basis. Rental income for the peritoneal dialysis cycler machines was $13,108, $12,472, and $8,762 for the twelve months ended December 31, 2001, 2000 and 1999, respectively. LEASES In June 2001, the Company entered into an amended operating lease arrangement with a bank that covers approximately $77,378 of equipment in its dialyzer manufacturing facility in Ogden, Utah. The agreement has a basic term expiration date of January 1, 2010, renewal options and a purchase option at the greater of 20% of the original cost or the fair market value. In September 2001, FMCH entered into an additional operating lease agreement for the financing of approximately $15,798 of new equipment for the expansion of the Ogden, Utah manufacturing facility. The agreement has an expiration date of September 28, 2011 with a one year renewal option, There is an early purchase option on October 2, 2006 for 70% of the original cost, and a second early purchase option at January 2, 2010 for the greater of fair market value or 40% of the original cost. 70 Future minimum payments under noncancelable leases (principally for clinics, offices and equipment) as of December 31, 2001 are as follows: OPERATING CAPITAL LEASES LEASES TOTAL --------- ------- -------- 2002 $166,644 $1,920 $168,564 2003 153,556 879 154,435 2004 179,200 422 179,622 2005 117,896 512 118,408 2006 97,579 -- 97,579 2007 and beyond 143,210 -- 143,210 -------- ------ -------- Total minimum payments $858,085 $3,733 $861,818 ====== ======== Less interest and operating costs 39 ------ Present value of minimum lease Payments ($2,019 payable in 2002) $3,694 ====== Rental expense for operating leases was $195,830, $157,335 and $132,248 for the years ended December 31, 2001, 2000 and 1999, respectively. Amortization of properties under capital leases amounted to $180, $369, and $852 for the years ended December 31, 2001, 2000 and 1999, respectively. Lease agreements frequently include renewal options and require that the Company pay for utilities, taxes, insurance and maintenance expenses. Options to purchase are also included in some lease agreements, particularly capital leases. NOTE 11. MANDATORILY REDEEMABLE PREFERRED SECURITIES During the fourth quarter of 2000 and the second and third quarters of 2001, a wholly-owned subsidiary of the Company issued to NMC shares of various series of Preferred Stock ("Redeemable Preferred Securities") which were then transferred to FMC for proceeds totaling $305,500 in 2000 and $392,037 for the twelve months ended December 31, 2001. The table below provides information for Redeemable Preferred Securities for the periods indicated. DECEMBER 30, DECEMBER 31, MANDATORILY REDEEMABLE PREFERRED SECURITIES 2001 2000 ------------ ------------ Series A Preferred Stock, 1,000 shares .... $ 113,500 $113,500 Series B Preferred Stock, 300 shares ...... 34,000 -- Series C Preferred Stock, 1700 shares ..... 192,000 192,000 Series D Preferred Stock, 870 shares ...... 97,500 -- Series E Preferred Stock, 1,300 shares .... 147,500 -- Series F Preferred Stock, 980 shares ...... 113,037 -- --------- -------- 697,537 305,500 Mark to Market Adjustment ................. (5,207) -- --------- -------- Total ..................................... $ 692,330 $305,500 ========= ======== These securities are similar in substance except for the order of preference both as to dividends and liquidation, dissolution or winding-up of the subsidiary. The order of preference is alphabetically Series A through Series F. In addition, the holders of the Redeemable Preferred Securities are entitled to receive dividends in an amount of dollars per share that varies from approximately 5% to 8% depending on the Series. The dividends will be declared and paid in cash at least annually. All the Redeemable Preferred Securities have a par value of $.01 per share. Upon liquidation or dissolution or winding up of the issuer of the Redeemable Preferred Securities, the holders of the Redeemable Preferred Securities are entitled to an amount equal to the liquidation preference for each share of stock plus an amount equal to all accrued and unpaid dividends thereon through the date of distribution. The liquidation preference is the sum of the issuance price plus, for each year or portion thereof an amount equal to one-half of one percent of the issue price, not to exceed 5%. The Redeemable Preferred Securities will be sold to the Company in two years from the date of issuance for a total amount equal to Euros 501,773 (Series A,B,C,and F) and US dollars $245,000 (Series D and E) plus any accrued and unpaid 71 dividends. For the twelve months ended December 31, 2001 and 2000, dividends of $32,946 and $1,295, respectively, were recorded and classified as part of interest expense in the consolidated statement of operations. Accordingly, the Euro Redeemable Preferred Securities are deemed to be a Euro liability and the risk of foreign currency fluctuations are hedged through forward currency contracts. The holders of the Redeemable Preferred Securities have the same participation rights as the holders of all other classes of capital stock of the issuing subsidiary. NOTE 12. PENSION AND OTHER POST RETIREMENT BENEFITS DEFINED BENEFIT PENSION PLANS Substantially all domestic employees are covered by NMC's non-contributory, defined benefit pension plan. Each year NMC contributes at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended. Plan assets consist primarily of publicly traded common stock, fixed income securities and cash equivalents. The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans.
TWELVE MONTHS ENDED DECEMBER 31, -------------------------------------- 2001 2000 1999 --------- --------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 105,441 $ 87,737 $ 87,464 Service Cost 11,050 9,987 8,212 Interest Cost 7,708 6,713 5,966 Amendments -- -- (5) Actuarial (Gain)/Loss 2,871 3,752 (12,496) Benefits Paid (3,048) (2,748) (1,404) --------- --------- -------- Benefit obligation at end of year $ 124,022 $ 105,441 $ 87,737 --------- --------- -------- CHANGE ON PLAN ASSETS Fair value of plan assets at beginning of year 81,948 86,794 77,019 Actual return on plan assets (4,558) (2,098) 11,179 Employee contribution 9,012 -- -- Benefits paid (3,048) (2,748) (1,404) --------- --------- -------- Fair value of plan assets at end of year $ 83,354 $ 81,948 $ 86,794 --------- --------- -------- Funded Status (40,668) (23,493) (942) Unrecognized net (gain)/loss 2,868 (14,367) (30,993) Unrecognized prior service cost (3) (4) (4) --------- --------- -------- Accrued benefit costs $ (37,803) $ (37,864) $(31,939) --------- --------- -------- WEIGHTED - AVERAGE ASSUMPTIONS AS OF DECEMBER 31, Discount rate 7.50% 8.00% 7.50% Expected return of plan assets 10.0 9.70 9.70 Rate of compensation increase 4.50 4.50 4.50 COMPONENTS OF NET PERIOD BENEFIT COST Service Cost $ 11,050 $ 9,987 $ 8,212 Interest Cost 7,708 6,713 5,966 Expected return on plan assets (8,430) (8,345) (7,401) Net Amortization (1,377) (2,430) (521) --------- --------- -------- Net periodic benefit costs $ 8,951 $ 5,925 $ 6,256 --------- --------- --------
NMC also sponsors a supplemental executive retirement plan to provide certain key executives with benefits in excess of normal pension benefits. The projected benefit obligation was $6,513 and $5,453 at December 31, 2001 and 2000, respectively. Pension expense for this plan, for the twelve months ended December 31, 2001, 2000 and 1999 was $1,070, $983 and $402, respectively. During the first quarter 2002, the Company informed its employees that the defined benefit and supplemental executive retirement plans will be curtailed. 72 NMC does not provide any postretirement benefits to its employees other than those provided under its pension plan and supplemental executive retirement plan. DEFINED CONTRIBUTION PLANS The Company's employees are eligible to join 401 (k) Savings Plan once they have achieved a minimum of 90 days of service and if they have more than 900 hours of service before their one year anniversary date. Under the provisions of the 401(k) plan, employees are allowed to contribute up to 16% of their salaries. The Company contributes 50% of their savings up to 6% of saved pay after one year. The Company's total contributions for the years ended December 31, 2001, 2000 and 1999 was $10,647, $8,786 and $7,298, respectively. EVEREST EMPLOYEES' RETIREMENT PLAN AND TRUST The Company's Everest employees participated in the Everest Employees Retirement Plan ("Everest Plan"), a non-contributory defined benefit pension plan. The defined benefit plan covered all the employees of Everest and a related party with common ownership, Nephrology Associates of Northern Illinois, Ltd ("NANI"), who met certain eligibility requirements. Retirement benefit payments were based on years of credited service and average compensation over the final five years of employment. The funding policy was to contribute annually amounts, which were deductible for federal income tax purposes. Effective May 16, 1996, all participant plan benefits in the defined benefit plans were frozen. Everest and NANI ceased funding the defined benefit plans as of May 16, 1996 and no additional years of benefit service were accrued by plan participants subsequent to that date. The following provides a reconciliation of benefit obligations, plan assets, and funded status of the Everest Plan NINE MONTHS ENDED DECEMBER 31, ----------------- 2001 ----------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year April 1, 2001 $ 7,402 Service Cost -- Interest Cost 386 Actuarial (Gain)/Loss (272) Benefits Paid (98) ------- Benefit obligation at end of year $ 7,418 ------- CHANGE ON PLAN ASSETS Fair value of plan assets at beginning of year April 1, 2001 6,869 Actual return on plan assets (280) Employee contribution -- Benefits paid (98) ------- Fair value of plan assets at end of year $ 6,491 ------- Funded Status (927) Unrecognized net (gain)/loss 394 Unrecognized prior service cost -- ------- Accrued benefit costs $ (533) ------- WEIGHTED - AVERAGE ASSUMPTIONS AS OF DECEMBER 31, Discount rate 7.00% Expected return of plan assets 7.55 Rate of compensation increase -- COMPONENTS OF NET PERIOD BENEFIT COST Service Cost $ -- Interest Cost 386 Expected return on plan assets (386) Net Amortization -- ------- Net periodic benefit costs $ -- ------- 73 NOTE 13. EQUITY PREFERRED STOCK At December 31, 2001 and 2000, the components of the Company's preferred stocks as presented in the Consolidated Balance Sheet and the Consolidated Statement of Changes in Equity are as follows: PREFERRED STOCKS, $100 PAR VALUE - - 6% Cumulative (1); 40,000 shares authorized; 36,460 outstanding $3,646 - - 8% Cumulative Class A (2); 50,000 shares authorized; 16,176 outstanding 1,618 - - 8% Noncumulative Class B (2); 40,000 shares authorized; 21,483 outstanding 2,148 ------ $7,412
PREFERRED STOCKS, $.10 PAR VALUE - - Noncumulative Class D (3); 100,000,000 shares authorized; 89,062,316 outstanding 8,906 ------- Total Preferred $16,318 =======
(1) 160 votes per share (2) 16 votes per share (3) 1/10 vote per share STOCK OPTIONS In 1996, FMC adopted a stock incentive plan (the "FMC Plan") under which the Company's key management and executive employees are eligible. Under the FMC Plan, eligible employees will have the right to acquire Preference Shares of FMC. Options granted under the FMC Plan will be evidenced by a non-transferable convertible bond and corresponding non-recourse loan to the employee, secured solely by the bond with which it was made. The bonds mature in ten years and are generally fully convertible after three to five years. Each convertible bond, which is DM denominated, entitles the holder thereof to convert the bond in Preference Shares equal to the face amount of the bond divided by the Preference Share's nominal value. During 1997, FMC granted 2,697,438 options (of which 216,663 were forfeited) to the Company, under the FMC Plan. At December 31, 1997 no options were exercisable. During 2001, 2000 and 1999 a total of "0," "75,833," and "30,065" awards were cancelled or forfeited resulting in awards outstanding of 205,166 for 2001and 2000 and 280,999 in 1999. If the 205,166 awards outstanding at December 31, 2001 were exercised, a total of approximately 68,389 non-voting preferred shares would be issued. At December 31, 2001, 68,389 options were exercisable under the FMC plan. During 1998, the FMC adopted a new stock incentive plan ("FMC 98 Plan") under which the Company's key management and executive employees are eligible. Under the FMC 98 Plan, eligible employees will have the right to acquire Preference Shares of FMC. Options granted under the FMC 98 Plan will be evidenced by a non-transferable convertible bond and a corresponding non-recourse loan to the employee, secured solely by the bond with which it was made. Each convertible bond, which will be DM denominated, will entitle the holder thereof to convert the bond in Preference Shares equal to the face amount of the bond divided by the Preference Share's nominal value. During 1998, FMC awarded 1,024,083 options and exercisable upon vesting for 1,024,083 Preference Shares. During 1999, FMC granted 571,940 Preference Shares. During 1999, options for 140,168 Preference Shares were forfeited or cancelled under the FMC 98 Plan. During 2000, FMC granted 653,325 Preference Shares and 303,123 Preference Shares were forfeited or cancelled. In addition, 10,060 stock options from the FMC 98 Plan were exercised with 10,060 Preference Shares being issued. During 2001, FMC granted 183,007 Preference Shares and 154,110 Preference Shares were forfeited or cancelled. In addition, 131,820 stock options from the FMC 98 Plan were exercised and Preference Shares issued. Grants for 999,850 Preference Shares were exercisable under the FMC 98 Plan at December 31, 2001. Effective September 2001, no additional Grants or Options will be awarded under the FMC 98 Plan. 74 On May 23, 2001, by resolution of the FMC shareholders at the annual general meeting, the FMC 98 Plan was replaced by a new plan (FMC International Plan). The management board was empowered to issue convertible bonds with a total value of $10,240 to the members of the management board and to other employees of the Company entitling a total subscription of up to 4 million non-voting Preference shares. The convertible bonds have a par value of $2.56 and are interest bearing at a rate of 5.5%. Purchase of the bonds is funded by a non-recourse loan secured by the bond with respect to which the loan was made. The Company has the right to offset its obligation on a convertible bond against the employee obligation on the related loan; therefore, the convertible bond obligations and employee loan receivables are not reflected in the Company's consolidated financial statements. The bonds mature in ten years and are generally fully convertible after three years. The bonds may be issued either as convertible bonds, which are subject to a stock price target or convertible bonds without a stock price target. In the case of convertible bonds which are subject to a stock price target the conversion right is exercisable only if the market price of the preference shares increased by 25% or more over the grant-date price subsequent to the day of grant for at least one day prior to exercise. Participants have the right to opt for convertible bonds with or without the stock price target. In order to create an incentive to select convertible bonds which depend on the stock price target, the number of convertible bonds awarded to those employees who select the bonds without a stock price target will be reduced by 15%. Each convertible bond entitles the holder thereof, upon payment of a conversion price to convert the bond into one Preference share. The conversion price of the convertible bonds which are not subject to the stock price target is determined by the average price of the Preference shares during the last 30 trading days prior to the date of grant. The conversion price of the convertible bonds subject to a stock price target is equal to 125% of the average price of the preference shares during the last thirty preceding days prior to the grant date. The Managing Board and Supervisory Board of FMC are authorized to issue up to 20% of the total number of convertible bonds each year up to May 22, 2006. The plan is valid until the last convertible bond issued under this plan is terminated or converted. During 2001, FMC granted bonds convertible into 729,135 Preference Shares under the FMC International Plan and bonds with respect to 5,350 Preference Shares were forfeited or cancelled under the FMC International Plan. No shares were exercised or exercisable under the FMC International Plan at December 31, 2001. NOTE 14. FINANCIAL INSTRUMENTS MARKET RISK The Company is exposed to market risks due to changes in interest rates and foreign currency rates. The Company uses derivative financial instruments, including interest rate swaps and foreign exchange contracts, as part of its risk management strategy. These instruments are used as a means of hedging exposure to interest rate and foreign currency fluctuations in connection with firm commitments and debt obligations. The Company does not hold or issue derivative instruments for trading or speculative purposes. The mark-to-market valuations of the financial instruments and of associated underlying exposures are closely monitored at all times. The Company uses portfolio sensitivities and stress tests to monitor risk. Overall financial strategies and the effects of using derivatives are reviewed periodically. FOREIGN CURRENCY CONTRACTS The Company uses foreign exchange contracts as a hedge against foreign exchange risks associated with the settlement of foreign currency denominated payables and firm commitments. At December 31, 2001 and 2000, the Company had outstanding foreign currency contracts for the purchase of Euros ("EUR") totaling $476,378 and $450,856 and respectively, contracts for the purchase of 84,000 Mexican Pesos, and contracts for the sale of 14,090 Canadian Dollars. The contracts outstanding at December 31, 2001 include forward contracts for delivery of EUR at rates ranging from $0.8532 to $0.9374 per EUR, forward contracts for the delivery of Mexican Pesos at rates ranging from 9.572 to 10.438 per US$, and outright purchase contracts for Canadian Dollars at rates ranging from 0.6393 to 0.6383 per Canadian Dollar. All contracts are for periods between January 2002 and November 2003. The fair value of currency contracts are the estimated amounts that the Company would receive or pay to terminate the agreement at the reporting date, taking into account the current exchange rates and the current creditworthiness of the counterparties. At December 31, 2001 and 2000, the Company would have (paid) received approximately ($13,340) and $20,400, respectively, to terminate the contracts. 75 INTEREST RATE AGREEMENTS At December 31, 2001 and 2000, the Company had interest rate swaps and option agreements outstanding with various commercial banks for notional amounts totaling $1,050,000. All of these agreements were entered into for other than trading purposes. The contracts mature at various dates between November 2003 and November 2007. For a notional amount of $1,050,000, the interest rate swaps effectively change the Company's interest rate exposure on its variable-rate loans under the NMC Credit Facility (drawn as of December 31, 2001: $450,600), drawdowns under the receivables financing facility (drawn as of December 31, 2001: $442,000) , and $290,688 of variable rate loans from affiliates to fixed rates of interest ranging between 6.34% and 7.69%. Under the NMC Credit Facility, the Company agreed to maintain at least $500,000 of interest rate protection. The fair value of the interest rate swaps and options is the estimated amount that the Company would receive or pay to terminate the agreements. The fair value of these agreements at December 31, 2001 and December 31, 2000 would require the Company to pay approximately $66,600 and $24,600 respectively. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions significantly affect the estimates. CREDIT RISK The Company is exposed to credit risk to the extent of potential nonperformance by counterparties on financial instruments. As of December 31, 2001, the Company's credit exposure was insignificant and limited to the fair value stated above; the Company believes the risk of incurring losses due to credit risk is remote. FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS At December 31, 2001 and 2000, the carrying value of cash, cash equivalents, accounts receivable, prepaid expenses, accounts payable, accrued expenses, short-term borrowings and current liabilities approximated their fair values, based on the short-term maturities of these instruments. Mandatorily redeemable preferred securities with related parties are mark to market at each balance sheet date and reflect their fair value. In addition, the Company is a "Subsidiary Guarantor" along with its parent company, FMC, for the issuance of Trust Preferred Securities on the books of FMC at a carrying value of $1,428,768 and $952,727, at December 31, 2001 and 2000 respectively. FMC and Subsidiary Guarantors guarantee the Trust Preferred Securities through a series of undertakings. At December 31, 2001 the fair value of the Trust Preferred Securities exceeded the carrying value by $4,506. At December 31, 2000, the carrying value of these Trust Preferred Securities exceeded the fair value by $54,900. The fair value of these Trust Preferred Securities is based upon market quotes. NOTE 15. RELATED PARTY TRANSACTIONS AND ALLOCATIONS SERVICES Related party transactions pertaining to services performed and products purchased/sold between affiliates are recorded as net accounts payable to affiliates on the balance sheet. At December 31, 2001 and 2000, the Company had net accounts payable of $39,934 and $6,317, respectively. BORROWINGS WITH AFFILIATES The Company has various outstanding borrowings with FMC and affiliates. The funds were used for general corporate purposes. The loans are due at various maturities. See Note 6 - "Debt, - Borrowings from Affiliates" for details and See Note 11 - "Mandatorily Redeemable Preferred Securities." 76 NOTE 16. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS COMMERCIAL LITIGATION Since 1997, the Company, NMC, and certain NMC subsidiaries have been engaged in litigation with Aetna Life Insurance Company and certain of its affiliates ("Aetna") concerning allegations of inappropriate billing practices for nutritional therapy and diagnostic and clinical laboratory tests and misrepresentations. In January 2002, the Company entered into an agreement in principle with Aetna to establish a process for resolving these claims and the Company's counterclaims relating to overdue payments for services rendered by the Company to Aetna's beneficiaries. Other insurance companies have filed claims against the Company, similar to those filed by Aetna, that seek unspecified damages and costs. The Company, NMC and its subsidiaries believe that there are substantial defenses to the claims asserted, and intend to vigorously defend all lawsuits. The Company has filed counterclaims against the plaintiffs in these matters based on inappropriate claim denials and delays in claim payments. Other private payors have contacted the Company and may assert that NMC received excess payments and, similarly, may join the lawsuits or file their own lawsuit seeking reimbursement and other damages. Although the ultimate outcome on the Company of these proceedings cannot be predicted at this time, an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. In light of the Aetna agreement in principle the Company established a pre-tax accrual of $55 million at December 31, 2001 to provide for the anticipated settlement of the Aetna lawsuit and estimated legal expenses related to the continued defense of other commercial insurer claims and resolution of these claims, including overdue payments for services rendered by the Company to these insurers' beneficiaries. No assurance can be given that the anticipated Aetna settlement will be consummated or that the costs associated with such a settlement or a litigated resolution of Aetna's claims and the other commercial insurers' claims will not exceed the $55 million pre-tax accrual. On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al. (Sup. Court of Calif., S.F. County, #315465) was filed as a class action by plaintiffs claiming to be creditors of W. R. Grace & Co.-Conn ("Grace Chemicals") against Grace Chemicals, the Company and other defendants, principally alleging that the Merger which resulted in the original formation of the Company (described in greater detail in "Indemnification by W. R. Grace & Co. and Sealed Air Corporation" below) was a fraudulent transfer, violated the uniform fraudulent transfer act, and constituted a conspiracy. An amended complaint (Abner et al. v. W. R. Grace & Company, et al.) and additional class actions were filed subsequently with substantially similar allegations; all cases have either been stayed and transferred to the U.S. District Court or are pending before the U.S. Bankruptcy Court in Delaware in connection with Grace's Chapter 11 proceeding. The Company has requested indemnification from Grace Chemicals and Sealed Air Corporation pursuant to the Merger agreements (see "Indemnification by W.R. Grace & Co. and Sealed Air Corporation"). If the Merger is determined to have been a fraudulent transfer, if material damages are proved by the plaintiffs, and if the Company is not able to collect, in whole or in part on the indemnity, from W.R. Grace & Co., Sealed Air Corporation, or their affiliates or former affiliates or their insurers, and if the Company is not able to collect against any party that may have received distributions from W.R. Grace & Co., a judgment could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is confident that no fraudulent transfer or conspiracy occurred and intends to defend the cases vigorously. OBRA 93 The Omnibus Budget Reconciliation Act of 1993 affected the payment of benefits under Medicare and employer health plans for dual-eligible ESRD patients. In July 1994, the Centers for Medicare and Medicaid Services (CMS) (formerly known as the Health Care Financing Administration, or HCFA) issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by that act would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than those provided under Medicare. 77 In April 1995, CMS issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. CMS further proposed that its new instruction be effective retroactive to August 1993, the effective date of the Omnibus Budget Reconciliation Act of 1993. NMC ceased to recognize the incremental revenue realized under the original instruction as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by the Omnibus Budget Reconciliation Act of 1993 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients affected by the act, and then began to re-bill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.95-0860 (WBB)) seeking to preclude CMS from retroactively enforcing its April 24, 1995 implementation of the Omnibus Budget Reconciliation Act of 1993 provision relating to the coordination of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a preliminary injunction to preclude CMS from enforcing its new policy retroactively, that is, to billing for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction and in December of 1996, NMC moved for partial summary judgment seeking a declaration from the Court that CMS' retroactive application of the April 1995 rule was legally invalid. CMS cross-moved for summary judgment on the grounds that the April 1995 rule was validly applied prospectively. In January 1998, the court granted NMC's motion for partial summary judgment and entered a declaratory judgment in favor of NMC, holding CMS' retroactive application of the April 1995 rule legally invalid. Based on its finding, the Court also permanently enjoined CMS from enforcing and applying the April 1995 rule retroactively against NMC. The Court took no action on CMS' motion for summary judgment pending completion of the outstanding discovery. On October 5, 1998, NMC filed its own motion for summary judgment requesting that the Court declare CMS' prospective application of the April 1995 rule invalid and permanently enjoin CMS from prospectively enforcing and applying the April 1995 rule. The Court has not yet ruled on the parties' motions. CMS elected not to appeal the Court's June 1995 and January 1998 orders. CMS may, however, appeal all rulings at the conclusion of the litigation. If CMS should successfully appeal so that the revised interpretation would be applied retroactively, NMC may be required to refund the payment received from employer health plans for services provided after August 10, 1993 under the CMS' original implementation, and to re-bill Medicare for the same services, which would result in a loss to NMC of approximately $120 million attributable to all periods prior to December 31, 1995. Also, in this event, the Company's business, financial condition and results of operations would be materially adversely affected. In July, 2000, NMC filed a complaint in the U.S. District Court for the Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical Applications of Virginia, Inc. v. Aetna Life Insurance Co., Inc., Aetna U.S. Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S. Healthcare and health plans administered by Aetna U.S. Healthcare for claims related to primary payor liability for dual eligible ESRD patients under the Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed the action pending resolution of the District of Columbia Court action. The Company's agreement in principle with Aetna establishes a process for resolving these claims. OTHER LITIGATION AND POTENTIAL EXPOSURES From time to time, the Company is a party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyzes current information including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The Company, like other health care providers, conducts its operations under intense government regulation and scrutiny. The Company must comply with regulations which relate to or govern the safety and efficacy of medical products and supplies, the operation of manufacturing facilities, laboratories and dialysis clinics, and environmental and occupational health and safety. The Company must also comply with the U.S. anti-kickback statute, the False Claims Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable laws or regulations may be amended, or enforcement agencies or courts may make interpretations that differ from the Company's or the manner in which the Company conduct its business. In the U.S., enforcement has become a high priority for the federal government and some states. In addition, the provisions of the False Claims Act authorizing payment of a portion of any recovery to the party bringing the suit encourage private plaintiffs to commence "whistle blower" actions. By virtue of this regulatory environment, as well as our corporate integrity agreement with the government, the Company expects that its business activities and practices will continue to be subject to extensive review by regulatory authorities and private parties, and continuing inquiries, claims and litigation 78 relating to its compliance with applicable laws and regulations. The Company may not always be aware that an inquiry or action has begun, particularly in the case of "whistle blower" actions, which are initially filed under court seal. The Company operates a large number facilities throughout the U.S. In such a decentralized system, it is often difficult to maintain the desired level of oversight and control over the thousands of individuals employed by many affiliated companies. The Company relies upon its management structure, regulatory and legal resources, and the effective operation of its compliance program to direct, manage and monitor the activities of these employees. On occasion, the Company may identify instances where employees, deliberately or inadvertently, have submitted inadequate or false billings. The actions of such persons may subject the Company and its subsidiaries to liability under the False Claims Act, among other laws, and the Company cannot predict whether law enforcement authorities may use such information to initiate further investigations of the business practices disclosed or any of its other business activities. Physicians, hospitals and other participants in the health care industry are also subject to a large number of lawsuits alleging professional negligence, malpractice, product liability, worker's compensation or related claims, many of which involve large claims and significant defense costs. The Company has been subject to these suits due to the nature of its business and the Company expects that those types of lawsuits may continue. Although the Company maintains insurance at a level which it believes to be prudent, the Company cannot assure that the coverage limits will be adequate or that insurance will cover all asserted claims. A successful claim against the Company or any of its subsidiaries in excess of insurance coverage could have a material adverse effect upon the Company and the results of its operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the Company's reputation and business. The Company has also had claims asserted against it and has had lawsuits filed against it relating to businesses that it has acquired or divested. These claims and suits relate both to operation of the businesses and to the acquisition and divestiture transactions. The Company has asserted its own claims, and claims for indemnification. Although the ultimate outcome on the Company cannot be predicted at this time, an adverse result could have a material adverse effect upon the Company's business, financial condition, and results of operations. At December 31, 2001, the Company recorded a pre-tax accrual to reflect anticipated expenses associated with the continued defense and resolution of these claims. No assurances can be given that the actual costs incurred by the Company in connection with the continued defense and resolution of these claims will not exceed the amount of this accrual. INDEMNIFICATION BY W. R. GRACE & CO. AND SEALED AIR CORPORATION The Company was formed as a result of a series of transactions pursuant to the Agreement and Plan of Reorganization (the "Merger") dated as of February 4, 1996 by and between W.R. Grace & Co. and Fresenius AG. At the time of the Merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant potential liabilities arising out of product-liability related litigation, pre-merger tax claims and other claims unrelated to NMC, which was Grace's dialysis business prior to the Merger. In connection with the Merger, W.R. Grace & Co.-Conn. agreed to indemnify the Company and NMC against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the Merger, other than liabilities arising from or relating to NMC's operations. Proceedings have been brought against W.R. Grace & Co. and the Company by plaintiffs claiming to be creditors of W.R. Grace & Co.-Conn., principally alleging that the Merger was a fraudulent conveyance, violated the uniform fraudulent transfer act, and constituted a conspiracy. See "Legal Proceedings" above. Pre-merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the Merger, could ultimately be the obligation of the Company. In particular, W. R. Grace & Co. ("Grace") has disclosed in its filings with the Securities and Exchange Commission that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the "Service"); that during those years Grace deducted approximately $122.1 million in interest attributable to corporate owned life insurance ("COLI") policy loans; that Grace has paid $21.2 million of tax and interest related to COLI deductions taken in tax years prior to 1993; and that a U.S. District Court ruling has denied interest deductions of a taxpayer in a similar situation. Subject to certain representations made by Grace, the Company and Fresenius AG, Grace and certain of its affiliates agreed to indemnify the Company against this or other pre-Merger or Merger related tax liabilities. Subsequent to the Merger, Grace was involved in a multi-step transaction involving Sealed Air Corporation (formerly known as Grace Holding, Inc.). The Company is engaged in litigation with Sealed Air Corporation ("Sealed Air") 79 to confirm the Company's entitlement to indemnification from Sealed Air for all losses and expenses incurred by the Company relating to pre-Merger tax liabilities and Merger-related claims. Subsequent to the Sealed Air transaction Grace and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result of the Company's continuing observation and analysis of the Service's on-going audit of Grace's pre-Merger tax returns, the Sealed Air litigation and the Grace bankruptcy proceedings, and based on its current assessment of the potential impact of these matters on the Company, the Company recorded a pre-tax accrual of $171.5 million at December 31, 2001 to reflect the Company's estimated exposure for liabilities and legal expenses related to the Grace bankruptcy. The Company intends to continue to pursue vigorously its rights to indemnification from Grace and its insurers and former and current affiliates, including Sealed Air, for all costs incurred by the Company relating to pre-Merger tax and Merger-related claims. 80 NOTE 17. SIGNIFICANT RELATIONS For the periods presented, approximately 64% of the Company's health care services net revenues are paid by and subject to regulations under governmental programs, primarily Medicare and Medicaid. The Company maintains reserves for losses related to these programs, including uncollectible accounts receivable, and such losses have been within management's expectations. Revenues from EPO accounted for approximately 27% of the Dialysis Services net revenues for the twelve months ended December 31, 2001 and materially contribute to Dialysis Services operating earnings. EPO is produced by a single source manufacturer, Amgen, Inc., and any interruption of supply could materially adversely affect the Company's business and results of operations. NOTE 18. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS The Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information during the fourth quarter of 1998. SFAS No. 131 established the standards for reporting information about operating statements in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. The Company's reportable segments are Dialysis Services and Dialysis Products. For purposes of segment reporting, the Dialysis Services Division and Spectra Renal Management are combined and reported as Dialysis Services. These divisions are aggregated because of their similar economic classifications. These include the fact that they are both health care service providers whose services are provided to a common patient population, and both receive a significant portion of their net revenue from Medicare and other government and non-government third party payors. The Dialysis Products segment reflects the activity of the Dialysis Products Division only. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company generally evaluates division operating performance based on Earnings Before Interest and Taxes (EBIT) but does use Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA) in some cases. The table below provides information for the years ended December 31, 2001, 2000 and 1999 pertaining to the Company's operations by geographic area.
UNITED STATES ASIA/PACIFIC TOTAL ---------------- -------------- ----------- NET REVENUES FOR TWELVE MONTHS ENDED 2001 $3,605,350 $ 4,201 $3,609,551 2000 3,085,320 3,855 3,089,175 1999 2,811,380 3,853 2,815,233 OPERATING EARNINGS FOR TWELVE MONTHS ENDED 2001 $ 559,319 $ 631 $ 559,950 2000 520,790 30 520,820 1999 511,847 444 512,291 TOTAL ASSETS AT DECEMBER 31, 2001 3,287,097 9,420 3,296,517 2000 2,810,514 10,394 2,820,908 1999 2,553,763 10,112 2,563,875
81 The table below provides information for the years ended December 31, 2001, 2000 and 1999 pertaining to the Company's two industry segments.
LESS DIALYSIS DIALYSIS INTERSEGMENT TOTAL SERVICES PRODUCTS SALES ------------- ----------- --------------- ----------- NET REVENUES FOR TWELVE MONTHS ENDED 2001 $3,149,223 $755,103 $294,775 $3,609,551 2000 2,624,520 716,757 252,102 3,089,175 1999 2,339,185 706,709 230,661 2,815,233 OPERATING EARNINGS FOR TWELVE MONTHS ENDED 2001 422,030 137,920 -- 559,950 2000 402,887 117,933 -- 520,820 1999 386,479 125,812 -- 512,291 ASSETS AT DECEMBER 31 2001 2,650,561 645,956 -- 3,296,517 2000 2,176,055 644,853 -- 2,820,908 1999 1,918,612 645,263 -- 2,563,875 CAPITAL EXPENDITURES FOR TWELVE MONTHS ENDED 2001 85,465 37,749 -- 123,214 2000 72,421 28,775 -- 101,196 1999 59,061 15,519 -- 74,580 DEPRECIATION AND AMORTIZATION OF PROPERTIES AND EQUIPMENT FOR TWELVE MONTHS ENDED 2001 146,986 24,196 -- 171,182 2000 120,985 23,749 -- 144,734 1999 117,059 21,936 -- 138,995
The table below provides the reconciliations of reportable segment operating earnings, assets, capital expenditures, and depreciation and amortization to the Company's consolidated totals.
TWELVE MONTHS ENDED DECEMBER 31, ---------------------------------------------------------- SEGMENT RECONCILIATION 2001 2000 1999 ---------------------- -------------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES: Total operating earnings for reportable segments $ 559,950 $ 520,820 $ 512,291 Corporate G&A (including foreign exchange) (129,482) (95,860) (113,375) Research and development expense (5,462) (4,127) (4,065) Net interest expense (226,480) (187,315) (201,915) Interest expense on settlement of investigation, net -- (29,947) -- Special charge for legal matters (258,159) -- -- Special charge for settlement of investigation and related costs -- -- (601,000) ----------- ----------- ----------- Income (Loss) before income taxes $ (59,633) $ 203,571 $ (408,064) =========== =========== =========== ASSETS: Total assets for reportable segments $ 3,296,517 $ 2,820,908 $ 2,563,875 Intangible assets not allocated to segments 1,888,873 1,934,643 2,006,985 Accounts receivable facility (442,000) (445,300) (335,000) Net assets of discontinued operations and IDPN accounts receivable -- 5,189 59,151 Corporate assets and other 259,576 237,918 349,557 ----------- ----------- ----------- Total Assets $ 5,002,966 $ 4,553,358 $ 4,644,568 =========== =========== =========== CAPITAL EXPENDITURES Total capital expenditures for reportable segments $ 123,214 $ 101,196 $ 74,580 Corporate capital expenditures 1,407 3,003 6,750 ----------- ----------- ----------- Total Capital Expenditures $ 124,621 $ 104,199 $ 81,330 =========== =========== =========== DEPRECIATION AND AMORTIZATION: Total depreciation and amortization for reportable segments $ 171,182 $ 144,734 $ 138,995 Corporate depreciation and amortization 75,637 78,136 78,957 ----------- ----------- ----------- Total Depreciation and Amortization $ 246,819 $ 222,870 $ 217,952 =========== =========== ===========
82 NOTE 19. QUARTERLY SUMMARY (UNAUDITED)
-------------------------------------------------------------------------- 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- 2001 Net revenues $868,276 $ 903,791 $ 916,508 $ 920,976 Cost of health care services and medical supplies 602,266 619,588 633,530 655,471 Operating expenses 167,575 167,930 162,356 175,829 Interest expense, net 55,478 55,149 59,457 56,396 Special charge for legal matters -- -- -- 258,159 -------- --------- ---------- ---------- Total expenses 825,319 842,667 855,343 1,145,855 -------- --------- ---------- ---------- Earnings (loss) before income taxes 42,957 61,124 61,165 (224,879) Provision (benefit) for income taxes 20,510 29,650 29,219 (59,756) -------- --------- ---------- ---------- Net income (loss) $ 22,447 $ 31,474 $ 31,946 $ (165,123) ======== ========= ========== ========== Basic and fully dilutive earnings (loss) per share $ 0.25 $ 0.35 $ 0.35 $ (1.84) -------- --------- ---------- ----------
The first and second quarter of 2001 have been restated to include the results of operations of Everest. See Note 2 - "Summary of Significant Accounting Policies - Everest Acquisition."
-------------------------------------------------------------------------- 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- 2000 Net revenues $ 745,115 $ 760,724 $ 794,694 $ 788,642 Cost of health care services and medical supplies 506,858 512,494 544,011 545,459 Operating expenses 139,899 141,199 140,944 137,478 Interest expense, net 47,118 49,269 46,892 44,036 Interest expense, on settlement of investigation 6,185 7,666 7,951 8,145 ---------- ---------- ---------- ----------- Total expenses 700,060 710,628 739,798 735,118 ---------- ---------- ---------- ----------- Earnings before income taxes 45,055 50,096 54,896 53,524 Provision for income taxes 21,961 24,927 27,227 24,206 ---------- ---------- ---------- ----------- Net income $ 23,094 $ 25,169 $ 27,669 $ 29,318 ========== ========== ========== =========== Basic and fully dilutive earnings per share $ 0.26 $ 0.28 $ 0.31 $ 0.31 ---------- ---------- ---------- -----------
83 To the Board of Directors and Stockholders of Fresenius Medical Care Holdings, Inc. Under the date of February 26, 2002, we reported on the consolidated balance sheets of Fresenius Medical Care Holdings, Inc. and its subsidiaries (the "Company") as of December 31, 2001 and 2000 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the years in the three year period ended December 31, 2001 as included in the annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP February 26, 2002 Boston, MA 84 SCHEDULE II FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS) FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
ADDITIONS (DEDUCTIONS) ----------------------------------- CHARGED BALANCE AT (CREDITED) TO BEGINNING OF COSTS AND BALANCE AT YEAR EXPENSES OTHER NET END OF PERIOD ---------------- ----------------- -------------- -------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $80,466 85,448 (62,055) $103,859
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
ADDITIONS (DEDUCTIONS) ----------------------------------- CHARGED BALANCE AT (CREDITED) TO BEGINNING OF COSTS AND BALANCE AT YEAR EXPENSES OTHER NET END OF PERIOD ---------------- ----------------- -------------- -------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $63,012 62,949 (45,495) $80,466
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
ADDITIONS (DEDUCTIONS) ----------------------------------- CHARGED BALANCE AT (CREDITED) TO BEGINNING OF COSTS AND BALANCE AT YEAR EXPENSES OTHER NET END OF PERIOD ---------------- ----------------- -------------- -------------- DESCRIPTION Valuation and qualifying accounts deducted from assets: Allowances for notes and accounts receivable $49,209 42,243 (28,440) $63,012
85 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- Exhibit 2.1 Agreement and Plan of Reorganization dated as of February 4, 1996 between W. R. Grace & Co. and Fresenius AG (incorporated herein by reference to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.2 Distribution Agreement by and among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius AG dated as of February 4, 1996 (incorporated herein by reference to Exhibit A to Appendix A to the Joint Proxy Statement-Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 2.3 Contribution Agreement by and among Fresenius AG, Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February 4, 1996 (incorporated herein by reference to Exhibit E to Appendix A to the Joint Proxy-Statement Prospectus of Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996 and filed with the Commission on August 5, 1996). Exhibit 3.1 Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402 of the New York Business Corporation Law dated March 23, 1988 (incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.2 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated May 25, 1988 (changing the name to W. R. Grace & Co., incorporated herein by reference to the Form 8-K of the Company filed on May 9, 1988). Exhibit 3.3 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.4 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 805 of the New York Business Corporation Law dated September 27, 1996 (changing the name to Fresenius National Medical Care Holdings, Inc., incorporated herein by reference to the Form 8-K of the Company filed with the Commission on October 15, 1996). Exhibit 3.5 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. under Section 805 of the New York Business Corporation Law dated June 12, 1997 (changing name to Fresenius Medical Care Holdings, Inc., incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 3.6 Certificate of Amendment of the Certificate of Incorporation of Fresenius Medical Care Holdings, Inc. dated July 6, 2001 (authorizing action by majority written consent of the shareholders) (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 2001). Exhibit 3.7 Amended and Restated By-laws of Fresenius Medical Care Holdings, Inc. (incorporated herein by reference to the Form 10-Q of the Company filed with the Commission on August 14, 1997). Exhibit 4.1 Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, NationsBank, N.A., as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 6-K of Fresenius Medical Care AG filed with the Commission on October 15, 1996). 86 Exhibit 4.2 Amendment dated as of November 26, 1996 (amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 8-K of Registrant filed with the Commission on December 16, 1996). Exhibit 4.3 Amendment No. 2 dated December 12, 1996 (second amendment to the Credit Agreement dated as of September 27, 1996, incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.4 Amendment No. 3 dated June 13, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 4.5 Amendment No. 4, dated August 26, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 14, 1997). Exhibit 4.6 Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.7 Form of Consent to Modification of Amendment No. 5 dated December 12, 1997 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.8 Amendment No. 6 dated effective September 30, 1998 to the Credit Agreement dated as of September 27, 1996, among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates, as Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Dresdner Bank AG and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agents, as previously amended (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 4.9 Amendment No. 7 dated as of December 31, 1998 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors , the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A. G. and Bank of America, N.A. (formerly known as NationsBank, N.A.). as Managing Agents, (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 9, 1999). 87 Exhibit 4.10 Amendment No. 8 dated as of June 30, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.11 Amendment No. 9 dated as of December 15, 1999 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 4.12 Amendment No. 10 dated as of September 21, 2000 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on November 11, 2000). Exhibit 4.13 Amendment No. 11 dated as of May 31, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A). as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.14 Amendment No. 12 dated as of June 30, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.15 Amendment No. 13 dated as of December 17, 2001 to the Credit Agreement dated as of September 27, 1996 among National Medical Care, Inc. and Certain Subsidiaries and Affiliates, as Borrowers, Certain Subsidiaries and Affiliates Guarantors, the Lenders named therein, Bank of America, N.A. (formerly known as NationsBank, N.A.), as paying agent and The Bank of Nova Scotia, The Chase Manhattan Bank, Dresdner Bank A.G. and Bank of America, N.A. (formerly known as NationsBank, N.A.), as Managing Agent (filed herewith). Exhibit 4.16 Fresenius Medical Care AG 1998 Stock Incentive Plan as amended effective as of August 3, 1998 (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 4.17 Fresenius Medical Care Aktiengesellschaft 2001 International Stock Incentive Plan (incorporated by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG filed August 2, 2001 (Registration No. 333-66558)). Exhibit 4.18 Senior Subordinated Indenture dated November 27, 1996, among Fresenius Medical Care AG, State Street Bank and Trust Company, as successor to Fleet National Bank, as Trustee and the Subsidiary Guarantors named therein (incorporated herein by reference to the Form 10-K of Registrant filed with the Commission on March 31, 1997). Exhibit 4.19 Senior Subordinated Indenture dated as of February 19, 1998, among Fresenius Medical Care AG, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 7/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). 88 Exhibit 4.20 Senior Subordinated Indenture dated as of February 19, 1998 among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer, State Street Bank and Trust Company as Trustee and Fresenius Medical Care Holdings, Inc., and Fresenius Medical Care AG, as Guarantors with respect to the issuance of 7 3/8% Senior Subordinated Notes due 2008 (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on March 23, 1998). Exhibit 4.21 Senior Subordinated Indenture dated as of June 6, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 4.22 Senior Subordinated Indenture dated as of June 15, 2001 among Fresenius Medical Care AG, FMC Trust Finance S.a.r.l. Luxemborg - III, Fresenius Medical Care Holdings, Inc., Fresenius Medical Care Deutschland GmbH and State Street Bank and Trust Company with respect to 7 7/8% Senior Subordinated Notes due 2011 (incorporated herein by reference to the Registration Statement on Form F-4 of Fresenius Medical Care AG (Registration No. 333-66558)). Exhibit 10.1 Employee Benefits and Compensation Agreement dated September 27, 1996 by and among W. R. Grace & Co., National Medical Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated herein by reference to the Registration Statement on Form F-1 of Fresenius Medical Care AG, as amended (Registration No. 333-05922), dated November 22, 1996 and the exhibits thereto). Exhibit 10.2 Purchase Agreement, effective January 1, 1995, between Baxter Health Care Corporation and National Medical Care, Inc., including the addendum thereto (incorporated by reference to the Form SE of Fresenius Medical Care dated July 29, 1996 and the exhibits thereto). Exhibit 10.3* Product Purchase Agreement effective January 1, 2001 between Amgen, Inc. and National Medical Care, Inc. and Everest Healthcare Services Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on May 15, 2001). Exhibit 10.4 Receivables Purchase Agreement dated August 28, 1997 between National Medical Care, Inc. and NMC Funding Corporation (incorporated herein by reference to the Form 10-Q of the Registrant filed with the Commission on November 14, 1997). Exhibit 10.5 Amendment dated as of September 28, 1998 to the Receivables Purchase Agreement dated as of August 28, 1997, by and between NMC Funding Corporation, as Purchaser and National Medical Care, Inc., as Seller (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 12, 1998). Exhibit 10.6 Amended and Restated Transfer and Administration Agreement dated as September 27, 1999 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-K of registrant filed with Commission on March 30, 2000). Exhibit 10.7 Amendment No. 2 to Amended and Restated Transfer and Administration Agreement dated as October 26, 2000 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.8 Amendment No. 5 to Amended and Restated Transfer and Administration Agreement dated as December 21, 2001 among Compass US Acquisition, LLC, NMC Funding Corporation, National Medical Care, Inc., Enterprise Funding Corporation, the Bank Investors listed therein, Westdeutsche Landesbank Girozentrale, New York Branch, as an administrative agent and Bank of America, N.A., as an administrative agent (filed herewith). 89 Exhibit 10.9 Employment Agreement dated January 1, 1992 by and between Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by reference to the Annual Report on Form 10-K of Fresenius USA, Inc., for the year ended December 31, 1992). Exhibit 10.10 Modification to FUSA Employment Agreement effective as of January 1, 1998 by and between Ben J. Lipps and Fresenius Medical Care AG (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 14, 1998). Exhibit 10.11 Employment Agreement dated March 15, 2000 by and between Jerry A. Schneider and National Medical Care, Inc (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.12 Employment Agreement dated March 15, 2000 by and between Ronald J. Kuerbitz and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.13 Employment Agreement dated March 15, 2000 by and between J. Michael Lazarus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on May 12, 2000). Exhibit 10.14 Employment Agreement dated March 15, 2000 by and between Robert "Rice" M. Powell, Jr. and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.15 Employment Agreement dated June 1, 2000 by and between John F. Markus and National Medical Care, Inc. (incorporated herein by reference to the Form 10-K of Registrant filed with Commission on April 2, 2001). Exhibit 10.16 Subordinated Loan Note dated as of May 18, 1999, among National Medical Care, Inc. and certain Subsidiaries with Fresenius AG as lender (incorporated herein by reference to the Form 10-Q of Registrant filed with Commission on November 22, 1999). Exhibit 10.17 Corporate Integrity Agreement between the Offices of Inspector General of the Department of Health and Human Services and Fresenius Medical Care Holdings, Inc. dated as of January 18, 2000 (incorporated herein by reference to the Form 8-K of the Registrant filed with the Commission on January 21, 2000). Exhibit 11 Statement re: Computation of Per Share Earnings. 90 EX-4.15 3 b42238fmex4-15.txt AMENDMENT NO. 13 TO CREDIT AGREEMENT 12/17/2001 EXHIBIT 4.15 AMENDMENT NO. 13 THIS AMENDMENT NO. 13, dated as of December 17, 2001 (the "AMENDMENT") relating to the Credit Agreement referenced below, by and among NATIONAL MEDICAL CARE, INC., a Delaware corporation, certain subsidiaries and affiliates party to the Credit Agreement and identified on the signature pages hereto, and BANK OF AMERICA, N.A., (formerly known as NationsBank, N.A.), as Paying Agent for and on behalf of the Lenders. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. W I T N E S S E T H WHEREAS, a $2.5 billion credit facility has been extended to National Medical Care, Inc. and certain subsidiaries and affiliates pursuant to the terms of that Credit Agreement dated as of September 27, 1996 (as amended and modified, the "CREDIT AGREEMENT") among National Medical Care, Inc., the other Borrowers, Guarantors and the Lenders identified therein, and NationsBank, N.A., as Paying Agent; WHEREAS, the Company has requested the modification of certain covenants and certain other changes to the Credit Agreement more fully set forth herein; WHEREAS, the requested consents and modifications described herein require the consent of the Required Lenders; and WHEREAS, the Required Lenders have consented to the requested modifications on the terms and conditions set forth herein and have authorized the Paying Agent to enter into this Amendment on their behalf to give effect to this Amendment; NOW, THEREFORE, IN CONSIDERATION of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. The Credit Agreement is amended and modified in the following respects: 1.1 In Section 1.1, the definition of "Permitted Investments" is hereby amended by renumbering the last clause thereof clause (xxiii) and inserting the following immediately prior thereto as a new clause (xxii): (xxii) Investments by Holdings or any Subsidiary of Holdings in the Refinancing Securities. 1.2 In Section 7.9, the Consolidated Leverage Ratio covenant in subsection (b) is hereby amended to read as follows: (b) CONSOLIDATED LEVERAGE RATIO. There shall be maintained as of the end of each fiscal quarter to occur during the periods shown, a Consolidated Leverage Ratio of not greater than: December 31, 2000 through December 30, 2002 3.25:1.00 December 31, 2002 and thereafter 3.00:1.00
1.3 Clause (iii) of Section 8.1(d) is hereby deleted in its entirety and the following is substituted therefore as a new clause (iii): "(iii) the total amount of all such Indebtedness shall not exceed $300 million outstanding at any time." 1.4 Clause (b) of Section 8.9 is hereby amended by inserting the following proviso at the end thereof: "; PROVIDED, that Holdings and its Subsidiaries may at any time and from time to time prepay, repurchase, redeem, defease or otherwise acquire or retire all or any of the Refinancing Securities as long as no Default or Event of Default shall have occurred and be continuing or shall be caused thereby." 1.5 Clauses (a) and (b) of Section 8.10 are hereby deleted in their entirety and the following substituted therefor as a new Section 8.10: "Neither Holdings nor the Company will make or permit any Restricted Payments, unless and to the extent that (i) no Default or Event of Default shall exist on a Pro Forma Basis after giving effect thereto, and (ii) the amount of Restricted Payments shall not in any event exceed in any fiscal year (a) with respect to Holdings, the amount set forth on Schedule 8.10, and (b) with respect to the Company, not more than 50% of Consolidated Net Income of the Company for the prior fiscal year; PROVIDED, that, without regard to the amounts set forth above, Holdings and its Subsidiaries may purchase, repurchase, redeem, defease or otherwise acquire or retire all or any of the Refinancing Securities." 1.6 In Section 8.11, [Sale Leasebacks] is hereby amended by deleting the reference to "$200 million" in clause (y) thereof, and replacing it with a reference to "$300 million". 2. The effectiveness of this Amendment is subject to receipt by the Paying Agent of the following: (i) copies of this Amendment executed by the Company and the other members of the Consolidated Group identified on the signature pages hereto, (ii) the consent of the Required Lenders; and (iii) an amendment fee in an amount equal to twelve and one-half basis points (0.125%) of the aggregate amount of Commitments held by the Lenders consenting to this Amendment for the ratable benefit of such consenting Lenders. 3. Except as modified hereby, all of the terms and provisions of the Credit Agreement (and Exhibits and Schedules) remain in full force and effect. 4. The Credit Parties hereby affirm (i) the representations and warranties set out in Section 6 of the Credit Agreement are true and correct as of the date hereof (except those which expressly relate to an earlier period) and (ii) no Default or Event of Default presently exists. 5. The Company agrees to pay all reasonable costs and expenses of the Paying Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen, PLLC. 2 6. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and its shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 7. This Amendment, and the Credit Agreement as amended hereby, shall be governed by and construed and interpreted in accordance with the laws of the State of New York. [remainder of page intentionally left blank] 3 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. BORROWERS: NATIONAL MEDICAL CARE, INC., a Delaware corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer FRESENIUS MEDICAL CARE AG By /s/ Emanuele Gatti ---------------------------------------------- Name: Dr. Emanuele Gatti Title: By /s/ Roberto Fuste ---------------------------------------------- Name: Roberto Fuste Title: NMC DO BRASIL LTDA., a Brazil corporation By /s/ Horst Radke /s/ Armin Karch ---------------------------------------------- Name: Horst Radtke / Armin Karch Title: NATIONAL MEDICAL CARE OF SPAIN, S.A., a Spanish corporation By /s/ Emanuele Gatti ---------------------------------------------- Name: Dr. Emanuele Gatti Title: NATIONAL MEDICAL CARE OF TAIWAN, INC., a Delaware corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer NMC CENTRO MEDICO NACIONAL, LDA., a Portuguese corporation By /s/ Ricardo Da Silva /s/ John Allen ---------------------------------------------- Name: Ricardo Da Silva / John Allen Title: FRESENIUS MEDICAL CARE ARGENTINA, S.A., as successor by merger to NMC DE ARGENTINA, S.A., an Argentine corporation By /s/ Guido Yagupsky /s/ Horst Radtke ---------------------------------------------- Name: Dr. Guido Yagupsky / Horst Radtke Title: FRESENIUS USA, INC., a Massachusetts corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer FRESENIUS MEDICAL CARE DEUTSCHLAND GmbH, a German corporation By /s/ Rolf Groos ---------------------------------------------- Name: Rolf Groos Title: By /s/ Norbert Weber ---------------------------------------------- Name: Norbert Weber Title: FRESENIUS MEDICAL CARE GROUPE FRANCE (formerly known as Fresenius Groupe France S.A.), a French corporation By /s/ Udo Werle /s/ Emanuele Gatti ---------------------------------------------- Name: Udo Werle / Dr. Emanuele Gatti Title: FRESENIUS MEDICAL CARE HOLDING, S.p.A., an Italian corporation By /s/ Emanuele Gatti /s/ Rolf Groos ---------------------------------------------- Name: Dr. Emanuele Gatti / Rolf Groos Title: FRESENIUS MEDICAL CARE ESPANA S.A., a Spanish corporation By /s/ Emanuele Gatti ---------------------------------------------- Name: Dr. Emanuele Gatti Title: FRESENIUS MEDICAL CARE MAGYAROSZA KfG, a Hungarian corporation By /s/ Norman Erhard ------------------------------------------ Name: Norman Erhard Title: BIO-MEDICAL APPLICATIONS OF ALABAMA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF FLORIDA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF GEORGIA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF INDIANA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF KENTUCKY, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF LOUISIANA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF MARYLAND, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF MASSACHUSETTS, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF NORTH CAROLINA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF OHIO, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF PENNSYLVANIA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF SOUTH CAROLINA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF TEXAS, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS OF VIRGINIA, INC. By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer LIFECHEM, INC., a Delaware corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer GUARANTORS: FRESENIUS MEDICAL CARE HOLDINGS, INC., a New York corporation formerly known as WRG-NY By /s/ Jerry Schneider ---------------------------------------------- Name: Title: NATIONAL MEDICAL CARE, INC., a Delaware corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer BIO-MEDICAL APPLICATIONS MANAGEMENT CO., INC., a Delaware corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer FRESENIUS MEDICAL CARE AG, a German corporation By /s/ Emanuele Gatti ---------------------------------------------- Name: Dr. Emanuele Gatti Title: By /s/ Roberto Fuste ---------------------------------------------- Name: Roberto Fuste Title: FRESENIUS USA, INC., a Massachusetts corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer FRESENIUS MEDICAL CARE DEUTSCHLAND GmbH, a German corporation By /s/ Rolf Groos ---------------------------------------------- Name: Rolf Groos Title: By /s/ Norbert Weber ------------------------------------------ Name: Norbert Weber Title: FRESENIUS MEDICAL CARE GROUPE FRANCE, a French corporation (formerly known as Fresenius Groupe France S.A.) By /s/ Udo Werle /s/ Emanuele Gatti ---------------------------------------------- Name: Udo Werle / Dr. Emanuele Gatti Title: FRESENIUS SECURITIES, INC., a California corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer NEOMEDICA, INC., a Delaware corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer FMC FINANCE S.A., a Luxembourg corporation By /s/ John Allen ---------------------------------------------- Name: John Allen Title: FMC TRUST FINANCE S.a.r.l. LUXEMBOURG, a Luxembourg corporation By /s/ Andrea Stopper ---------------------------------------------- Name: Andrea Stopper Title: FMC TRUST FINANCE S.a.r.l. LUXEMBOURG III, a Luxembourg corporation By /s/ Gabriele Dux ------------------------------------------ Name: Gabriele Dux Title: QCI HOLDINGS, INC., a Delaware corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer SRC HOLDINGS, INC., a Delaware corporation By /s/ Marc Lieberman ---------------------------------------------- Name: Marc Lieberman Title: Treasurer PAYING AGENT: BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), as Paying Agent for and on behalf of the Lenders By_________________________________ Name: Title: CONSENT TO AMENDMENT NO. 13 Bank of America, N.A. (formerly known as NationsBank, N.A.), as Paying Agent 101 N. Tryon Street, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attn: James D. Young, Agency Services Re: Credit Agreement dated as of September 27, 1996 (as amended and modified, the "CREDIT AGREEMENT") among National Medical Care, Inc., the other Borrowers, Guarantors and Lenders identified therein and NationsBank, N.A. (now known as Bank of America, N.A.), as Paying Agent. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. Amendment No. 13 dated November __, 2001 (the "SUBJECT AMENDMENT") relating to the Credit Agreement Ladies and Gentlemen: This should serve to confirm our receipt of, and consent to, the Subject Amendment. We hereby authorize and direct you, as Paying Agent for the Lenders, to enter into the Subject Amendment on our behalf in accordance with the terms of the Credit Agreement upon your receipt of such consent and direction from the Required Lenders, and agree that Company and the other Credit Parties may rely on such authorization. Sincerely, ______________________________________ [Name of Lender] By:___________________________________ Name: Title: EX-10.8 4 b42238fmex10-8.txt AMENDMENT NO. 15 TO ADMINISTRATION AGREEMENT EXHIBIT 10.8 AMENDMENT NO. 5 Dated as of December 21, 2001 to AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT Dated as of September 27, 1999 THIS AMENDMENT NO. 5 (this "AMENDMENT") dated as of December 21, 2001 is entered into by and among NMC FUNDING CORPORATION, a Delaware corporation, as Transferor, NATIONAL MEDICAL CARE, INC., a Delaware corporation, as Collection Agent, ENTERPRISE FUNDING CORPORATION, a Delaware corporation ("ENTERPRISE"), as a Conduit Investor, COMPASS US ACQUISITION, LLC, a Delaware limited liability company ("COMPASS"), as a Conduit Investor, GIRO MULTI-FUNDING CORPORATION, a bankruptcy-remote special purpose company incorporated in Delaware ("GMFC"), as a Conduit Investor, the FINANCIAL INSTITUTIONS PARTIES HERETO as Bank Investors, WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH ("WESTLB"), as an Administrative Agent, BAYERISCHE LANDESBANK, NEW YORK BRANCH ("BLB"), as an Administrative Agent and BANK OF AMERICA, N.A. ("BANK OF AMERICA"), as an Administrative Agent and as Agent. PRELIMINARY STATEMENTS A. The Transferor, the Collection Agent, Compass, Enterprise, GMFC, the Bank Investors, WestLB, as an Administrative Agent, BLB, as an Administrative Agent, and Bank of America, as an Administrative Agent and as Agent, are parties to that certain Amended and Restated Transfer and Administration Agreement dated as of September 27, 1999 (as amended or otherwise modified prior to the date hereof, the "TAA"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the TAA. B. The parties hereto have agreed to amend the TAA on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises set forth above, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE TAA. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the TAA is amended as follows: 1.1 The definition of "Commitment Termination Date" in Section 1.1 of the TAA is amended to change the date set forth therein from "December 21, 2001" to "October 24, 2002". 1.2 The definition of "Concentration Factor" in Section 1.1 of the TAA is amended to add the following at the end of such definition: "; PROVIDED that (i) for so long as Aetna Inc. is rated at least BBB by Standard & Poor's and at least Baa2 by Moody's, the Concentration Factor for Aetna Inc. shall be 7.5% of the Net Investment outstanding on such date, (ii) for so long as Cigna Corp. is rated at least A by Standard & Poor's and at least A2 by Moody's, the Concentration Factor for Cigna Corp. shall be 10% of the Net Investment outstanding on such date and (iii) for so long as United Healthcare Corporation is rated at least A by Standard & Poor's and at least A2 by Moody's, the Concentration Factor for United Healthcare Corporation shall be 10% of the Net Investment outstanding on such date;" 1.3 The definition of "Eligible Receivable" in Section 1.1 of the TAA is amended to delete clause (iii)(E) set forth therein and to insert the word "and" immediately before clause (iii)(D) thereof. 1.4 The definition of "Facility Limit" in Section 1.1 of the TAA is amended to change the dollar amount set forth therein from "$500,000,000" to "$560,000,000". 1.5 The definition of "Moody's" in Section 1.1 of the TAA is hereby amended in its entirety to read as follows: "MOODY'S" means Moody's Investors Service. 1.6 The definition of "Net Receivables Balance" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "NET RECEIVABLES BALANCE" means at any time the Outstanding Balance of the Eligible Receivables at such time reduced, without duplication, by the sum of (i) the aggregate amount by which the Outstanding Balance of all Eligible Receivables of each Designated Obligor or class of Designated Obligors exceeds the Concentration Factor for such Designated Obligor or class of Designated Obligors, PLUS (ii) the aggregate Outstanding Balance of all Eligible Receivables which are Defaulted Receivables, PLUS (iii) the excess, if any, of (A) the aggregate Outstanding Balance of all Eligible Receivables of each Obligor referred to in clause (G) of the definition of "Obligor" contained in this Section 1.1, over (B) an amount equal to 5% of the aggregate Outstanding Balance of all Eligible Receivables, PLUS (iv) the aggregate amount by which the Outstanding Balance of all Eligible Receivables originated by any member of the Spectra Renal Management Group exceeds 7.5% of the Net Investment. 1.7 The following definition is added to Section 1.1 of the TAA in appropriate alphabetical order: 2 "RATING AGENCY" means, at any time, Moody's, S&P or any other rating agency chosen by a Conduit Investor or its Related CP Issuer to rate its commercial paper notes at such time. 1.8 The definition of "Related Group Limit" in Section 1.1 of the TAA is amended and restated in its entirety to read as follows: "RELATED GROUP LIMIT" means (i) with respect to the Related Group that includes Enterprise, $220,000,000, (ii) with respect to the Related Group that includes Compass, "$220,000,000 and (iii) with respect to the Related Group that includes GMFC, $120,000,000." 1.9 The definition of "Termination Date" in Section 1.1 of the TAA is amended to change the date set forth in clause (viii) thereof from "December 21, 2001" to "October 24, 2002". 1.10 Clause (i)(z) of the second sentence of Section 2.2(a) of the TAA is amended to replace the dollar amount "$490,000,000" with the dollar amount "$548,800,000". 1.11 Clause (ii) of Section 2.11 of the TAA is amended and restated in its entirety to read as follows: "(ii) a listing by Primary Payor of all Receivables together with an analysis as to the aging of such Receivables as of such last day, but only to the extent the Receivable Systems of the Collection Agent are able to generate such information". 1.12 Clause (iii) of Section 5.1(a) of the TAA is amended by adding the following at the end of such Section immediately before the period: "and (z) such Person has reviewed each Investor Report prepared by the Collection Agent since the end of the last day of the immediately preceding quarterly period of the Transferor's fiscal year and the information upon which each such Investor Report was based and, based on such review, such Person has concluded that (1) the calculation of the Net Receivables Balance (including, without limitation, the calculation of each of the items described in clauses (i) through (iv) of the definition of "Net Receivables Balance") by the Collection Agent in each such Investor Report is accurate and complete in all material respects and (2) each such Investor Report is otherwise accurate and complete in all material respects". 1.13 Schedule II to the TAA is amended in its entirety to read as set forth in the attached Schedule II. 3 1.14 Exhibit E to the TAA is hereby amended and restated in its entirety to read as set forth in New Exhibit E attached hereto. 1.15 Exhibit Q is hereby amended and restated in its entirety to read as set forth in the new Exhibit Q attached hereto. Upon the effectiveness of such amendment and restatement, each of the entities set forth on such new Exhibit Q under the heading "New Transferring Affiliate" (each a "NEW TRANSFERRING AFFILIATE") shall be a Transferring Affiliate under and for purposes of the TAA. SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become effective and be deemed effective as of the date hereof upon the receipt by the Agent of each of the following: (a) counterparts of this Amendment duly executed by the Transferor, the Collection Agent, the Conduit Investors, the Bank Investors, the Administrative Agents and the Agent; (b) a reaffirmation of the Parent Agreement, substantially in the form of Exhibit A attached hereto, duly executed by each of FMC and FMCH; (c) a copy of the resolutions of the Board of Directors of each of the Transferor, the Collection Agent and each New Transferring Affiliate certified by its Secretary approving the execution, delivery and performance by such Person of this Amendment and the other Transaction Documents to be delivered by such Person hereunder or thereunder; (d) the Certificate of Incorporation of each New Transferring Affiliate certified by the Secretary or Assistant Secretary of each New Transferring Affiliate; (e) a Good Standing Certificate for each of the Transferor and each Originating Entity issued by the Secretary of State or other similar official of such Person's jurisdiction of incorporation; (f) a Certificate of Secretary or Assistant Secretary of each of the Transferor, the Collection Agent and each New Transferring Affiliate substantially in the form of Exhibit L to the TAA; (g) for each Originating Entity and the Transferor, copies of proper financing statements, dated a date reasonably near the date hereof naming such Originating Entity or the Transferor, as applicable, as the debtor in favor of the Agent, for the benefit of the Investors, as the secured party or other similar instruments or documents as may be necessary or in the reasonable opinion of the Agent desirable under the UCC of all appropriate jurisdictions or any comparable law to cause the Agent's undivided percentage interest in all Receivables and the Related Security and Collections 4 relating thereto to be a continuously perfected first priority interest through the Termination Date; (h) an opinion of Douglas G. Kott, Deputy General Counsel for FMCH, NMC and each Transferring Affiliate, acting as counsel to FMCH, the Transferor, the Collection Agent and the Originating Entities, in form and substance satisfactory to each Administrative Agent; (i) an opinion of Dr. Rainer Runte, acting as counsel to FMC, in form and substance satisfactory to each Administrative Agent; (j) an opinion of Arent Fox Kintner Plotkin & Kahn, PLLC, special counsel to FMC, FMCH, the Transferor and the Seller, covering certain bankruptcy and general corporate matters in form and substance satisfactory to each Administrative Agent; (k) an opinion of Arent Fox Kintner Plotkin & Kahn, PLLC, special counsel to the Transferor and the Originating Entities relating to UCC issues, in form and substance satisfactory to each Administrative Agent; (l) Amendment No. 2 to Transferring Affiliate Letter, duly executed and delivered by the Seller and each of the Transferring Affiliates, in the form attached hereto as Exhibit B; (m) Amendment No. 4 to the Parent Agreement, duly executed and delivered by FMC, FMCH and the Transferor, in the form attached as Exhibit C; (n) for each Related Group, an amended and restated Fee Letter, in form and substance satisfactory to the Administrative Agent for such Related Group; (o) confirmation from each Rating Agency that the execution and delivery of this Amendment and the transactions contemplated hereby will not result in the reduction or withdrawal of the then current rating of the Commercial Paper issued by GMFC or the Related CP Issuer for Compass; and (p) such other documents, instruments, certificates and opinions as the Agent or any Administrative Agent shall reasonably request. SECTION 3. SUCCESSOR AGENT. Pursuant to Section 9.5 of the TAA, Bank of America hereby notifies each Investor and the Transferor that it shall resign in its capacity as Agent effective as of January 31, 2002 (the "Succession Date"). Effective as of the Succession Date, each Investor hereby appoints WestLB to be the successor Agent and WestLB hereby accepts such appointment. On the Succession Date, WestLB shall succeed to and become vested with all the rights, powers, privileges and duties of the Agent, and Bank of America shall be discharged from its duties and obligations as Agent under the TAA. Notwithstanding the foregoing, the provisions of Article IX of the TAA shall continue to inure to the benefit of Bank 5 of America as to any actions taken or omitted to be taken by it while it was Agent under the TAA. Each of the parties hereto hereby agrees to take such action to reflect the appointment of WestLB as the successor Agent as may be reasonably requested by WestLB. Without limiting the generality of the foregoing, the Collection Agent shall use its best efforts to cause the Concentration Account Bank to execute, on or before the Succession Date, a letter in form and substance reasonably satisfactory to WestLB acknowledging that WestLB has succeeded to all the rights and obligations of the Agent under the Concentration Account Agreement. SECTION 4. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE TRANSFEROR AND THE COLLECTION Agent. 4.1 Upon the effectiveness of this Amendment, each of the Transferor and the Collection Agent hereby reaffirms all covenants, representations and warranties made by it in the TAA and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. 4.2 Each of the Transferor and the Collection Agent hereby represents and warrants that (i) this Amendment constitutes the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms and (ii) upon the effectiveness of this Amendment, no Termination Event or Potential Termination Event shall exist under the TAA. SECTION 5. REFERENCE TO AND EFFECT ON THE TAA. 5.1 Upon the effectiveness of this Amendment, each reference in the TAA to "this Agreement," "hereunder," "hereof," "herein," "hereby" or words of like import shall mean and be a reference to the TAA as amended hereby, and each reference to the TAA in any other document, instrument and agreement executed and/or delivered in connection with the TAA shall mean and be a reference to the TAA as amended hereby. 5.2 Except as specifically amended hereby, the TAA and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. 5.3 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any Investor, any Administrative Agent or the Agent under the TAA or any other document, instrument, or agreement executed in connection therewith, nor constitute a waiver of any provision contained therein. SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK. SECTION 7. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of 6 which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 8. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. NMC FUNDING CORPORATION, as Transferor By: /s/ Marc Lieberman ----------------------------------------------- Name: Marc Lieberman Title: Treasurer NATIONAL MEDICAL CARE, INC., as Collection Agent By: /s/ Marc Lieberman ----------------------------------------------- Name: Marc Lieberman Title: Treasurer ENTERPRISE FUNDING CORPORATION, as a Conduit Investor By: /s/ Tony Wong ----------------------------------------------- Name: Tony Wong Title: Vice President COMPASS US ACQUISITION, LLC, as a Conduit Investor By: /s/ Douglas K. Johnson ----------------------------------------------- Name: Douglas K. Johnson Title: President GIRO MULTI-FUNDING CORPORATION, as a Conduit Investor By: /s/ David O. Taylor ----------------------------------------------- Name: David Taylor Title: Vice President Signature Page to Amendment No. 5 BANK OF AMERICA, N.A., as a Bank Investor, as Administrative Agent and as Agent By: /s/ Brian D. Krum ----------------------------------------------- Name: Brian D. Krum Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH, as a Bank Investor and as Administrative Agent By: /s/ Christian Brune ----------------------------------------------- Name: Christian Brune Title: Associate Director, Securitization By: /s/ Violet Diamant ----------------------------------------------- Name: Violet Diamant Title: Associate Director, Securitization BAYERISCHE LANDESBANK, NEW YORK BRANCH, as a Bank Investor By: /s/ Hereward Drummond ----------------------------------------------- Name: Hereward Drummond Title: Senior Vice President By: /s/ Wolfgang Kottmann ----------------------------------------------- Name: Wolfgang Kottmann Title: Vice President BAYERISCHE LANDESBANK, NEW YORK BRANCH, as Administrative Agent By: /s/ Alexander Kohnert ----------------------------------------------- Name: Alexander Kohnert Title: First Vice President By: /s/ Lori-ann Wynter ----------------------------------------------- Name: Lori-Ann Wynter Title: Vice President Signature Page to Amendment No. 5 LANDESBANK HESSEN-THUERINGEN GIROZENTRALE, as a Bank Investor By: /s/ MARTIN SCHEELE ----------------------------------------------- Name: Dr. martin Scheele Title: Vice President By: /s/ Jens Doring ----------------------------------------------- Name: Jens Doring Title: Associate Signature Page to Amendment No. 5 EXHIBIT B FORM OF AMENDMENT TO TRANSFERRING AFFILIATE LETTER EXHIBIT C FORM OF AMENDMENT TO PARENT AGREEMENT NEW EXHIBIT E to AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT FORM OF INVESTOR REPORT NEW EXHIBIT Q to AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT LIST OF TRANSFERRING AFFILIATES Chief Executive Office for each 95 Hayden Avenue Transferring Affiliate: Lexington, Massachusetts 02420-9192
STATE OF ORIGINAL TRANSFERRING AFFILIATES INCORPORATION FEIN - -------------------------------- ------------- ---- (before December 21, 2001) Bio-Medical Applications Management Company, Inc. Delaware 22-1946461 Bio-Medical Applications of Aquadilla, Inc. Delaware 04-2968314 Bio-Medical Applications of Alabama, Inc. Delaware 04-2625090 Bio-Medical Applications of Anacostia, Inc. Delaware 04-2716481 Bio-Medical Applications of Arecibo, Inc. Delaware 04-2740118 Bio-Medical Applications of Arizona, Inc. Delaware 04-2977283 Bio-Medical Applications of Arkansas, Inc. Delaware 04-2505389 Bio-Medical Applications of Bayamon, Inc. Delaware 04-2832066 Bio-Medical Applications of Caguas, Inc. Delaware 04-2739513 Bio-Medical Applications of California, Inc. Delaware 04-3129981 Bio-Medical Applications of Camarillo, Inc. Delaware 04-2957737 Bio-Medical Applications of Capitol Hill, Inc. Delaware 04-2592736 Bio-Medical Applications of Carolina, Inc. Delaware 04-2696241 Bio-Medical Applications of Carson, Inc. Delaware 04-2999484 Bio-Medical Applications of Columbia Heights, Inc. Delaware 04-2583382 Bio-Medical Applications of Connecticut, Inc. Delaware 04-2990950 Bio-Medical Applications of Delaware, Inc. Delaware 04-3183720 Bio-Medical Applications of East Orange, Inc. Delaware 04-2687835 Bio-Medical Applications of Eureka, Inc. Delaware 04-2652260 Bio-Medical Applications of Florida, Inc. Delaware 11-2226338 Bio-Medical Applications of Fremont, Inc. Delaware 04-3033477 Bio-Medical Applications of Fresno,lnc. Delaware 04-3017372 Bio-Medical Applications of Georgia, Inc. Delaware 04-2832065 Bio-Medical Applications of Glendora, Inc. Delaware 04-3002798 Bio-Medical Applications of Guayama, Inc. Delaware 04-2963519 Bio-Medical Applications of Hillside, Inc. Delaware 04-2687843 Bio-Medical Applications of Humacao, Inc. Delaware 04-3039570
Bio-Medical Applications of Illinois, Inc. Delaware 04-2560009 Bio-Medical Applications of Indiana, Inc. Delaware 04-2969825 Bio-Medical Applications of Irvington, Inc. Delaware 04-2687819 Bio-Medical Applications of Jersey City, Inc. Delaware 04-2531570 Bio-Medical Applications of Kansas, Inc. Delaware 04-3291316 Bio-Medical Applications of Kentucky, Inc. Delaware 04-2546968 Bio-Medical Applications of Las Americas, Inc. Delaware 04-2999492 Bio-Medical Applications of Long Beach, Inc. Delaware 04-2516909 Bio-Medical Applications of Los Gatos, Inc. Delaware 04-3033478 Bio-Medical Applications of Louisiana, Inc. Delaware 04-2508242 Bio-Medical Applications of Maine, Inc. Delaware 04-2508244 Bio-Medical Applications of Maryland, Inc. Delaware 04-2553140 Bio-Medical Applications of Massachusetts, Inc. Delaware 04-3088660 Bio-Medical Applications of Mayaguez, Inc. Delaware 04-2594769 Bio-Medical Applications of Michigan, Inc. Delaware 04-2516906 Bio-Medical Applications of Minnesota, Inc. Delaware 04-3376339 Bio-Medical Applications of Mission Hills, Inc. Delaware 04-3061729 Bio-Medical Applications of Mississippi, Inc. Delaware 04-3108559 Bio-Medical Applications of Missouri, Inc. Delaware 04-2975268 Bio-Medical Applications of MLK, Inc. Delaware 04-2879593 Bio-Medical Applications of New Hampshire, Inc. Delaware 04-2944527 Bio-Medical Applications of New Jersey, Inc. Delaware 04-3106961 Bio-Medical Applications of New Mexico, Inc. Delaware 04-2520837 Bio-Medical Applications of North Carolina, Inc. Delaware 04-3085674 Bio-Medical Applications of Northeast, D.C., Inc. Delaware 04-2832070 Bio-Medical Applications of Oakland, Inc. Delaware 04-2553148 Bio-Medical Applications of Ohio, Inc. Delaware 04-3110360 Bio-Medical Applications of Oklahoma, Inc. Delaware 04-3017363 Bio-Medical Applications of Pennsylvania, Inc. Delaware 04-2466383 Bio-Medical Applications of Pine Brook, Inc. Delaware 04-2687837 Bio-Medical Applications of Ponce, Inc. Delaware 04-2521638 Bio-Medical Applications of Puerto Rico, Inc. Delaware 04-3167416 Bio-Medical Applications of Rhode Island, Inc. Delaware 04-2489760 Bio-Medical Applications of Rio Piedras, Inc. Delaware 04-2968308 Bio-Medical Applications of San German, Inc. Delaware 04-2740117 Bio-Medical Applications of San Juan, Inc. Delaware 04-2520840 Bio-Medical Applications of South Carolina, Inc. Delaware 04-2944532 Bio-Medical Applications of Southeast Washington, Inc. Delaware 04-2633086 Bio-Medical Applications of Tennessee, Inc. Delaware 04-3074770 Bio-Medical Applications of Texas, Inc. Delaware 11-2226275 Bio-Medical Applications of The District of Columbia, Inc. Delaware 04-2558118 Bio-Medical Applications of Trenton, Inc. Delaware 04-2545929 Bio-Medical Applications of Ukiah, Inc. Delaware 04-2652266 Bio-Medical Applications of Virginia, Inc. Delaware 04-3054876 Bio-Medical Applications of West Virginia, Inc. Delaware 04-2894956
Bio-Medical Applications of Wisconsin, Inc. Delaware 04-2539147 Bio-Medical Applications of Woonsocket, Inc. Delaware 04-2853785 FMC Dialysis Services - Oregon, LLC (f/k/a Willamette Valley Oregon 93-1175031 Kidney Center, LLC) FMC Dialysis Services Colorado, LLC (f/k/a Bio-Medical Applications of Delaware 04-3447327 Colorado, Inc.) Fresenius USA, Inc. Massachusetts 04-2550576 Home Intensive Care, Inc. Delaware 61-0892053 National Medical Care, Inc Delaware 04-2835488 Neomedica, Inc Delaware 04-3357803 San Diego Dialysis Services, Inc. Delaware 04-2487762 Spectra East, Inc. Delaware 04-3455945 Spectra Laboratories, Inc. Nevada 94-2825915
STATE OF NEW TRANSFERRING AFFILIATES INCORPORATION FEIN - -------------------------------- ------------- ---- (added December 21, 2001) Bio-Medical Applications Home Dialysis Services, Inc. Delaware 04-3017194 Bio-Medical Applications of Blue Springs, Inc Delaware 04-2975267 Bio-Medical Applications of Clinton, Inc. Delaware 04-3112273 Bio-Medical Applications of Dover, Inc. Delaware 04-2944525 Bio-Medical Applications of Essex, Inc. Delaware 04-3031214 Bio-Medical Applications of Fayetteville, Inc. Delaware 04-2944524 Bio-Medical Applications of Hoboken, Inc. Delaware 04-3027026 Bio-Medical Applications of Manchester, Inc. Delaware 04-2969816 Bio-Medical Applications of Nevada, Inc Nevada 93-1087002 Bio-Medical Applications of New York, Inc. Delaware 04-2448922 Bio-Medical Applications of San Antonio, Inc. Delaware 04-3281549 Bio-Medical Applications of South Queens, Inc. Delaware 04-2718440 Con-Med Supply Company, Inc. Illinois 36-3147024 Conejo Valley Dialysis, Inc. California 95-3249390 Dialysis America Alabama, LLC Delaware 04-3441502 Dialysis America Georgia, LLC Delaware 04-3441506 Dialysis Associates of Northern New Jersey, LLC New Jersey 22-3547454 Dialysis Services, Inc. Texas 74-2083988 Dialysis Services of Cincinnati, Inc. Ohio 31-1374389 Dialysis Specialists of Topeka, Inc. Kansas 48-1178898 Dialysis Specialists of Tulsa, Inc. Oklahoma 73-1508212 DuPage Dialysis Ltd. Illinois 36-3029873 Everest Healthcare Holdings, Inc. Delaware 04-3540082 Everest Healthcare Indiana, Inc. Indiana 36-3575844 Everest Healthcare Ohio, Inc. Ohio 31-1418495 Everest Healthcare Rhode Island, Inc. Delaware 36-4403091 Everest Healthcare Texas Holding Corp Delaware 36-4321504
Everest Healthcare Texas, LP Delaware 36-4321507 Everest Management, Inc. Delaware 36-4338092 Fresenius Management Services, Inc. Delaware 04-2733764 Fresenius USA Home Dialysis, Inc. Delaware 04-3476248 Fresenius USA Marketing, Inc. Delaware 04-3477762 Fresenius USA of Puerto Rico, Inc. Delaware 04-3477759 Fresenius USA Sales, Inc. Massachusetts 04-3444482 Gulf Region Mobile Dialysis, Inc. Delaware 04-2938292 Haemo-Stat, Inc. California 95-3529889 Home Dialysis of America, Inc. Arizona 86-0711476 Home Dialysis of Muhlenberg County, Inc. Kentucky 61-1262466 Mercy Dialysis Center, Inc. Wisconsin 39-1589773 North Buckner Dialysis Center, Inc. Delaware 36-4206319 Northern New Jersey Dialysis, LLC Delaware 36-4291598 Prime Medical, Inc. Massachusetts 04-3134599 Qualicenters, Inc. Colorado 84-1168893 Renal Scientific Services, Inc. Delaware 04-2508237 Santa Barbara Community Dialysis Center, Inc. California 95-2814241 Terrell Dialysis Center, LLC Delaware 36-4247457 WSKC Dialysis Services, Inc. Illinois 36-2668594
NEW SCHEDULE II to AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT COMMITMENTS OF BANK INVESTORS BANK INVESTOR COMMITMENT - ------------- ---------- Bank of America, N.A. $195,000,000 Westdeutsche Landesbank Girozentrale, New York Branch $170,000,000 Bayerische Landesbank, New York Branch $120,000,000 Landesbank Hessen - Thueringen Girozentrale $75,000,000(1) - -------- (1) Landesbank Hessen - Thueringen Girozentrale is a member of both the Compass and the Enterprise Related Groups. The portion of its Commitment included in the Compass Related Group is $50,000,000. The portion of its Commitment included in the Enterprise Related Group is $25,000,000. EX-11 5 b42238fmex11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATION (DOLLARS AND SHARES IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------------------------------ 2001 2000 1999 --------------- ------------------ ------------------ The weighted average number of shares of Common Stock were as follows........................... 90,000 90,000 90,000 =============== ================== ==================
Income (loss) used in the computation of earnings per share were as follows:
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------------------------------ CONSOLIDATED 2001 2000 1999 --------------- ------------------ ------------------ Net Income/(Loss)......................................... $ (79,256) $ 105,250 $ (327,027) Dividends paid on preferred stocks........................ (520) (520) (520) --------------- ------------------ ------------------ Income/loss used in per share computation of earnings..... $ (79,776) $ 104,730 $ (327,547) =============== ================== ================== Basic and fully dilutive earnings (loss) per share........ $ (0.89) $ 1.16 $ (3.64) =============== ================== ==================
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